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The Court of Appeals held that a requesting spouse has
reason to know of the substantial 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 the
substantial understatement.” Id. at 965. In evaluating how a
reasonably prudent taxpayer might act, the Court of Appeals
considered 4 factors: (1) The spouse’s level of education; (2)
the spouse’s involvement in the family’s business and financial
affairs; (3) the presence of expenditures that appear lavish or
unusual when compared to the family’s past levels of income,
standard of living, and spending patterns; and (4) the culpable
spouse’s evasiveness and deceit concerning the couple’s finances.
After considering the factors, the Court of Appeals concluded
that the requesting spouse had satisfied her burden of
establishing that she did not have reason to know that the
deduction in question would give rise to the substantial
understatement. Nevertheless, because the Court of Appeals also
concluded that the requesting spouse had knowledge of sufficient
facts to put her on notice that an understatement existed, it
held that the requesting spouse had a duty to inquire into the
factual circumstances surrounding the deduction. Because the
requesting spouse had made an appropriate inquiry, the Court of
Appeals held that the requesting spouse had satisfied the
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