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the necessary profit motive. Id. at 203. We narrowed the
question to whether the electing spouse knew or believed that her
former husband was not engaged in the activity for the primary
purpose of making a profit. Id. at 205. We found that the
Commissioner failed to carry his burden. A similar result is
appropriate on this record.
Here, Ms. Sowards had no involvement in her husband’s law
practice. All the records, bills, correspondence, bank
statements, etc., were delivered to the law firm’s address. Mr.
Sowards did not discuss his business affairs with her.
Furthermore, as the record demonstrates, Ms. Sowards knew nothing
of the organizational consulting business fabricated by her
husband. Respondent presented no evidence which would convince
us that Ms. Sowards’s testimony should be questioned.
Accordingly, respondent has failed to prove that Ms. Sowards had
actual knowledge of the factual circumstances which made the
items “unallowable as deductions”.
G. Conclusion
On this record, we hold that Mr. Sowards omitted significant
income from petitioners’ 1995, 1996, and 1997 returns and that
the resulting underpayments for 1996 and 1997, as determined in
the notice of deficiency, were due to fraud. We also hold that
petitioners are not entitled to deductions that respondent
disallowed and that the negligence penalties determined by
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