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certain funds that he had embezzled and that had not been re-
ported as gross receipts of Accu-Data or Meadows.
Bad Debt and Legal Expenses
Petitioner and Mr. Morris claimed deductions of $37,596 for
a business bad debt and $2,851.25 for legal expenses in Schedule
C of their 1987 joint return. Those deductions completely offset
the $40,000 bonus that Mr. Morris had received during 1987 and
reported in that schedule. The activity reported in Schedule C
of the 1987 joint return was identified as "financial services".
The business bad debt deduction claimed in Schedule C of the
joint return for 1987 was attributable to a loan (Galt loan) made
by Mr. Morris, who was not in the business of making loans during
that year, or by one of the entities that he controlled to either
Tom Galt (Mr. Galt) or Galt Communications, Inc. (Galt Communica-
tions). Galt Communications, a corporation owned 80 percent by
Mr. Galt and 20 percent by Mr. Morris, was established for the
purpose of selling electronic appliances and cellular telephone
services. At the time the Galt loan was made, Mr. Morris was not
an employee of Galt Communications, but he hoped to secure future
employment with it.
The legal expenses claimed as a deduction in Schedule C of
the 1987 joint return were incurred during an unsuccessful
attempt to recover the proceeds of the Galt loan.
Petitioner inquired about the $37,596 business bad debt
deduction claimed in the 1987 joint return because she thought
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