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substantial understatement, her defense in essence is
premised solely on ignorance of law. Id. In such a
scenario, regardless of whether the spouse possesses
knowledge of the tax consequences of the item at issue,
she is considered as a matter of law to have reason to
know of the substantial understatement and thereby is
effectively precluded from establishing to the
contrary. * * * [Id. at 964.]
Where the requesting spouse lacks such pervasive knowledge
of the facts of the underlying transaction, the Court of Appeals
concluded that the trier of fact must determine whether the
requesting spouse had sufficient knowledge of the facts to make
denial of relief appropriate:
A spouse has “reason to know” of the substantial
understatement if a reasonably prudent taxpayer in her
position at the time she signed the return could be
expected to know that the return contained the
substantial understatement. * * * Factors to consider
in analyzing whether the alleged innocent spouse had
“reason to know” of the substantial understatement
include: (1) the spouse’s level of education; (2) the
spouse’s involvement in the family’s business and
financial affairs; (3) the presence of expenditures
that appear lavish or unusual when compared to the
family’s past levels of income, standard of living, and
spending patterns; and (4) the culpable spouse’s
evasiveness and deceit concerning the couple’s
finances. * * * [Id. at 965; citations omitted.]
Even though she had limited knowledge of the facts
underlying the transaction giving rise to the deduction, the
Court of Appeals found, on the basis of the size of the deduction
in relation to the taxpayers’ joint income, that Patricia had
sufficient knowledge “such that a reasonably prudent taxpayer in
her position would be led to question the legitimacy of the
deduction.” Id. However, because Patricia questioned Charles
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