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return could have been expected to know that the return contained
the understatement.7 Price v. Commissioner, 887 F.2d 959, 965
(9th Cir. 1989).8 Whether such a taxpayer has reason to know of
an understatement is a subjective test that rests on factors such
as the taxpayer’s level of education, the taxpayer’s involvement
in the family’s business and financial affairs, the evasiveness
or deceit of the taxpayer’s spouse as to the couple’s finances,
and the presence of any unusual or lavish expenditures
inconsistent with the couple’s past levels of income, standard of
living, and spending patterns. Id. The court in Price also
stated that this “reason to know” requirement may impose on the
requesting spouse a “duty of inquiry” that would put that spouse
on notice that an understatement exists. Id. The test for
whether this duty of inquiry requirement applies is the same
subjective test that is used to determine whether the requesting
spouse had reason to know of the understatement; i.e., in an
erroneous deduction setting, whether a reasonably prudent
taxpayer in the position of the requesting spouse would be led to
7 Respondent makes no claim that petitioner actually knew
about the understatement or the shelter and deductions related
thereto.
8 Although the knowledge requirement in Price v.
Commissioner, 887 F.2d 959, 965 (9th Cir. 1989), was that of
former sec. 6013(e)(1)(E), we have held that interpretations of
the former provision are instructive to our interpretation of the
knowledge requirement of sec. 6015(b)(1)(C). Butler v.
Commissioner, 114 T.C. 276, 283 (2000).
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