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Petitioner may not rely on the disallowance or the failure
to substantiate the deductions alone to prove a lack of basis in
fact or law. As the Court stated in Douglas: "it simply does
not follow that because deductions lacking in a factual or legal
basis will be disallowed, all deductions which are disallowed
lack a factual or legal basis." Douglas v. Commissioner, supra
at 763; Purcell v. Commissioner, 826 F.2d 470 (6th Cir. 1987),
affg. 86 T.C. 228 (1986).
The substantiation requirement of section 274(d) would not
change the above analysis as to what constitutes grossly
erroneous deductions. If petitioners had been able to adequately
substantiate Mr. Kelly's travel and entertainment expenses, those
expenses would have been fully deductible under well-settled
legal principles.
Petitioner contends that if the entertainment expenses had a
factual basis, there is no logical explanation why they were not
reimbursed. There is no indication that the unreimbursed
expenses were ever submitted to Mr. Kelly's employer, and no
explanations why they were not submitted.
As discussed in respondent's briefs and by the Court, there
could be a number of logical explanations as to why Mr. Kelly was
not reimbursed for more expenses. As respondent suggests, there
may have been an internal dollar limit in his department on the
amount of entertainment expenses that would be reimbursed, or Mr.
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