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Klassics. She did not know and had no reason to know that the
reported cost of supplies exceeded the gross receipts and that
Mr. Scott had reported advertising expenses that had not been
incurred.
On the record before us, we find that a reasonably prudent
taxpayer under petitioner’s circumstances at the time of signing
the 1990 joint tax return would not have been expected to know
that the tax liability stated in that return was erroneous.
The relevant knowledge in the case of a reported but unpaid
liability is whether, when the return was signed, the taxpayer
knew or had reason to know “that the liability would not be
paid”. Washington v. Commissioner, supra at 150; Rev. Proc.
2000-15, sec. 4.03(1)(d), 2000-1 C.B. at 449. Accordingly, we
must consider whether, “taking into account all the facts and
circumstances”, sec. 6015(f)(1), petitioner knew or had reason to
know that Mr. Scott would not pay the taxes shown as due on the
returns.
Having observed petitioner’s appearance and demeanor at
trial, we find her testimony to be honest, forthright, and
credible. When she signed the returns for 1991 and 1993 on or
about their due dates, she did not know that Mr. Scott would not
file the 1991 return until August 26, 1996, and the 1993 return
until January 26, 1998, or that he would not pay the taxes with
the returns. Petitioner did not sign the 1992 return that was
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