- 22 - 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.Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Next
Last modified: May 25, 2011