USCA1 Opinion
[NOT FOR PUBLICATION]
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 96-1860
JOHN T. BARRETT, JR. AND JANE W. A. BARRETT,
Petitioners, Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
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APPEAL FROM THE UNITED STATES TAX COURT
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Before
Selya, Boudin and Lynch,
Circuit Judges.
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John T. Barrett, Jr. on brief pro se.
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Loretta C. Argrett, Assistant Attorney General, David I. Pincus
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and Paula K. Speck, Attorneys, Tax Division, Department of Justice,
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Washington, D.C., on brief for appellee.
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February 20, 1997
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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
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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
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(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
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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
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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.
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Cir.), cert. denied, 117 S. Ct. 363 (1996). The Barretts
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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.
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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
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v. Commissioner, 14 T.C. 1282, 1293 (1950). We think the tax
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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
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of 1990 made it reasonable to abandon hope that they would
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recover something on their Note. See Estate of Mann v.
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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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