10 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 proximatelyPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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