- 6 -
as petitioners contend, that that award became worthless during
1991, petitioners nonetheless would not be entitled for 1991 to a
nonbusiness bad debt deduction with respect to that award.
A taxpayer is not entitled to a deduction for a worthless
debt under section 166 in connection with an income item unless
it has been included in the taxpayer's gross income for Federal
income tax purposes either for the year for which the deduction
is claimed or for a prior year. Seymour v. Commissioner, 14 T.C.
1111, 1117 (1950); see Gertz v. Commissioner, 64 T.C. 598, 600
(1975); O'Meara v. Commissioner, 8 T.C. 622, 633 (1947); sec.
1.166-1(e), Income Tax Regs.
As petitioners concede on brief, the $50,000 punitive
damages award at issue is an item of gross income.5 See Commis-
sioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955); sec.
1.61-14(a), Income Tax Regs. Petitioner did not at any time
recover from Mr. Erkel any portion of that award. Petitioners,
who use the cash method of accounting, were not required to, and
did not, include in their gross income for 1991 any portion of
the $50,000 punitive damages award. See sec. 451(a); sec. 1.451-
5 Petitioners argue on brief that since punitive damages that
are collected by a taxpayer are included in the taxpayer's gross
income for Federal income tax purposes under Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955), punitive damages
that are awarded to, but not collected by, the taxpayer give rise
to a bad debt deduction under sec. 166. Petitioners' reliance on
the Glenshaw Glass Co. case is misplaced. That case does not in
any way indicate that uncollected punitive damages give rise to a
bad debt deduction under sec. 166.
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