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First, respondent seems to argue that petitioner is not
entitled to any deduction because it was no longer in the
hospital business to which the expenses attached at the time of
payment or accrual. This position is without merit. It has long
been established that, if an expense relates to a trade or
business, a taxpayer is still entitled to a deduction for payment
in a later year even though the taxpayer is no longer engaged in
that trade or business. Dowd v. Commissioner, 68 T.C. 294, 301
(1977); Burrows v. Commissioner, 38 B.T.A. 236, 238 (1938).
Second, given that the FPCF payments related back to
petitioner's hospital business prior to May 1983, what is the
impact of the fact that, at that time, petitioner was exempt
under section 501(c)(3)? Respondent argues that this exempt
status precludes petitioner from claiming the deductions under
section 162(a) because such deductions are precluded by section
265(1),12 which denies deductions allocable to tax-exempt income
and, as provided in sections 161 and 261, has priority over
section 162(a). Petitioner's argument fails to take into account
12 Sec. 265(1) (now sec. 265(a)(1)) provides:
No deduction shall be allowed for--
(1) Expenses.--Any amount otherwise
allowable as a deduction which is allocable to one
or more classes of income other than interest
(whether or not any amount of income of that class
or classes is received or accrued) wholly exempt
from the taxes imposed by this subtitle * * *
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