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In 1985, petitioner advertised through trade publications and product
brochures and claimed an advertising deduction of approximately $11,000. In
1986, while continuing to advertise through trade publications and product
brochures, petitioner also began to sponsor Sussex Farm. Prior to doing so,
petitioner consulted with John Alan Cohan, an attorney specializing in
equestrian matters, and was informed that petitioner's sponsorship of Sussex
Farm might be deductible as an ordinary and necessary business expense. The
terms of petitioner's sponsorship of Sussex Farm were not formalized in a
written contract. Instead, Mr. Vitale, in his capacity as petitioner's sole
director, determined how much to pay Sussex Farm. On its 1986, 1987, 1988,
and 1989 tax returns, petitioner deducted advertising expenses in the amounts
of $66,145, $66,323, $42,295, and $30,314, respectively. Of those amounts,
the total advertising expenses attributable to payments to or on behalf of
Sussex Farm in 1986, 1987, 1988, and 1989 were $55,850, $51,500, $35,206, and
$20,650, respectively. In each of these years, the amount paid was equal to
Sussex Farm's net expenses.
During the years in issue, Sussex Farm owned between 15 and 19 horses.
Sussex Farm showed one horse in 1986 and two horses in 1987, 1988, and 1989 in
various equestrian competitions. Whenever one of Sussex Farm's horses was
shown, petitioner's name was announced over a loudspeaker as the sponsor of
the horse.
On audit respondent challenged petitioner's advertising deductions
relating to Sussex Farm, and petitioner in response discontinued its
sponsorship of Sussex Farm in 1990.
OPINION
I. Deductibility of Petitioner's Payments to Sussex Farm
A. In General
The initial question before us is whether the payments in issue
constituted deductible business expenses, as petitioner maintains, or
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