Midwest Industrial Supply, Inc. - Page 5

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          constituted payment by petitioner of its sole shareholder's personal expenses,
          as respondent maintains.  This is a factual question, and the burden of proof
          rests with petitioner.  Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115  
               Two legal principles are central to this case.  First, taxpayers may   
          deduct "all the ordinary and necessary expenses paid or incurred during the 
          taxable year in carrying on any trade or business".  Sec. 162.  Second,     
          transactions between closely held corporations and their shareholders are   
          examined with special scrutiny.  Electric & Neon, Inc. v. Commissioner, 56  
          T.C. 1324, 1339 (1971), affd. without published opinion 496 F.2d 876 (5th Cir.
          1974); Georgiou v. Commissioner, T.C. Memo. 1995-546.                       
               B.  Qualification of Expenses as "Ordinary"                            
               Deductions are not "ordinary" unless they bear a reasonably proximate  
          relationship to the operation of the taxpayer's business.  Deputy v. du Pont,
          308 U.S. 488, 495-496 (1940).  It is well established that, where the primary
          purpose of a corporate sponsorship is to pay an individual's personal       
          expenses, the amounts expended are not deductible.  See, e.g., W.D. Gale, Inc.
          v. Commissioner, T.C. Memo. 1960-191, affd. 297 F.2d 270 (6th Cir. 1961)    
          (concluding that a corporate taxpayer could not deduct costs of a powerboat 
          that bore the corporation's name and competed in races, because racing was  
          primarily a hobby of the principal shareholder); Burrous v. Commissioner, T.C.
          Memo. 1977-364.                                                             
               At trial, Mr. Vitale attempted to establish a nexus between            
          petitioner's business and the advertising deductions by asserting that      
          petitioner had sold dust control products to horse-related facilities as a  
          result of its sponsorship of Sussex Farm.  Mr. Vitale did not provide the   
          purchasers' names or any documentary evidence to support this assertion.  In
          short, Mr. Vitale has failed to persuade us that these sales were made.     

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