-63-
In deciding whether Mrs. Jones had "reason to know" of the
substantial understatements when she signed the returns, we take
into account: (1) Her level of education; (2) her involvement in
the family's business and financial affairs; (3) the presence of
expenditures that appear lavish or unusual when compared to the
family's past levels of income, standard of living, and spending
pattern; and (4) the culpable spouse's evasiveness and deceit
concerning the couple's finances. Kistner v. Commissioner, 18
F.3d 1521, 1525 (11th Cir. 1994), revg. T.C. Memo. 1991-463;
Stevens v. Commissioner, 872 F.2d 1499 (11th Cir. 1989). The
foregoing factors are considered "because, ordinarily, they
predict what a prudent person would realize regardless of the
other spouse's evasiveness or deceit." Bliss v. Commissioner, 59
F.3d 374, 379 (2d Cir. 1995), affg. T.C. Memo. 1993-390.
Petitioners reported that they had $49,976 of taxable income
in 1989 and negative taxable income in 1990 and 1991. In 1990
and 1991, Mrs. Jones received the Winterchase lots and the
Papermill Road property, which had fair market values of $166,904
and $46,794, respectively, and the balance due on her townhouse,
$34,987, was effectively canceled. Petitioners did not report
the value of these distributions as income on the joint returns
they filed in 1990 and 1991.
Mrs. Jones was not involved in the day-to-day operation of
petitioner's business; however, she was 50-percent owner of
Carlsgate Properties, Inc., an S corporation, and had been the
owner of her own decorating business, Delane's Decorating
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