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items are defined as "any item of gross income attributable to
such spouse which is omitted from gross income", and "any claim
of a deduction, credit, or basis by such spouse in an amount for
which there is no basis in fact or law." Sec. 6013(e)(2).
Petitioner and respondent disagree as to how the grossly
erroneous items should be characterized. Petitioner contends
that all items should be considered as omissions from gross
income since some of the items disallowed by respondent were
items claimed as cost of goods sold, the disallowance of which
increased the gross income reported on the return. Respondent
argues that all the items disallowed are properly characterized
as deductions.
Petitioner and Mr. Velinsky reported $31,850 as expenses on
the 1990 Schedule C, which included such items as car and truck
expenses, depreciation, and miscellaneous expenses such as
postage, printing, and cleaning expenses. Petitioner and Mr.
Velinsky also reported $58,430 as cost of goods sold on the
Schedule C, and subtracted this amount from gross receipts to
arrive at gross income. Respondent has allowed a "cost of goods
sold deduction" in the amount of $27,657. The amounts that
respondent allowed all related to the production of the video.
These amounts included video production expenses, miscellaneous
supplies for lumber, paint, brushes, and set design, and other
miscellaneous supplies for the music video, including film, film
development, rent, and studio time. Respondent did not allow the
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