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The parties have stipulated that petitioners filed joint
returns for the years at issue, and respondent and Ms. Carvin
agree that the bad debt deduction is attributable to petitioner
Mr. Bell and that the understatement was substantial. The
remaining issues are: (1) Whether the bad debt deduction is
grossly erroneous; (2) whether petitioner Darlene Carvin knew, or
had reason to know, of the substantial understatement of tax when
she signed the return; and (3) whether it would be inequitable to
hold Ms. Carvin liable for the income tax deficiency. If we
determine that one of the requirements for innocent spouse relief
has not been met, the other factors do not need to be considered.
Bokum v. Commissioner, 992 F.2d at 1134.
For purposes of section 6013(e), a deduction is "grossly
erroneous" if there is no basis in fact or law for the deduction.
Sec. 6013(e)(2)(B). A deduction has no basis in fact when the
expense for which it is claimed was never, in fact, made.
Douglas v. Commissioner, 86 T.C. 758, 762 (1986). A deduction
has no basis in law when the expense, even if made, does not
qualify as a deductible expense under well-settled legal
principles or when no substantial legal argument can be made in
support of its deductibility. Id. A deduction that is without
basis in fact or law is one that is frivolous, fraudulent, or
phony. Id. at 763. The fact that a deduction has been
disallowed does not, per se, prove that the deduction is grossly
erroneous. Ness v. Commissioner, 954 F.2d 1495, 1498 (9th Cir.
1992), revg. 94 T.C. 784 (1990); Russo v. Commissioner, 98 T.C.
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