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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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Last modified: May 25, 2011