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(3) the liability with respect to which the taxpayer
incurred the expense arose under a Federal or State law;
(4) the act or failure to act which gave rise to the
liability occurred at least 3 years before the taxable year at
issue;
(5) the taxpayer used the accrual method of accounting
throughout the period in which the acts or failures to act giving
rise to the liability occurred; and
(6) the specified liability loss for any taxable year does
not exceed the net operating loss for that year. Sec.
172(f)(1)(B) and (2).
The parties agree that petitioners meet requirements (1),
(2), (5), and (6). To prevail, petitioners must also meet
requirements (3) and (4).
Deductions are a matter of legislative grace, and
petitioners bear the burden of proving that they are entitled to
any deductions they claimed on their returns. Rule 142(a);
Deputy v. DuPont, 308 U.S. 488, 493 (1940); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, 290
U.S. 111, 115 (1933).
B. Whether the Liability for Which Petitioners Incurred the
Expense Arose Under a Federal or State Law
1. Petitioner’s Liability To Pay for Professional Services
To be a specified liability loss, the liability with
respect to which petitioners incurred the expense must have
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