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attributable to a deduction that had no basis in fact or law; (4)
this deduction is a grossly erroneous item; and (5) in accordance
with the requirements of section 6013(e)(4), the understatement
exceeds the required percentage of Nancy's 1988 income.
Still in dispute is whether Nancy satisfies the following
requirements: (1) The State Coal royalty deduction is an item of
Sheldon; (2) at the time the 1981 tax return was signed Nancy did
not know, and had no reason to know, of the substantial
understatement of tax; and (3) it is inequitable to hold Nancy
liable for the deficiency. We consider these disputed matters
seriatim.
A. Item "of" Sheldon
Respondent contends that petitioners have failed to prove
that Nancy did not write any checks to buy the interest in State
Coal, and thus that petitioners have failed to prove that the
State Coal royalty deduction is an item of Sheldon. Petitioners
contend that Nancy played no role in the decision to buy the
interest in State Coal, that Nancy's name does not appear on any
document purporting to grant an interest or impose an obligation
regarding State Coal, and that the total amount required to buy
the interest in State Coal was paid by Sheldon from his
individual accounts.
We agree with petitioners.
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