Charles R. and Dru L. Haggart - Page 12

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          the requesting spouse’s knowledge, or reason to know, of the                
          understatement of tax.  The understatements of tax in this case             
          result from the overstatements of the costs of goods sold and the           
          other Schedule C disallowed deductions.  The proper inquiry is              
          whether Mrs. Haggart knew, or had reason to know, of the                    
          understatements of tax attributable to these items that were                
          reported on petitioners’ Schedules C for 1996 and 1997.                     
               With the proper inquiry in mind, there are two aspects of              
          section 6015(b)(1)(C).  First, “where a spouse seeking relief has           
          actual knowledge of the underlying transaction * * * innocent               
          spouse relief is denied.”  Cheshire v. Commissioner, 115 T.C.               
          183, 192-193 (2000), affd. 282 F.3d 326 (5th Cir. 2002); see also           
          Purcell v. Commissioner, 826 F.2d 470, 473-474 (6th Cir. 1987),             
          affg. 86 T.C. 228 (1986).  For purposes here, we are willing to             
          assume that Mrs. Haggart may not have had actual knowledge of the           
          underlying transaction.                                                     
               Nonetheless, she must still satisfy the second prong of                
          section 6015(b)(1)(C).  The requesting spouse must not have                 
          reason to know of the underlying transaction which gives rise to            
          the deficiency at issue.  See Bokum v. Commissioner, 94 T.C. 126            
          (1990), affd. 992 F.2d 1132 (11th Cir. 1993).  Mrs. Haggart had             
          reason to know of the underlying transaction.                               
               Petitioners maintained a joint bank account into which                 
          petitioners’ income was deposited and from which all household              
          expenses, including expenses related to Mr. Haggart’s employment,           
          were paid.  Mrs. Haggart, upon reviewing bank statements or                 

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