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know or have reason to know of the understatement of tax at the
time she signed the return; and (4) that it would be inequitable
to hold petitioner liable for the deficiency resulting from this
understatement. Respondent asserts that petitioner has failed to
prove each of these items.
Respondent contends that the loss deduction does not con-
stitute a grossly erroneous item. The Internal Revenue Code
defines a “grossly erroneous” deduction as one having no basis in
fact or law at the time the income tax return is filed. Sec.
6013(e)(2). A deduction has no basis in fact when the expense
for which the deduction 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 princi-
ples or when no substantial legal argument can be made to support
its deductibility. Id. Ordinarily, a deduction having no basis
in fact or in law may be described as frivolous, fraudulent, or
phony. Bokum v. Commissioner, 992 F.2d 1136, 1142 (11th Cir.
1993), affg. T.C. Memo. 1990-21.
The taxpayer has the burden of proving that the deduction is
grossly erroneous. Rule 142(a). The taxpayer cannot meet this
burden merely by relying on statements contained in the notice of
deficiency, the report of the revenue agent, or the report of the
Appeals officer that the partnership investment is a sham, lacks
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