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has the burden of proving by a preponderance of the evidence that
petitioner, at the time of signing the returns, had actual
knowledge of the items giving rise to the deficiency that
otherwise would have been allocated solely to intervenor under
the separate return rule. See sec. 6015(c)(3)(C) (“If the
Secretary demonstrates * * * actual knowledge”); Culver v.
Commissioner, supra.
In King v. Commissioner, 116 T.C. 198, 203 (2001), this
Court considered the standard for “actual knowledge of the item
giving rise to the deficiency” applicable to erroneous deductions
under section 6015(c)(3)(C). There, the taxpayer filed a joint
return with her husband, Curtis Freeman, and claimed significant
losses from Freeman’s cattle ranching operations. The taxpayer
knew that the cattle ranch was not profitable but did not know
that Freeman lacked a profit motive for engaging in the activity,
which was the critical fact underlying the Commissioner’s
determination that Freeman was not entitled to deduct the losses
under section 183. This Court held that the taxpayer was
entitled to relief under section 6015(c), even though the
taxpayer was aware of the activity giving rise to the erroneous
deduction (the cattle ranching activity) because she did not know
the predicate facts causing the losses to be nondeductible (i.e.
her husband’s lack of a profit motive):
The question in this case, therefore, is not
whether petitioner knew the tax consequences of a not-
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