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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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