- 14 -
could not substantiate the expenses in court 6 years later. See
Kaye v. Commissioner, supra; Feldman v. Commissioner, T.C. Memo.
1993-17, affd. 20 F.3d 1128 (11th Cir. 1994).
Thus, for the omitted income and deduction items we hold
that petitioner has failed to demonstrate a substantial
understatement of tax attributable to grossly erroneous items of
her spouse alone. The constructive dividend was attributable to
both petitioner and her husband, and the disallowed deductions
were not shown to have no basis in fact or law.
Issue 2. Whether Petitioner Knew, or Had Reason to Know, that
There Was a Substantial Understatement of Tax
Petitioner knew, or had reason to know, of the substantial
understatement of tax when she signed the 1989 tax return. Sec.
6013(e)(1)(C). The U.S. Court of Appeals for the Second Circuit,
to which this case is appealable, has adopted the test for
knowledge espoused in Price v. Commissioner, 887 F.2d 959 (9th
Cir. 1989). Hayman v. Commissioner, 992 F.2d at 1261. We follow
the Court of Appeals for the Second Circuit's position in the
ensuing discussion under the Golsen rule. Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971).
Price articulates two slightly different burdens for a
taxpayer to overcome in determining whether a putative innocent
spouse knew, or had reason to know, of the substantial
understatement, depending on whether the issue concerns a
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