Court Opinion

ID: 2964551
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:27:20.839046+00
Date Added: 2024-06-11T11:21:34.461382
License: Public Domain

USCA1 Opinion

	

                                [NOT FOR PUBLICATION]
                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT

                                 ____________________

        No. 96-1860

                     JOHN T. BARRETT, JR. AND JANE W. A. BARRETT,

                               Petitioners, Appellants,

                                          v.

                          COMMISSIONER OF INTERNAL REVENUE,

                                Respondent, Appellee.
                                 ____________________

                       APPEAL FROM THE UNITED STATES TAX COURT

                                 ____________________

                                        Before

                               Selya, Boudin and Lynch,
                                   Circuit Judges.
                                   ______________

                                 ____________________

            John T. Barrett, Jr. on brief pro se.
            ____________________
            Loretta C.  Argrett, Assistant Attorney  General, David I.  Pincus
            ___________________                               ________________
        and Paula  K. Speck, Attorneys,  Tax Division, Department  of Justice,
            _______________
        Washington, D.C., on brief for appellee.

                                 ____________________

                                  February 20, 1997
                                 ____________________

                 Per Curiam.  This  appeal from a decision of  the United
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            States  Tax Court finds its  origin in a  dispute between the

            appellants,  Mr.  and Mrs.  John  T.  Barrett, Jr.,  and  the

            Internal Revenue  Service  ("IRS")  over  the  Barretts'  tax

            liability for the  years 1989 and 1990.   On March  24, 1993,

            the IRS issued a notice of deficiency asserting  a deficiency

            of  $3,800.00 for  1989 and  a deficiency  of  $10,080.00 for

            1990.    In  addition,  the   IRS  asserted  accuracy-related

            penalties in the amount of $760.00 for 1989 and in the amount

            of $2,016.00  for 1990.   See  I.R.C.    6662.   Following  a
                                      ___

            trial,  the tax  court ruled  in favor  of the  IRS.   Having

            reviewed  the  record  and  the parties'  briefs,  we  affirm

            essentially  for the reasons stated  by the tax  court in its

            memorandum  dated  April 24,  1996.    We add  the  following

            comments.

                 The Barretts  argued below that they  suffered a capital

            loss in 1989--rather than the capital gain  determined by the

            IRS--because  the  subordinated note  ("Note")  given to  Mr.

            Barrett in 1989 by  Drexel Lambert Group, Inc.  ("Drexel") in

            connection  with the  redemption of  his Drexel  stock became

            worthless  by the end of that year.  Although the Barretts do

            not  press  on appeal  their  argument that  the  Note became

            worthless  in 1989, they do  argue that they  should not have

            been found  liable for an addition  to tax.   They admit that

            their 1989 tax return  contains a number of errors,  but they

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            argue  that   these  errors  are  excusable   and  that  they

            reasonably  determined the  Note to  be totally  worthless in

            1989.

                 We think  the tax  court  could properly  find that  the

            Barretts  were   negligent  in  maintaining  records  and  in

            providing  information to  their tax  return preparer.   They

            failed to supply  their tax preparer  with the correct  basis

            for the Drexel shares.   They also failed to mention the Note

            to their tax preparer.  We are unpersuaded by their excuses.1
                                                                        1

            Since  we do not think  the issue of  1989 worthlessness is a

            close one, we  see no clear error in the  tax court's finding

            sustaining  the  accuracy-related  penalty on  the  ground of

            negligence.  See Leuhsler v. Commissioner, 963 F.2d 907,  910
                         ___ ________    ____________

            (6th Cir.  1992) (observing  that a  tax court's  findings on

            negligence issues are reviewed for clear error).  

                 The  Barretts contested the deficiency determination for

            1990  on  the ground  that they  are entitled  to a  bad debt

            deduction for  that year.  See  I.R.C.   166.   To succeed on
                                       ___

            this contention, they  were required to  prove that the  Note

            became totally  worthless  in 1990.    Treas. Reg.     1.166-

            5(a)(2); Buchanan v. United States,  87 F.3d 197, 198-99 (7th
                     ________    _____________

                                
            ____________________

               1We  note, in  particular,  that the  Barretts have  never
               1
            adequately explained why they did not have (and keep) records
            of  the  amount they  paid  for the  stock.    Based on  such
            records, the  Barretts could  easily have supplied  their tax
            preparer with the correct basis of the stock.  

                                         -3-

            Cir.), cert. denied,  117 S.  Ct. 363 (1996).   The  Barretts
                   ____________

            failed to meet this burden.  

                 Drexel's filing for bankruptcy in 1990 is not enough, by

            itself,  to establish  that  the Note  became worthless  that

            year.  See  Cox v. Commissioner, 68  F.3d 128, 131  (5th Cir.
                   ___  ___    ____________

            1995).   Rather, the question whether  any of Drexel's assets

            would be available to pay the Note depends upon the value  of

            Drexel's assets,  the amount  and validity of  senior claims,

            and the cost of the bankruptcy administration.  See Dallmeyer
                                                            ___ _________

            v. Commissioner, 14 T.C. 1282, 1293 (1950).  We think the tax
               ____________

            court  could properly find  that the Barretts  failed to show

            these  latter factors  and  that the  record indicates  these

            factors could not be determined with any degree of  certainty

            in 1990.  In short, the  Barretts failed to meet their burden

            of  showing that the facts and circumstances known at the end
                                                         ________________

            of  1990 made it reasonable  to abandon hope  that they would
            ________

            recover  something  on their  Note.   See  Estate of  Mann v.
                                                  ___  _______________

            United States, 731  F.2d 267,  278 (5th Cir.  1984) ("If  and
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            when  [a debt]  becomes wholly  worthless must  be determined

            from the  facts and  circumstances known or  which reasonably

            could  have been  known at  the end of  the year  of asserted

            worthlessness.").

                 The trial  testimony of  Andrew Rothenberg cited  by the

            Barretts does not  alter our  conclusion.  It  is plain  that

            Rothenberg was  addressing the  prospects of recovery  on the

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            Note in 1992, when  the plan of reorganization  was proposed.

            By then,  the largest  claims against the  Drexel estate  had

            been settled.  The  participants in the bankruptcy proceeding

            presumably  had   a  much  clearer  picture   of  the  assets

            available, the claims  that would be allowed,  and the amount

            and  ranking of  claims.   Rothenberg  does  not address  the

            prospects   of  recovery   in   1990  based   on  facts   and

            circumstances known (or  reasonably knowable) by that  year's

            end.

                 Finally, the tax court readily could have found that the

            bare  allegation of  insolvency made  in Drexel's  1992 civil

            complaint lacked sufficient indicia of reliability to warrant

            admission  of  the complaint  under  Fed.  R. Evid.  803(24).

            Under  the circumstances,  the tax  court did  not abuse  its

            discretion in declining to admit the complaint for its truth.

            We reject  the Barretts' suggestion--made for  the first time

            in their reply brief--that the tax court did not finally rule

            on this issue.

                 Affirmed.
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