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Deductions are allowed under section 162 for the ordinary
and necessary expenses of carrying on an activity which
constitutes the taxpayer's trade or business. Deductions are
allowed under section 212 for expenses paid or incurred in
connection with an activity engaged in for the production or
collection of income, or for the management, conservation, or
maintenance of property held for the production of income. With
respect to either section, the taxpayer must demonstrate a profit
objective for the activities in order to deduct associated
expenses. See Agro Science Co. v. Commissioner, 934 F.2d 573,
576 (5th Cir. 1991), affg. T.C. Memo. 1989-687; Antonides v.
Commissioner, 893 F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C.
686 (1988); Allen v. Commissioner, 72 T.C. 28, 33 (1979);
Jasionowski v. Commissioner, 66 T.C. 312, 320-322 (1976); Rand v.
Commissioner, 34 T.C. 1146, 1149 (1960); sec. 1.183-2(a), Income
Tax Regs. While a reasonable expectation of profit is not
required, a taxpayer's profit motive must be bona fide. Simon v.
Commissioner, 830 F.2d 499, 500 (3d Cir. 1987), affg. T.C. Memo.
1986-156.
Respondent argues that for purposes of section 183, a
taxpayer must prove that profit was the primary purpose for
engaging in the activity. In Simon v. Commissioner, supra at
500, the Court of Appeals for the Third Circuit, the court to
which this case is appealable, stated:
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Last modified: May 25, 2011