- 8 -
been “established” as allowable. We are unable to conclude on
the record before us that petitioner has carried her burden of
showing that such deduction lacked a basis in fact or law. In
addition, even if petitioner demonstrated that the deduction
lacked a basis in fact or law, petitioner has not alleged any
facts demonstrating that she meets the percentage-of-adjusted-
gross-income rules set forth in section 6013(e)(4). See
discussion, supra p. 6. Therefore, in regard to the bad debt
deduction, we conclude that summary adjudication on petitioner’s
innocent spouse claim is inappropriate.
As noted above, section 6013(e)(2) treats an omission from
gross income as a grossly erroneous item, regardless of whether
such item had a basis in fact or law. Since cost of goods sold
is subtracted from gross sales to compute gross income,4 an
overstatement of cost of goods sold is treated as an omission
from gross income, and therefore an overstatement of cost of
goods sold, by itself, is considered grossly erroneous. In re
Lilly v. Internal Revenue Service, __ F.3d __, __ (4th Cir., Feb.
20, 1996); Lawson v. Commissioner, T.C. Memo. 1994-286; LaBelle
v. Commissioner, T.C. Memo. 1986-602. Accordingly, in the case
at bar, the overstatement of cost of goods sold is a grossly
erroneous item. In addition, the understatement arising from
such item creates a substantial understatement, because it is in
4 Secs. 1.61-3(a) and 1.162-1(a), Income Tax Regs.
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