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Year Corporation Muscle Car Expense Improper Deduction
1989 FGI $202,453 $243,682
TTI 136,645 152,838
BEL -- --
1990 FGI 257,604 291,930
TTI 16,259 16,259
BEL -- --
1991 FGI 2,123 10,615
TTI -- --
BEL 9,487 40,503
Totals $624,571 $755,827
Respondent agrees that these expenses relate to petitioners'
muscle car collection; however, she disagrees that the
expenditures constitute deductible expenses. Respondent argues
that petitioners have not established that these expenditures are
ordinary and necessary, as opposed to capital expenditures, and
that petitioners had not yet entered into a trade or business in
1989, 1990, or 1991; i.e., petitioners' activities were
preparatory, at best, to future business activities. We agree.
A taxpayer who is carrying on a trade or business may deduct
all the ordinary and necessary expenses paid or incurred in
connection with the operation of the business. Sec. 162(a).
However, an expense paid or incurred must be capitalized and may
not be deducted if it materially enhances the value, use, life
expectancy, strength, or capacity of the property. Sec.
1.263(a)-1(b), Income Tax Regs. Petitioners have not proven that
the expenditures in question did not materially enhance the
value, use, life expectancy, or strength of the muscle cars.
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