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Petitioners failed to provide substantiation for any of the
claimed expenses that respondent disallowed. During trial,
petitioners did not provide any testimony or written
documentation for substantiation purposes. Further, we find that
petitioners put forth little effort in trying to obtain the
required documentation since they became aware of the deficiency
more than 2 years ago.
As a result, we hold that petitioners are not entitled to
claim the disputed expenses as deductions. In light of the lack
of evidence on the record substantiating any of petitioners’
claimed expenses, we also hold that petitioners are not entitled
to exclude the disputed expenses from income.
II. State Income Tax Refund
Generally, if an amount was deducted on a prior year’s tax
return which resulted in a reduction of tax and a tax benefit to
the taxpayer, a subsequent recovery by the taxpayer of such
amount must be included in gross income in the year the recovery
is received. Sec. 111(a); Kadunc v. Commissioner, T.C. Memo.
1997-92. Therefore, gross income includes a refund of State
income tax in the year received to the extent that the payment of
such tax was claimed as a deduction in a prior taxable year which
resulted in a reduction of Federal income tax. See Kadunc v.
Commissioner, supra.
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