Julian O. Von Kalinowski and Penelope J. Von Kalinowski - Page 15

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          understatement in tax on the joint returns which she filed with             
          her husband.  In the context of an understatement resulting from            
          deductions claimed in error, the United States Court of Appeals             
          for the Ninth Circuit (the circuit where an appeal of this                  
          decision would lie) interpreted this requirement as follows:  “It           
          requires a spouse seeking relief to establish that she did not              
          know and did not have reason to know that the deduction would               
          give rise to a substantial understatement.”  Price v.                       
          Commissioner, 887 F.2d 959, 963 (9th Cir. 1989), revg. an oral              
          opinion of this Court; see also Hayman v. Commissioner, 992 F.2d            
          1256, 1261 (2d Cir. 1993), affg. T.C. Memo. 1992-228; Stevens v.            
          Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989), affg. T.C.              
          Memo. 1988-63.                                                              
               We are satisfied that petitioner lacked actual knowledge of            
          the understatement.  We therefore turn to whether petitioner had            
          reason to know of the understatement.                                       
               A spouse has “reason to know” of the understatement if a               
          reasonably prudent taxpayer in his or her position at the time of           
          signing the return could be expected to know that the return                
          contained the understatement.  Price v. Commissioner, supra at              
          965.  Factors to be considered in determining whether the spouse            
          had reason to know of the 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                

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