
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                                [NOT FOR PUBLICATION]                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                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                 __________            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                                         -2-            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            _____________            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                                         -4-            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.                 ________                                         -5-
