Derwyn J. Booker - Page 10

          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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