- 32 -
Maxcy v. Commissioner, supra at 527, the Court held that the
taxpayer failed to prove that he could compute an NOL by
deducting from his gross income a claimed business expense of
interest on underpayments of personal income tax. In Aaron v.
Commissioner, supra at 1376, the Court sustained the
Commissioner's determination that the taxpayer could not compute
an NOL by deducting the State income taxes that he claimed were
related to his business income. According to the Court, the
phrase "attributable to" meant that an expense had to bear a
"direct relation" to the individual's business. Id.
In Rev. Rul. 70-40, 1970-1 C.B. 50, the Commissioner
reconsidered and reversed her position in Rev. Rul. 58-142,
supra, insofar as it held that State income taxes, deficiency
interest, and litigation expenses related to a taxpayer's
business income were nondeductible nonbusiness expenses for
purposes of determining an NOL.2 Prior to her reconsideration,
this and other Courts had consistently rejected that position.
First, in Standing v. Commissioner, supra at 795, this Court held
that the taxpayer's deficiency interest and professional fees
were deductible as business expenses under sections 22(n)(1) and
2 At the same time, the Commissioner reaffirmed her view
that these expenses were not deductible in computing AGI. The
Commissioner explained her inconsistency in these two views by
noting that the legislative history of sec. 172(d)(4) contained
no language comparable to the language in the legislative history
of former sec. 62(a)(1) which stated that expenses deductible in
arriving at AGI must be "directly incurred" in carrying on a
trade or business, and that State income taxes are not directly
incurred. Rev. Rul. 70-40, 1970-1 C.B. 50, 50-51.
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