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the portion of deficiency for each of the years at issue that is
attributable to the unreported embezzlement income.
Claimed Deductions
In order for a claimed deduction to be a grossly erroneous
item under section 6013(e)(1)(B), there must be a "claim of a
deduction * * * in an amount for which there is no basis in fact
or law." Sec. 6013(e)(2)(B). In Douglas v. Commissioner, 86
T.C. 758, 762-763 (1986), we construed the phrase "no basis in
fact or law", as follows:
As we read the statute as a whole and its legislative
history, a deduction has no basis in fact when the
expense for which the deduction is claimed was never,
in fact, made. A deduction has no basis in law when
the expense, even if made, does not qualify as a de-
ductible expense under well-settled legal principles or
when no substantial legal argument can be made to
support its deductibility. Ordinarily, a deduction
having no basis in fact or in law can be described as
frivolous, fraudulent, or, to use the word of the
committee report, phony. [Fn. ref. omitted.]
The mere fact that a deduction is disallowed does not mean that
the deduction has no basis in fact or in law within the meaning
of section 6013(e)(2)(B). See id. at 763.
We are persuaded by the record before us that the deduc-
tions for a bad business debt and the legal expenses incurred in
an attempt to recover that debt, which were claimed in the 1987
joint return and which petitioner concedes are erroneous, are not
frivolous, fraudulent, or phony and that they have some basis in
fact and in law within the meaning of section 6013(e)(2)(B). The
parties do not dispute that the loan underlying the bad debt
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