Hector Prowse - Page 17

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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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