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Respondent determined a deficiency in petitioners’ Federal
income tax of $2,182 for 1997. After concessions by respondent,
the issues1 for decision are: (1) Whether petitioners are
entitled to a business expense deduction under section 162(a) for
expenditures made on behalf of Intercontinental Trading Group,
Inc.; (2) in the alternative, whether petitioners are entitled to
a loss deduction under section 165 or bad debt deduction under
section 166 relating to those expenditures; and (3) whether
1 Petitioners claimed a deduction of $30,067.59 on a
Schedule C, Profit or Loss From Business, attached to their
jointly filed Form 1040, U.S. Individual Income Tax Return. The
Schedule C reflected a business name of “International Trading
Co.”. Petitioners identified the amount claimed on line 27 of
Schedule C as “Other expenses”--“Postal Service and Bad Debt”.
On page 2 of the Schedule C, Part V, “Other Expenses” petitioners
reflected an amount of $30,000. The item was further identified
as “Bankruptcy of David Sparks ($30,000 real estate note)”. No
amount is included on Schedule C, page 2, line 48 as a total.
The instruction on the Schedule C, page 2, line 48 requires a
taxpayer to enter the total claimed from line 48 on page 1, line
27.
From the face of the 1997 return, it is unclear whether
petitioners intended to identify the $30,000 reflected on page 2
as part of the total of $30,067.59 claimed on line 27 or whether
petitioners failed to carry forward the $30,000 to page 1 of the
Schedule C. The notice of deficiency (explanation of
adjustments) disallowed the $30,067 (apparently rounded down by
respondent) as a bad debt deduction. The $30,000 identified at
part V of the Schedule C is not included as an adjustment in the
statutory notice. At trial, petitioners asserted that they are
entitled to a $30,000 bad debt deduction, separate from, and in
addition to, the $30,067.59 deduction claimed on line 27 of the
Schedule C.
The parties agree that petitioners are entitled to a
Schedule C deduction for legal and professional fees of $4,229,
for the tax year in issue.
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Last modified: May 25, 2011