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the employment agreement were $200,000 and $900,000,
respectively. Petitioner received payment of $200,000 before his
status as an at-will employee was terminated. Any amount above
the $200,000 minimum was to be based on net sales.4 A valid debt
did not exist for the remaining $700,000.
Moreover, respondent claims that even if petitioners were
owed an additional amount under paragraph 4.B of the employment
agreement, they still would not be entitled to a bad debt
deduction. We agree. The regulations state that
Worthless debts arising from unpaid wages, salaries,
fees, rents, and similar items of taxable income shall
not be allowed as a deduction under section 166 unless
the income such items represent has been included in
the return of income for the year for which the
deduction as a bad debt is claimed or for a prior
taxable year. [Sec. 1.166-1(e), Income Tax Regs.]
The commissions received pursuant to the employment
agreement, like wages or salary, were ordinary income. Thus,
since petitioners did not report any of the commissions alleged
to be owed as income in 1990 or in a prior year, they cannot
claim these unpaid commissions as a bad debt deduction for 1990.
4 Pursuant to par. 6.B of the employment agreement, the
commissions payable to petitioner under par. 4.B were to survive
the termination of his employment. Petitioner argues that this
means he is entitled to the full $900,000. By the terms of the
employment agreement, $900,000 is the maximum commission payable,
not the amount required to be paid. As stated previously, any
amount received over the $200,000 minimum was to be based on a
percentage of net sales. Petitioners did not provide any
information regarding net sales by which to determine whether an
additional commission payment was due.
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