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the time the notice of deficiency was issued and respondent's
answer was filed, and thereafter, a reasonable basis existed for
respondent's position that Mr. Sharer's basis in the partnership
had not been adequately substantiated. See Balken v.
Commissioner, T.C. Memo. 1994-499, affd. 72 F.3d 133 (8th Cir.
1995).
D. Itemized Deductions Claimed on 1986 and 1987 Returns
We determined that petitioner was entitled to deduct all of
the itemized deductions claimed on her 1986 and 1987 returns,
because the expenses had been paid out of her separate property,
and not out of community funds. Our holding in petitioner's
favor turned on whether she and Mr. Sharer were living "separate
and apart". As indicated above and in our opinion in Sharer v.
Commissioner, T.C. Memo. 1994-453, under the community property
laws of California, income earned by a spouse during marriage is
community income. However, earnings and accumulations of a
spouse, while living separate and apart from the other spouse,
are the separate property of that spouse.
Respondent's position on this issue was substantially
justified. As discussed above, there was substantial evidence
supporting respondent's position. Our finding that petitioner
and Mr. Sharer were living separate and apart was based in large
part on our crediting petitioner's testimony about their marital
relationship.
E. Additions to Tax
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