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Mr. Campbell’s subsequent difficulties in the futures market, the
Campbells were compelled to move from an affluent area of the
Chicago suburbs to a rural area in Missouri, substantially
downgrading their standard of living. Petitioner was forced to
strip her retirement account and borrow money from her mother to
pay for her husband’s $100,000 settlement with the IRS. All of
these factors point to the conclusion that the Campbells’
standard of living deteriorated, rather than improved, after the
London straddle.
Taking all the facts and circumstances into consideration,
we hold that petitioner did not have actual knowledge of the
London straddle. Given this holding, we must decide whether a
reasonably prudent taxpayer in petitioner’s circumstances had
reason to know that the deduction was false or a duty to inquire
about the deduction on the return.
We conclude that petitioner did not have reason to know
about the false deduction. Petitioner has established that she
had no knowledge of the underlying transaction that gave rise to
the deficiency. She was not involved in Mr. Campbell’s business
affairs, she did not know about the London straddle, and she did
not know that Mr. Campbell financed the London straddle with
money taken from her account. We believe that petitioner’s
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