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therefore must show both that she lacked actual knowledge of the
understatement and that she had no “reason to know” of the
understatement.
Because an appeal in this case would lie in the Court of
Appeals for the Ninth Circuit, we are bound by Ninth Circuit law.
See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d
985 (10th Cir. 1971).
The principal Ninth Circuit case interpreting the “not know,
and had no reason to know” requirement7 in connection with an
erroneous deduction is Price v. Commissioner, 887 F.2d 959, 962
(9th Cir. 1989). Charles and Patricia Price filed a joint return
in which they deducted $90,000 in alleged exploration and
development expenses passed through to them from a Colombian gold
mining operation formed by Charles. The $90,000 deduction was
taken against total income of $103,000. After making a cursory
review of the tax return, Patricia noticed the large deduction
and questioned Charles about the legitimacy of the deduction.
7Price v. Commissioner, 887 F.2d 959 (9th Cir. 1989), arose
under former sec. 6013(e) rather than under current sec. 6015(b).
The same standard applies under the sec. 6015(b) knowledge test.
Former sec. 6013(e)(1)(C) provided “the other spouse establishes
that in signing the return he or she did not know, and had no
reason to know, that there was such substantial understatement”.
Current sec. 6015(b)(1)(C) provides “the other individual filing
the joint return establishes that in signing the return he or she
did not know, and had no reason to know, that there was such
understatement”. The only meaningful change in the language was
to eliminate the requirement that the understatement be
“substantial”. The “did not know, and had no reason to know”
language is the same in both provisions.
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