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Given this holding, we must decide whether a reasonably
prudent taxpayer, in Ms. McClelland’s position, had a reason to
know that the deduction was false or had a duty to inquire about
this deduction. Ms. McClelland was a shareholder and officer of
Red Wing, and she knew that Red Wing was selling a tugboat, but
the record does not support a conclusion that she had any reason
to know that Red Wing took an improper interest paid deduction.
Ms. McClelland’s involvement with Red Wing’s financial affairs
was limited, and Mr. McClelland provided all of the financial
information to Mr. Kramer for tax purposes. Had Ms. McClelland
been provided the opportunity to review Red Wing’s Form 1120S for
its fiscal tax year ended October 31, 1997, she might have
observed the false interest deduction, but she was never provided
such opportunity. Accordingly, we hold that Ms. McClelland did
not have a reason to know that the interest deduction was false,
nor did she have a duty to inquire into the interest paid
deduction.
b. Section 6015(b)(1)(D): Inequity
We take into account all the facts and circumstances in
deciding whether it is inequitable to hold the relief-seeking
spouse liable for a deficiency. Sec. 6015(b)(1)(D). Because
this requirement is almost identical to the requirement of former
section 6013(e)(1)(D), cases interpreting that section such as
Erdahl v. Commissioner, 930 F.2d 585 (8th Cir. 1989), remain
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