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Petitioner's 1985-89 Federal income tax returns were
examined by respondent. The examination resulted in petitioner’s
receipt, in March 1992, of respondent’s no-change report and
letter with respect to his 1989 reported income and deductions.
OPINION
Section 162 allows as a deduction all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on
a trade or business. Section 172(d)(4) allows section 162
deductions in excess of gross income to be carried forward as a
net operating loss for 15 years following the taxable year of the
loss. Section 167 provides, in part, for depreciation deductions
with respect to property used in a trade or business.
Respondent determined that petitioner did not engage in the
drilling business during the taxable years 1986 and 1991 with the
intent to earn a profit. Respondent disallowed the deductions in
1991 attributable to petitioner's drill rig activity, maintaining
that petitioner was not in business in 1986, and that
petitioner's drilling equipment was not in business use in 1986
or 1991.
Respondent concedes that if petitioner was engaged in
business in 1986, he incurred a net operating loss of $25,546
that he can carry forward to 1991, the year before us, without
regard to his later trade or business status and the proper
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