Knowledge-of-the-Transaction Test Applies to Erroneous-Deductions Cases
In Greer v. Comm'r of Internal Revenue, No. 09-1420, the U.S. Court of Appeals for the Sixth Circuit rejected petitioner's challenge to the district court's denial of her request for relief under the innocent-spouse and equitable-relief provisions of the tax code.
The Court took the opportunity to decide that the appropriate test to be used in determining whether a taxpayer had a reason to know of an understatement, or to suspect a possible understatement resulting from disallowed deductions or credits is the "knowledge-of-the-transaction" test, as derived from Price v. Commissioner.
On review of the record, the Court held that it cannot be said that the Tax Court clearly erred in finding that petitioner should have inquired into the favorable tax benefits thrown off by the couple's investment in denying innocent-spouse relief, nor did the court abuse its discretion in denying equitable relief.
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