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for-profit activity but whether she knew or believed
that her former spouse was not engaged in the activity
for the primary purpose of making a profit. Thus, in
determining whether petitioner had actual knowledge of
an improperly deducted item on the return, more is
required than petitioner’s knowledge that the deduction
appears on the return or that her former spouse
operated an activity at a loss. Whether petitioner had
the requisite knowledge is an essential fact respondent
was required to establish under section 6015(c)(3)(C).
Respondent failed in this regard. * * * [Id. at 205;
emphasis added.]
Applying the factual standard of King to the case at hand,
the losses from the Shorthorn partnership would be allocated to
petitioner only if she knew the factual basis for the denial of
the deductions. According to respondent:
the factual basis for the disallowed deduction in the
Hoyt tax shelter cases generally centers on the lack of
animals to sustain the deductions taken and an
overvaluation of the animals that were available. * * *
Respondent concedes that neither he nor Mr. Rasberry
has established that petitioner had actual knowledge of
the factual circumstances giving rise to the
disallowance of the partnership losses. * * *
Respondent argues that the principle of King v.
Commissioner, supra, should not be extended to limited
partnership investments because both spouses would often be
eligible for section 6015(c) relief, since neither would have
actual knowledge of the factual basis for the disallowance of the
partnership losses. That is not how section 6015(c) works. Only
items that are not attributable to the requesting spouse under
section 6015(d) are subject to the “actual knowledge” exception
in section 6015(c)(3)(C). Since the erroneous deductions here
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