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report any income from the joint venture on his Federal income
tax returns for 1995-2000. On February 2, 1996, Thacker filed a
voluntary petition for bankruptcy under chapter 11 with the
United States Bankruptcy Court for the Southern District of New
York. Petitioner filed a proof of claim with respect to the
unpaid compensation he claimed was owed to him under the joint
venture agreement with Thacker. Petitioner’s claim was
eventually discharged.
Worthless debts arising from claims of unpaid compensation
are not deductible under section 166 unless the income in
question was reported on the taxpayer’s income tax return for the
year for which the bad debt deduction is claimed or for a prior
taxable year. See sec. 1.166-1(e), Income Tax Regs.; see also
Gertz v. Commissioner, 64 T.C. 598, 600 (1975). In this case,
petitioner did not report the income that is the subject of his
bad debt claim on his 2001 return or on the return of any prior
taxable year. Consequently, respondent properly disallowed
petitioner’s bad debt deduction.
C. Deduction for Legal Expenses
As explained earlier in this opinion, section 162 authorizes
a taxpayer to claim a deduction for ordinary and necessary
business expenses paid or incurred during the taxable year to
carry on a trade or business. Petitioner claimed a deduction for
legal expenses of $1,300 on his 2001 Schedule C and attached to
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