David G. Lagraff and Cynthia L. Lagraff - Page 4

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          $15,000.00 in commissions for loans that he worked on before his            
          termination and which have in fact been funded and closed since             
          his termination.”  Petitioner’s counsel cited as authority for              
          this position a contractual covenant implied under California               
          law.                                                                        
               Petitioners filed a joint Federal income tax return for                
          taxable year 1999.  With this return, they filed a Schedule C,              
          Profit or Loss From Business, for petitioner’s business as a loan           
          officer.  On this schedule, they reported an expense of $15,000             
          from “bad debts from sales or services”.  This amount represents            
          the commissions which petitioners assert that Anderson owes                 
          petitioner.  Petitioners, as cash-basis taxpayers, had never                
          reported as income any portion of the $15,000 of purported                  
          commissions due petitioner.  In the notice of deficiency,                   
          respondent disallowed in full the bad debt deduction.                       
               A deduction generally is allowed for debts, other than                 
          nonbusiness debts, which become worthless during the taxable                
          year.  Sec. 166(a)(1), (d)(1).  However, a taxpayer is not                  
          entitled to a bad debt deduction for the value of unpaid wages or           
          other items of income which have never been reported as income.             
          Gertz v. Commissioner, 64 T.C. 598 (1975).  The regulations under           
          section 166 provide in relevant part:                                       
                    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            





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