T.C. Summary Opinion 2003-150
UNITED STATES TAX COURT
DAVID G. LAGRAFF AND CYNTHIA L. LAGRAFF, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8540-02S. Filed October 14, 2003.
David G. LaGraff and Cynthia L. LaGraff, pro sese.
Cameron M. McKesson, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioners’ Federal
income tax of $1,716 for the taxable year 1999.
After concessions by petitioners, the sole issue remaining
for decision is whether petitioners are entitled to a bad debt
deduction.
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
Madera, California, on the date the petition was filed in this
case.
From November 1998 through May 1999, petitioner husband
(petitioner) worked as an independent contractor for Anderson
Mortgage Group, Inc. (Anderson), as a loan officer. In this
capacity, petitioner earned commissions for real estate mortgage
loans which he procured, funded, and closed. Petitioner’s
contract with Anderson provided that either party had the right
to terminate the contract for any reason by providing the other
party with 24 hours’ written notice. The contract further
provided that upon termination “any loans procured but not funded
or closed will become the property of Anderson Mortgage and no
compensation will be due” petitioner. In May 1999, Anderson
terminated the contract after giving petitioner the required 24
hours’ notice. In July 1999, an attorney retained by petitioner
wrote Anderson, stating that petitioner was “due approximately
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$15,000.00 in commissions for loans that he worked on before his
termination and which have in fact been funded and closed since
his termination.” Petitioner’s counsel cited as authority for
this position a contractual covenant implied under California
law.
Petitioners filed a joint Federal income tax return for
taxable year 1999. With this return, they filed a Schedule C,
Profit or Loss From Business, for petitioner’s business as a loan
officer. On this schedule, they reported an expense of $15,000
from “bad debts from sales or services”. This amount represents
the commissions which petitioners assert that Anderson owes
petitioner. Petitioners, as cash-basis taxpayers, had never
reported as income any portion of the $15,000 of purported
commissions due petitioner. In the notice of deficiency,
respondent disallowed in full the bad debt deduction.
A deduction generally is allowed for debts, other than
nonbusiness debts, which become worthless during the taxable
year. Sec. 166(a)(1), (d)(1). However, a taxpayer is not
entitled to a bad debt deduction for the value of unpaid wages or
other items of income which have never been reported as income.
Gertz v. Commissioner, 64 T.C. 598 (1975). The regulations under
section 166 provide in relevant part:
Worthless debts arising from unpaid wages, salaries,
fees, rents, and similar items of taxable income shall not
be allowed as a deduction under section 166 unless the
income such items represent has been included in the return
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of income for the year for which the deduction as a bad debt
is claimed or for a prior taxable year.
Sec. 1.166-1(e), Income Tax Regs.
The amount of the alleged bad debt in this case represents
commissions which petitioner asserts he was owed for services
rendered as an independent contractor, but which were never paid
to him. Assuming arguendo that a bona fide debt existed,
petitioners nevertheless are not entitled to a bad debt deduction
because the commissions are items of income, sec. 61(a), which
were never included in petitioners’ income, sec. 1.166-1(e),
Income Tax Regs. We therefore need not reach respondent’s
alternative argument that there was no bona fide debt with
respect to the unpaid commissions. Gertz v. Commissioner, supra.
At trial, petitioner stated that he did not report the
$15,000 in commissions as income “since I never received it, * *
* although I have offered to declare it if necessary * * * if
that would fix the problem.” We note that, if petitioners had
reported the $15,000 as income on the Schedule C in 1999 along
with the claimed $15,000 deduction, the two items would have
offset each other, and the result would have been the same as the
result under our opinion in this case.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.