T.C. Memo. 1999-113
UNITED STATES TAX COURT
CLAIR AND JUDITH WORTHINGTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22005-97. Filed April 5, 1999.
Clair and Judith Worthington, pro sese.
Brian Bernhardt, for respondent.
MEMORANDUM OPINION
WOLFE, Special Trial Judge: This case was heard pursuant to
the provisions of section 7443A(b)(3) and Rules 180, 181, and
182. All section references are to the Internal Revenue Code in
effect for the tax years in issue, unless otherwise indicated.
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All Rule references are to the Tax Court Rules of Practice and
Procedure.
Respondent determined deficiencies in petitioners' 1994 and
1995 Federal income taxes in the amounts of $990 and $473,
respectively, and accuracy-related penalties under section
6662(a) for the years 1994 and 1995 in the amounts of $198 and
$110, respectively.
After concession by both parties,1 the issues for decision
are: (1) Whether petitioners are entitled to claimed bad debt
deductions under section 166 for 1994 and 1995; (2) whether
petitioners failed to include interest income in their 1994
Federal income tax return; and (3) whether petitioners are liable
for the accuracy-related penalties under section 6662.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioners resided in
Baldwin, Michigan, when the petition in this case was filed.
All references to petitioner are to Clair Worthington.
1
Respondent conceded: (1) Petitioners are entitled to a
legal and professional expense deduction for the year 1994 in the
amount of $4,500; (2) petitioners did not receive taxable refund
income in the year 1995 in the amount of $828; (3) petitioners
are entitled to a tax preparation expense deduction for the year
1994 in the amount of $180, with $90 being allocated to Schedule
A and $90 being allocated to Schedule C. Petitioners conceded
that they are not entitled to the entire claimed legal and
professional expense deduction of $6,080 for the year 1995 but
are only entitled to such a deduction for that year in the amount
of $2,080.
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During the years in issue, petitioner operated a heating and
plumbing service. On their 1994 and 1995 Federal income tax
returns, petitioners claimed business bad debt deductions in the
amounts of $1,342 and $2,850, respectively. In the notice of
deficiency, respondent determined that petitioners are not
entitled to the bad debt deductions because the revenue
corresponding to such claimed deductions never was included in
petitioners' income.
Petitioners received interest income from First Union
National Bank of Florida in 1994 in the amount of $794. In the
notice of deficiency, respondent determined that petitioners had
not included this income on their 1994 Federal income tax return.
Petitioners contend that both the interest income and the
income that the bad debt deductions represent were included in
the amount set forth on the gross receipts line of the Schedules
C attached to their 1994 and 1995 Federal income tax returns.
Petitioners' 1994 and 1995 Federal income tax returns were
prepared by a tax preparation firm that used worksheets to
prepare those tax returns. Petitioners destroyed these
worksheets after their 1994 and 1995 Federal income tax returns
were filed.
Section 166(a) provides that there shall be allowed as a
deduction any debt which becomes worthless within the taxable
year. However, worthless debts arising from unpaid wages,
salaries, fees, rents, and similar items of taxable income are
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not allowed as a deduction unless the income such items represent
has been included in the return of income for the year for which
the deduction as a bad debt is claimed or for a prior taxable
year. See Gertz v. Commissioner, 64 T.C. 598 (1975); Garrison v.
Commissioner, T.C. Memo. 1994-200, affd. without published
opinion 67 F.3d 299 (6th Cir. 1995); sec. 1.166-1(e), Income Tax
Regs.
At trial, petitioners submitted various stopped checks and
work orders and claimed that these items substantiate their
claimed bad debt deductions. Contrary to petitioners'
assertions, these documents do not demonstrate that the income
which gave rise to these items was in fact included in their
gross income. Although petitioner was a well-spoken witness, he
has not furnished any documentation that would corroborate his
position. In the present case, we cannot rely upon petitioner's
self-serving, uncorroborated testimony. See Niedringhaus v.
Commissioner, 99 T.C. 202, 219-220 (1992); Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986). The tax law requires
taxpayers to substantiate amounts claimed as deductions by
maintaining the records necessary to establish such entitlement.
See Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per
curiam 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax
Regs. During the trial, petitioner admitted that he destroyed
the worksheets that he claims might have substantiated his
position. Moreover, petitioners have not submitted evidence that
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indicates that they tried to reconstruct the information
contained in these worksheets. Accordingly, we find that
petitioners are not entitled to the bad debt deductions claimed
on their 1994 and 1995 Federal income tax returns.
Petitioners also have not furnished any documentation that
substantiates their claim that they included the interest income
from First Union National Bank of Florida on their 1994 Federal
income tax return. Accordingly, we find for respondent on this
issue.
Section 6662(a) imposes a penalty of 20 percent of the
portion of the underpayment which is attributable to negligence
or disregard of rules or regulations. See sec. 6662(b)(1).
Negligence is the lack of due care or failure to do
what a reasonable and ordinarily prudent person would
do under the circumstances. See Neely v.
Commissioner, 85 T.C. 934, 947 (1985). The term
"disregard" includes any careless, reckless, or
intentional disregard. Sec. 6662(c). In general,
taxpayers are required to "keep such permanent books
of account or records, including inventories, as are
sufficient to establish the amount of gross income,
deductions, credits, or other matters required to be
shown by such person in any return of such tax or
information." Sec. 1.6001-1(a), Income Tax Regs.
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Taxpayers are required to keep such books or records "at all
times available for inspection by authorized internal revenue
officers or employees, and [these records] shall be retained so
long as the contents thereof may become material in the
administration of any internal revenue law." Sec. 1.6001-1(e),
Income Tax Regs. When they destroyed the worksheets used in the
preparation of their income tax returns, and failed otherwise to
maintain adequate books and records, petitioners did not exercise
due care and failed to do what a reasonable and ordinarily
prudent person would do. Accordingly, we hold that petitioners
were negligent with respect to the entire underpayment for each
of the years 1994 and 1995 and, therefore, are liable for the
accuracy-related penalties under section 6662(a).
To reflect the foregoing concessions,
Decision will be entered
under Rule 155.