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all Rule references are to the Tax Court Rules of Practice and
Procedure. Mr. Welton resided in Solvang, California, at the
time his petition was filed.
After concessions, the only remaining issues are whether
expenses reported on Mr. Welton's 1994 Schedule C (Profit or Loss
From Business) are deductible and whether Mr. Welton is liable
for an accuracy-related penalty pursuant to section 6662(a). Mr.
Welton contends that he is involved in numerous business
activities (i.e., investing in securities, developing and selling
software, and selling real estate) and that he is allowed to
deduct the expenses reported on his Schedule C. Respondent
disallowed these expenses.
Section 162(a) provides that a taxpayer engaged in a trade
or business may deduct all ordinary and necessary expenses. A
taxpayer who is not engaged in a trade or business may deduct,
pursuant to section 212, ordinary and necessary expenses paid or
incurred in producing or collecting income. An expenditure is
not "ordinary and necessary" unless the taxpayer establishes that
it is directly connected with, or proximately related to, the
taxpayer's activities. See Bingham's Trust v. Commissioner, 325
U.S. 365, 370 (1945). Mr. Welton established that he incurred
some of the disallowed expenses. His testimony and the evidence
he presented, however, did not establish that his reported
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Last modified: May 25, 2011