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[NOT FOR PUBLICATION]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
___________________
and Paula K. Speck, Attorneys,
_______________

General, David I. Pin

_____________

Tax Division, Department

Washington, D.C., on brief for appellee.

____________________

of Justi

February 20, 1997

____________________

Per Curiam.
__________

States

This

appeal from a decision of

Tax Court finds its

origin in a

the United

dispute between the

appellants,

Mr.

Internal Revenue

liability for the

and Mrs.

John

Service

("IRS")

T.

Barrett, Jr.,

over

the

years 1989 and 1990.

and

the

Barretts'

tax

On March

the IRS issued a notice of deficiency asserting

of

$3,800.00 for

1990.

In

1989 and

addition,

a deficiency

the

IRS

of

asserted

24, 1993,

a deficiency

$10,080.00 for

accuracy-related

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

of $2,016.00

trial,

for 1990.

the tax

reviewed

the

essentially

memorandum

comments.

See
___

court ruled

record

and

I.R.C.

6662.

in favor

of the

the parties'

for the reasons stated

dated

April 24,

1996.

Following

IRS.

briefs,

by the tax

We add

Having

we

affirm

court in its

the

following

The Barretts

argued below that they

suffered a capital

loss in 1989--rather than the capital gain

IRS--because

the

subordinated note

Barrett in 1989 by

connection

worthless

not

press

worthless

been found

determined by the

("Note")

given to

Drexel Lambert Group, Inc.

with the

redemption of

by the end of that year.

on appeal

their

in 1989, they do

their 1989 tax return

("Drexel") in

his Drexel

stock became

Although the Barretts do

argument that

argue that they

liable for an addition

to tax.

the

Note became

should not have

They admit that

contains a number of errors,

-2-

Mr.

but they

argue

that

reasonably

these

errors

determined the

are

excusable

Note to

and

be totally

that

they

worthless in

1989.

We think

Barretts

providing

the tax

were

court

negligent

information to

failed to supply

in

could properly

maintaining

find that

records

the

and

in

their tax

return preparer.

They

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

the issue of

we do not think

close one, we

sustaining

(6th Cir.

see no clear error in the

the

negligence.

1989 worthlessness is a

accuracy-related

tax court's finding

penalty on

the

ground of

See Leuhsler v. Commissioner, 963 F.2d 907,

___ ________
____________

1992) (observing

that a

tax court's

910

findings on

negligence issues are reviewed for clear error).

The

1990

on

Barretts contested the deficiency determination for

the ground

deduction for

that year.

this contention, they

became totally

that they

See
___

are entitled

I.R.C.

were required to

worthless

in 1990.

5(a)(2); Buchanan v. United States,

________
_____________

166.

to a

bad debt

To succeed on

prove that the

Treas. Reg.

Note

1.166-

87 F.3d 197, 198-99 (7th

____________________

1We
1

note, in

particular,

that the

Barretts have

never

adequately explained why they did not have (and keep) records
of

the

amount they

records, the

paid

Barretts could

for the

stock.

Based on

easily have supplied

preparer with the correct basis of the stock.

-3-

such

their tax

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,

year.

1995).

to establish

See
___

that

the Note

Cox v. Commissioner, 68
___
____________

Rather, the question whether

became worthless

F.3d 128, 131

that

(5th Cir.

any of Drexel's assets

would be available to pay the Note depends upon the value

Drexel's assets,

the amount

and validity of

senior claims,

and the cost of the bankruptcy administration.

v. Commissioner, 14 T.C. 1282, 1293 (1950).

____________

court

could properly find

that the Barretts

these

latter factors

that the

and

of

See Dallmeyer
___ _________

We think the tax

failed to show

record indicates

factors could not be determined with any degree of

these

certainty

in 1990.

of

In short, the

Barretts failed to meet their burden

showing that the facts and circumstances known at the end

________________

of 1990 made it reasonable

________

recover

something

on their

United States, 731

_____________

when

[a debt]

from the

could

to abandon hope

Note.

F.2d 267,

becomes wholly

facts and

have been

See
___

Estate of Mann v.
_______________

278 (5th Cir.

1984) ("If

worthless must

circumstances known or

known at

that they would

the end of

and

be determined

which reasonably

the year

of asserted

worthlessness.").

The trial

testimony of

Barretts does not

Rothenberg was

alter our

addressing the

Andrew Rothenberg cited

conclusion.

It

is plain

prospects of recovery

by the

that

on the

-4-

Note in 1992, when

By then,

the largest

been settled.

presumably

the plan of reorganization

had

The

claims against the

was proposed.

Drexel estate

had

participants in the bankruptcy proceeding

available, the claims

much

clearer

picture

that would be allowed,

of

the

assets

and the amount

and

ranking of

prospects

of

claims.

recovery

circumstances known (or

Rothenberg

in

1990

does

not address

based

on

facts

reasonably knowable) by that

the

and

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

Under

of

the complaint

the circumstances,

under

the tax

Fed.

R. Evid.

court did

803(24).

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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