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A spouse has reason to know of an understatement “if a
reasonably prudent taxpayer in * * * her position, at the time
* * * she signed the return, could be expected to know that the
return contained an understatement or that further investigation
was warranted. * * * The spouse seeking relief has a ‘duty of
inquiry’.” Butler v. Commissioner, 114 T.C. 276, 283-284 (2000)
(citations omitted).
In deciding whether a spouse had reason to know of an
understatement, a key factor is the extent to which family
expenditures, of which the spouse had knowledge, exceeded
reported income. See Estate of Jackson v. Commissioner, 72 T.C.
356, 361 (1979); Hammond v. Commissioner, T.C. Memo. 1990-22,
affd. 938 F.2d 185 (8th Cir. 1991).8 Other relevant factors
include the spouse’s education level; her involvement in the
family’s business and financial affairs; the presence of lavish
or unusual expenditures as compared to the family’s past income
levels, income standards, and spending patterns; and the culpable
spouse’s evasiveness and deceit concerning the couple’s finances.
See Butler v. Commissioner, supra at 284.
Although petitioner did not review the joint returns before
signing them, she is charged with knowledge of their contents.
8 Cases interpreting former sec. 6013(e) “remain instructive
as to our analysis of whether a taxpayer ‘knew or had reason to
know’ of an understatement pursuant to new section 6015(b).”
Butler v. Commissioner, 114 T.C. 276, 283 (2000).
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