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satisfied the no knowledge of the understatement requirement of
former section 6013(e)(1)(C) on these facts.10
As in Varney v. Commissioner, T.C. Memo. 1991-14, the
essence of the transaction in this case is that the distributions
came from IRA’s. Knowledge of the distributions’ composition is
what enables a taxpayer to ascertain the proper tax treatment of
the distributions. See secs. 61(4), 72, 408. Unaware that the
distributions consisted of IRA withdrawals and interest income,
petitioner concluded that the distributions represented an
inheritance excludable from income for Federal income tax
purposes. See sec. 102(a) (“Gross income does not include the
value of property acquired by gift, bequest, devise, or
inheritance.”). Petitioner did not know the essential facts of
the transaction that define its character for Federal income tax
purposes. See Varney v. Commissioner, supra; see also Hillman v.
Commissioner, T.C. Memo. 1993-151 (a taxpayer must have
sufficient knowledge of transaction to permit him to inquire as
to its appropriate tax treatment); cf. Cheshire v. Commissioner,
supra. Since petitioner did not know that the distributions
consisted of IRA withdrawals and interest income and, after
satisfying his duty of inquiry, reasonably believed the
10In Varney v. Commissioner, T.C. Memo. 1991-14, we
ultimately concluded that the taxpayer was not entitled to be
relieved of joint and several liability for the deficiency
because the taxpayer did not prove he satisfied former sec.
6013(e)(1)(D).
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