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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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.

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.
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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.