- 15 -
Under section 6013(e)(1)(C), Mrs. Streck must establish that
in signing the tax returns for the years in issue, she did not
know, and had no reason to know, there was a substantial
understatement. The standard to be applied in determining
whether a taxpayer "had reason to know" is whether a reasonably
prudent person with knowledge of the facts possessed by the
person claiming innocent spouse status should have been alerted
to the possibility of a substantial understatement. Shea v.
Commissioner, 780 F.2d 561, 566 (6th Cir. 1986), affg. in part
and revg. in part T.C. Memo. 1984-310; Flynn v. Commissioner, 93
T.C. 355, 365 (1989). Three factors are significant in
determining whether a spouse had reason to know of an
understatement of tax: (1) Participation in business affairs or
bookkeeping by the alleged innocent spouse, Quinn v.
Commissioner, 62 T.C. 223, 229-230 (1974), affd. 524 F.2d 617
(7th Cir. 1975), (2) the culpable spouse's refusal to be
14(...continued)
deductions disallowed are attributable to grossly erroneous items
of Mr. Streck. Sec. 6013(e)(2)(B) defines "grossly erroneous
items" as "any claim of a deduction, credit, or basis * * * for
which there is no basis in fact or law." Mrs. Streck must prove
that the disallowed deductions have no basis in fact or law.
Flynn v. Commissioner, 93 T.C. 355, 360 (1989). Mrs. Streck
failed to establish that the deductions disallowed by respondent
were frivolous, fraudulent, or phony. Id. at 364. Both Mr. and
Mrs. Streck argued that the deductions related to Double D Ranch,
Inc., are valid business expenses. As previously indicated,
petitioners failed to produce evidence of the amount and nature
of the expenses of Double D Ranch, Inc., that were disallowed.
We find that Mrs. Streck has not proven that any of the
deductions were grossly erroneous items.
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