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Charles assured her that the deduction was proper and had been
approved by the certified public accountant who prepared and
signed the return.
After the Commissioner disallowed the deduction and Charles
and Patricia were divorced, Patricia claimed relief from joint
and several liability under former section 6013(e). Following
the law in omitted income cases, the Tax Court denied Patricia’s
claim for relief from joint and several liability because
Patricia was aware of the existence of the transaction underlying
the deduction–-the existence of her husband’s gold mining
investment.
The Court of Appeals for the Ninth Circuit reversed and
granted Patricia’s request for relief from joint and several
liability. The Court of Appeals held that in erroneous deduction
cases, unlike omitted income cases, the requesting spouse’s mere
knowledge of the existence of the transaction underlying the
deduction is not enough to deny relief. In order to be denied
relief, the requesting spouse must know or have reason to know
“that the deduction would give rise to a substantial
understatement.” Id. at 963. While ignorance of the legal or
tax consequences of an item which gives rise to a deficiency is
no defense, something more than mere knowledge of the transaction
is required:
Thus, if a spouse knows virtually all of the facts
pertaining to the transaction which underlies the
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