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the actual knowledge standard in section 6015(c)(3)(C), in the
context of a disallowed deduction, requires respondent to prove
that petitioner had actual knowledge of the factual circumstances
which made the item unallowable as a deduction. Consistent with
Cheshire, such actual knowledge does not include knowledge of the
tax laws or knowledge of the legal consequences of the operative
facts.6
The factual basis for respondent’s determination in this
case was the lack of required profit objective on the part of
petitioner’s former spouse. Section 183(a) disallows any
deductions attributable to activities not engaged in for profit
except as provided under section 183(b). Section 183(c) defines
an activity not engaged in for profit as “any activity other than
one with respect to which deductions are allowable for the
taxable year under section 162 or under paragraph (1) or (2) of
section 212.” This case is appealable to the Court of Appeals
for the Fourth Circuit. The standard for determining whether
expenses of an activity are deductible under either section 162
5(...continued)
Commissioner’s burden of proof under sec. 6015(c)(3)(C) is met by
a preponderance of the evidence).
6We note that in Cheshire v. Commissioner, 115 T.C. 183
(2000), the spouse claiming relief was found to have actual
knowledge of factual circumstances that caused the items of
omitted income to be taxable and that her omission was based on
her misunderstanding of the law.
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