Joseph and Marlene Schnell - Page 5

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          Ratcliff v. Commissioner, T.C. Memo. 1983-636 (citing Hendricks             
          v. Commissioner, 406 F.2d 269, 272 (5th Cir. 1969), affg. T.C.              
          Memo. 1967-140).  Petitioners used the cash method for reporting            
          income and deductions.  Fees for services by Barad that allegedly           
          were owed by the City have never been included in income, and               
          unpaid amounts, even if earned, do not constitute "bad debts"               
          within the meaning of section 166 for which a deduction for                 
          worthlessness may be claimed.  See Crosson v. Commissioner,                 
          supra.  Therefore, as a matter of law and without regard to the             
          burden of proof, respondent properly disallowed the bad debt                
          deductions for each of the years in issue.                                  
               In regard to the advertising and offices expenses, section             
          162(a) permits a deduction for all “ordinary and necessary                  
          expenses paid or incurred during the taxable year in carrying on            
          any trade or business”.  Petitioners bear the burden of proving             
          their entitlement to the claimed deductions.  Rule 142(a);                  
          INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); see also             
          Banker v. Commissioner, T.C. Memo. 1999-351.  Taxpayers must                
          establish that expenses deducted are ordinary and necessary and             
          must maintain records sufficient to substantiate the amounts of             
          the deductions claimed.  Sec. 6001; sec. 1.6001-1(a), Income Tax            
          Regs.  If the taxpayers do not retain the required records and              
          produce credible evidence, the burden of proof does not shift to            
          respondent.  Sec. 7491(a)(2)(A) and (B).  Petitioners failed to             






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