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2. Knowledge or Reason to Know
Petitioner must establish “that * * * she did not know, and
had no reason to know, that there was * * * [a] substantial
understatement” on the 1979 joint return. Sec. 6013(e)(1)(C).
Respondent does not contend that petitioner had actual knowledge
of the understatements on the 1979 return nor would the record
support a contention to that effect. Petitioner did not have
actual knowledge of the understatement at the time the 1979
return was signed.
We now turn to whether petitioner had reason to know of the
substantial understatement of income tax on the 1979 joint
return. Respondent contends that petitioner did have reason to
know. We disagree.17
17 Respondent relies heavily on a letter dated Nov. 25,
1985, that Mr. Heitzman wrote to the Atlanta Appeals Office in
response to a request for information from him concerning
petitioner. In that letter, Mr. Heitzman stated that he and
petitioner “reviewed very carefully any investment either one of
us made during our marriage”. At trial in the case at hand,
Mr. Heitzman recanted what he wrote in the letter.
Mr. Heitzman wrote that letter less than 2 years after he
and petitioner were divorced. In 1985, Mr. Heitzman was still
very bitter over the failure of his marriage with petitioner.
Compounding Mr. Heitzman’s bitterness was the bankruptcy of both
of his businesses because of the death of his partner, who was
also one of his major financial backers, and the financial
failure of his other major financial backer. To make matters
worse, Mr. Heitzman was also in the early stages of litigation
concerning the deficiency arising from the Stonehurst deductions
that eventually culminated in the decision in Heitzman v.
Commissioner, supra. He also had not yet been discharged from
bankruptcy and may well have hoped for contribution from
petitioner irrespective of the “hold harmless” clause in the
divorce settlement agreement.
(continued...)
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