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return for 1985 showed wages of $30,203 and Shorthorn partnership
losses of $20,180 and for 1986 showed wages of $36,943 and
Shorthorn partnership losses of $26,234. A reasonably prudent
taxpayer would have questioned deductions of this size in
relation to their income. “Tax returns setting forth large
deductions, such as tax shelter losses offsetting income from
other sources and substantially reducing or eliminating the
couple's tax liability, generally put a taxpayer on notice that
there may be an understatement of tax liability.” Hayman v.
Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C.
Memo. 1992-228.
Unlike the situation in Price v. Commissioner, 887 F.2d 959
(9th Cir. 1989), where the requesting spouse questioned the
deduction and received assurances regarding the propriety of the
deduction, petitioner failed to make inquiries. The court in
Price distinguished cases, like the one at hand, where “a spouse
seeking relief * * * simply ignored a large deduction and * * *
refused to make inquiries.” Id. at 966; see also Reser v.
Commissioner, 112 F.3d 1258, 1267-1268 (5th Cir. 1997) (“Tax
returns setting forth ‘dramatic deductions’ will generally put a
reasonable taxpayer on notice that further investigation is
warranted. A spouse who has a duty to inquire but fails to do so
may be charged with constructive knowledge of the substantial
understatement and thus precluded from obtaining innocent spouse
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