- 16 -
Commissioner, supra at 1507. Petitioner may be put on notice of
the understatement if a reasonably prudent taxpayer in her
position would be led to question the legitimacy of the
deduction. Id. at 1505. The Court of Appeals for the Second
Circuit has concluded:
Tax returns setting forth large deductions, such
as tax shelter losses offsetting income from other
sources and substantially reducing or eliminating the
couple’s tax liability, generally put a taxpayer on
notice that there may be an understatement of tax
liability.
See Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993),
affg. T.C. Memo. 1992-228.
Mr. Hendricks was a farm and ranch real estate broker and an
investor, which required him to report his various investment
activities on Schedule E on the Hendrickses’ Federal income tax
return. On their joint 1983 tax return, the Hendrickses claimed
$158,521 in losses arising from Boulder Oil and Gas. This amount
did not appear on the face of the return, but it was listed on
Schedule E, combined with the income and expenses of at least 11
other properties, including the condominiums and an office
building.
Considering all of the circumstances, we conclude that
petitioner was not put “on notice” of the understatement. See
Boyle v. Commissioner, T.C. Memo. 1994-438. We conclude that a
reasonably prudent taxpayer in petitioner’s position, at the time
of signing the return, could not be expected to know about the
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