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Barrett v. Commissioner
Court: United States Court of Appeals
Docket No: 96-1860
Case Date: 02/21/1997









[NOT FOR PUBLICATION]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
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Per Curiam. This appeal from a decision of the United __________

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.

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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 _____________

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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