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service providers are deductible under section 162(a)(1), which
allows a deduction for "expenses incurred in carrying on any
trade or business, including * * * a reasonable allowance for
salaries or other compensation for personal services actually
rendered".
In Commissioner v. Groetzinger, 480 U.S. 23 (1987), the
Supreme Court said that in order for a taxpayer to be in a trade
or business, within the meaning of section 162, the "primary
purpose" for engaging in the activity must be for profit. The
Supreme Court stated:
the taxpayer must be involved in the activity with
continuity and regularity and * * * the taxpayer's
primary purpose for engaging in the activity must be
for income or profit. * * * [Id. at 35.]
The Court of Appeals for the Third Circuit has explained:
"It is well established that in order to take a deduction for
expenses incurred in carrying out a trade or business the
taxpayer must have entered into the venture with the primary and
predominant purpose and objective of making a profit." Simon v.
Commissioner, 830 F.2d 499, 500 (3d Cir. 1987), affg. T.C. Memo.
1986-156. "While a reasonable expectation of profit is not
essential, the profit motive must be bona fide." Id. (citing Fox
v. Commissioner, 80 T.C. 972, 1006 (1983), affd. without
published opinion 742 F.2d 1441 (2d Cir. 1984), affd. sub nom.
Barnard v. Commissioner, 731 F.2d 230 (4th Cir. 1984), Zemel v.
Commissioner, 734 F.2d 9 (3d Cir. 1984), Rosenblatt v.
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