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business is not deductible by an individual in computing AGI.
In Rev. Rul. 58-142, 1958-1 C.B. 147, the Commissioner stated
that an individual's payment of State income taxes, interest on
State and Federal income taxes, and litigation expenses related
to these taxes was "not attributable to a trade or business",
even if these expenses were related to business income or
deductible under section 212. The Commissioner ruled that these
State income taxes, interest on State and Federal income taxes,
and litigation expenses were not deductible from gross income in
computing AGI under former section 62(a)(1). The Commissioner
also ruled that these State income taxes, interest on State and
Federal income taxes, and litigation expenses did not generate an
NOL under section 172(d)(4).
The Commissioner's ruling in Rev. Rul. 58-142, supra, with
respect to AGI, was based on former section 1.62-1(d), Proposed
Income Tax Regs., 21 Fed. Reg. 8403 (Nov. 2, 1956), which
provides:
To be deductible for the purposes of determining
adjusted gross income, expenses must be those directly,
and not those merely remotely, connected with the
conduct of a trade or business. For example, taxes are
deductible in arriving at adjusted gross income only if
they constitute expenditures directly attributable to a
trade or business or to property from which rents or
royalties are derived. Thus, property taxes paid or
incurred on real property used in a trade or business
are deductible, but State taxes on net income are not
deductible even though the taxpayer's income is derived
from the conduct of a trade or business.
The Commissioner's ruling with respect to the NOL was primarily
based on this Court's decisions in Maxcy v. Commissioner, 26 T.C.
526 (1956), and Aaron v. Commissioner, 22 T.C. 1370 (1954). In
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