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Commissioner, 72 T.C. 1164, 1170-1172 (1979). A taxpayer has
reason to know of a substantial understatement of tax if a
reasonably prudent taxpayer under the circumstances of the spouse
at the time of signing the return could be expected to know that
the tax liability stated was erroneous or that further
investigation was warranted. Stevens v. Commissioner, supra at
1505. We must place the reasonably prudent person in the
particular circumstances of the taxpayer. Pietromonaco v.
Commissioner, 3 F.3d 1342, 1345 (9th Cir. 1993), revg. T.C. Memo.
1991-472. "[T]he more a spouse knows about a transaction,
ceteris paribus, the more likely it is that she will know or have
reason to know that the deduction arising from that transaction
may not be valid." Price v. Commissioner, 887 F.2d at 963, n.9.
When deciding whether an alleged innocent spouse had reason
to know of a substantial understatement in both omission and
deduction cases, the following factors are considered: (a) The
spouse's level of education; (b) the spouse's involvement in the
family's business and financial affairs; (c) the presence of
expenditures that appear lavish or unusual when compared to the
family's past levels of income, standard of living, and spending
patterns; and (d) the culpable spouse's evasiveness and deceit
concerning the couple's finances. Price v. Commissioner, supra
at 965; see also Stevens v. Commissioner, 872 F.2d 1499, 1505
(11th Cir. 1989). In making our determination, we must consider
the interplay or balance of the factors, instead of merely
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