                  T.C. Summary Opinion 2003-150



                     UNITED STATES TAX COURT



     DAVID G. LAGRAFF AND CYNTHIA L. LAGRAFF, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8540-02S.             Filed October 14, 2003.



     David G. LaGraff and Cynthia L. LaGraff, pro sese.

     Cameron M. McKesson, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.
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     Respondent determined a deficiency in petitioners’ Federal

income tax of $1,716 for the taxable year 1999.

     After concessions by petitioners, the sole issue remaining

for decision is whether petitioners are entitled to a bad debt

deduction.

     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

Madera, California, on the date the petition was filed in this

case.

     From November 1998 through May 1999, petitioner husband

(petitioner) worked as an independent contractor for Anderson

Mortgage Group, Inc. (Anderson), as a loan officer.    In this

capacity, petitioner earned commissions for real estate mortgage

loans which he procured, funded, and closed.    Petitioner’s

contract with Anderson provided that either party had the right

to terminate the contract for any reason by providing the other

party with 24 hours’ written notice.    The contract further

provided that upon termination “any loans procured but not funded

or closed will become the property of Anderson Mortgage and no

compensation will be due” petitioner.    In May 1999, Anderson

terminated the contract after giving petitioner the required 24

hours’ notice.   In July 1999, an attorney retained by petitioner

wrote Anderson, stating that petitioner was “due approximately
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$15,000.00 in commissions for loans that he worked on before his

termination and which have in fact been funded and closed since

his termination.”    Petitioner’s counsel cited as authority for

this position a contractual covenant implied under California

law.

       Petitioners filed a joint Federal income tax return for

taxable year 1999.    With this return, they filed a Schedule C,

Profit or Loss From Business, for petitioner’s business as a loan

officer.    On this schedule, they reported an expense of $15,000

from “bad debts from sales or services”.      This amount represents

the commissions which petitioners assert that Anderson owes

petitioner.    Petitioners, as cash-basis taxpayers, had never

reported as income any portion of the $15,000 of purported

commissions due petitioner.    In the notice of deficiency,

respondent disallowed in full the bad debt deduction.

       A deduction generally is allowed for debts, other than

nonbusiness debts, which become worthless during the taxable

year.    Sec. 166(a)(1), (d)(1).    However, a taxpayer is not

entitled to a bad debt deduction for the value of unpaid wages or

other items of income which have never been reported as income.

Gertz v. Commissioner, 64 T.C. 598 (1975).      The regulations under

section 166 provide in relevant part:

            Worthless debts arising from unpaid wages, salaries,
       fees, rents, and similar items of taxable income shall not
       be allowed as a deduction under section 166 unless the
       income such items represent has been included in the return
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     of income for the year for which the deduction as a bad debt
     is claimed or for a prior taxable year.

Sec. 1.166-1(e), Income Tax Regs.

     The amount of the alleged bad debt in this case represents

commissions which petitioner asserts he was owed for services

rendered as an independent contractor, but which were never paid

to him.   Assuming arguendo that a bona fide debt existed,

petitioners nevertheless are not entitled to a bad debt deduction

because the commissions are items of income, sec. 61(a), which

were never included in petitioners’ income, sec. 1.166-1(e),

Income Tax Regs.   We therefore need not reach respondent’s

alternative argument that there was no bona fide debt with

respect to the unpaid commissions.     Gertz v. Commissioner, supra.

     At trial, petitioner stated that he did not report the

$15,000 in commissions as income “since I never received it, * *

* although I have offered to declare it if necessary * * * if

that would fix the problem.”   We note that, if petitioners had

reported the $15,000 as income on the Schedule C in 1999 along

with the claimed $15,000 deduction, the two items would have

offset each other, and the result would have been the same as the

result under our opinion in this case.
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    Reviewed and adopted as the report of the Small Tax Case

Division.

                                     Decision will be entered

                             for respondent.
