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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
(1933).
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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