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standard, following Price v. Commissioner, 887 F.2d 959 (9th Cir.
1989). Erdahl v. Commissioner, supra at 589.
Under this standard, the Court inquires whether a spouse has
reason to know if “‘a reasonably prudent taxpayer under the
circumstances of the spouse at the time of signing the return
could be expected to know that the tax liability stated was
erroneous or that further investigation was warranted.’” Id. at
590 (quoting Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th
Cir. 1989), affg. T.C. Memo. 1988-63). The more the
relief-seeking spouse knows about a transaction, “‘the more
likely it is that she will know or have reason to know that the
deduction arising from that transaction may not be valid.’” Id.
at 590 n.6 (quoting Price v. Commissioner, supra at 963 n.9).
The duty to inquire may arise when the relief-seeking spouse has
notice that a particular deduction could result in a substantial
understatement. Id. The failure to inquire “‘may result in
constructive knowledge of the understatement’”. Id. at 590
(quoting Price v. Commissioner, supra at 965). The factors
considered in deciding whether the relief-seeking spouse had a
reason to know or a duty to inquire include: “‘the spouse's
level of education, [her] involvement in family financial
affairs, the evasiveness or deceit of the culpable spouse, and
any unusual or lavish expenditures inconsistent with the family's
ordinary standard of living.’” Id. at 591 (quoting Guth v.
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