Edgar B. and Monica Alacan - Page 5

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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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