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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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