OPINION
Issue 1. Encore
Section 162 allows a deduction for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on
a trade or business. In order to establish entitlement to
deductions and credits, taxpayers have the burden of proving that
they meet the statutory requisites. New Colonial Ice Co. v.
Commissioner, 292 U.S. 435 (1934).
Section 38 allows a credit for investment in certain
depreciable property. The amount of the credit is limited to a
percentage of a taxpayer’s qualified investment in section 38
property. Sec. 46(a). Qualified investment in new property is a
percentage of the property’s basis, generally its cost. Secs.
46(c)(1), 1012. The lessor of the property, here Encore, may
elect to pass through the credit to the lessee, here petitioner,
and the lessee generally is treated as having acquired the
property for its fair market value. Sec. 48(d).
In Mahoney v. Commissioner, 808 F.2d 1219 (6th Cir. 1987),
affg. 85 T.C. 127 (1985), the Court of Appeals for the Sixth
Circuit, where an appeal of the instant case would lie,
determined that in order to be valid, a transaction giving rise
to asserted deductions must satisfy both components of a two-
prong test. See also Pasternak v. Commissioner, 990 F.2d 893
(6th Cir. 1993), affg. Donahue v. Commissioner, T.C. Memo. 1991-
181; Rose v. Commissioner, 868 F.2d 851 (6th Cir. 1989), affg. 88
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Last modified: May 25, 2011