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Consequently, she did not satisfy the no knowledge of the
understatement requirement of section 6015(b)(1)(C). See id.
In Varney v. Commissioner, supra, we reached the opposite
conclusion under former section 6013(e)(1)(C). The distributions
in Varney were from an IRA belonging to the taxpayer’s deceased
spouse, which the spouse had opened prior to her marriage to the
taxpayer. After the taxpayer’s spouse learned that she had
terminal cancer, the spouse withdrew the funds in her IRA and
deposited them into a joint account with the taxpayer. When the
taxpayer asked his spouse about the large deposit into their
joint account, his spouse told him that the funds were part of
the savings she had accumulated over the years. The taxpayer
knew only that the funds came from his spouse’s savings; he did
not know that the funds were distributed from his spouse’s IRA.
In deciding whether the taxpayer met the section 6013(e)(1)(C)
requirement, we examined whether the taxpayer was aware of the
underlying transaction that produced the omitted income. We
concluded that, since the taxpayer had satisfied his duty of
inquiry and did not know that the funds received were the result
of a distribution from his spouse’s IRA, the taxpayer did not
have actual or constructive knowledge of the transaction
generating the understatement. We held that the taxpayer
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