- 18 - The notice of deficiency states that $3,063 of personal expenses were disallowed for 1990. Other than this, petitioner has presented no proof that any of the disallowed expenses lacked a legal basis. We hold that $3,063 of the disallowed expenses for 1990 were grossly erroneous. The grossly erroneous items attributable to Mr. Womack thus consist of the unreported income and $3,063 of the disallowed business expenses. Substantial Understatement A substantial understatement is one that exceeds $500. Sec. 6013(e)(3). The amounts of the understatements related to the grossly erroneous items of Mr. Womack for 1989 and 1990, respectively, each exceed $500 and, therefore, are substantial. Knowledge of the Understatement A taxpayer seeking innocent spouse relief must establish that he or she in signing the return did not know, and had no reason to know, that there was a substantial understatement of tax. Sec. 6013(e)(1)(C). A spouse has reason to know if a reasonably prudent taxpayer under the taxpayer's circumstances at the time of signing the return could be expected to know the return was erroneous or that further investigation was warranted. Stevens v. Commissioner, 872 F.2d at 1505; Bokum v. Commissioner, 94 T.C. at 148. The test establishes a duty of inquiry. Stevens v. Commissioner, supra. If a spouse knows enough facts to be put on notice of the possibility of a substantial understatement, shePage: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
Last modified: May 25, 2011