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Under section 265(1)3, payments made to FPCF are not
deductible if they are allocable to a class of exempt income.
Section 265 provides the following:
No deduction shall be allowed for--
(1) Expenses.--Any amount otherwise allowable as a
deduction which is allocable to one or more classes of
income other than interest (whether or not any amount
of income of that class or classes is received or
accrued) wholly exempt from the taxes imposed by this
subtitle * * *.
Respondent contends that, as a section 501(c)(3)
organization from 1977 to October 1, 1982, petitioner's income
was exempt from tax under section 501(a) and as a result section
265(1) disallows deductions for expenses allocable to that
income. Thus, respondent argues, petitioner is not entitled to
deduct payments to the FPCF attributable to insurance coverage
for years in which petitioner was a tax-exempt organization.
Based upon the record, we find that a dispute of material
fact exists as to both the amount of the payments made by
petitioner to the FPCF and the years to which these payments
correspond. Petitioner argues that it is allowed as ordinary and
necessary business expenses the amounts paid to the FPCF under
the settlement agreement. The settlement agreement, at least in
part, required petitioner to make payments for taxable years in
which petitioner was an exempt organization. Petitioner argues
3Sec. 265(1) was redesignated as sec. 265(a)(1) by sec.
902(d) of the Tax Reform Act of 1986.
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