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must determine whether they are deductible as compensation to
Peters. If the fees are not deductible by PGWV, we must
determine whether Peters, individually, is entitled to a
deduction under section 212(1). Petitioners have the burden of
proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).
1. Deductibility of Legal Fees by PGWV Under Section 162(a)
Section 162(a) allows a deduction for "all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business". For an expense to be
deductible under section 162(a), it must meet five basic
elements: (a) It must be ordinary; (b) it must be necessary; (c)
it must be paid or incurred by the taxpayer in the taxable year;
(d) there must be a trade or business; and (e) the expense must
arise in connection with or proximately result from that trade or
business. O'Malley v. Commissioner, 91 T.C. 352, 361 (1988).
These elements are in the conjunctive: if just one is not
satisfied, the deduction is not allowed. Because we make our
decision based on the last element, whether the expenses arose in
the carrying on of PGWV's trade or business, we do not consider
the other elements. Respondent has conceded that legal fees of
$128,854.71, $198,431.67, and $135,659.23 were incurred for the
tax years 1988 through 1990, respectively, and that PGWV paid
them.
Respondent argues that the legal fees are personal in
nature, and they did not arise in connection with or proximately
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