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OPINION
Issue 1. Section 162(a) Expenses
The primary issue for decision is whether petitioner is
entitled to deduct expenses which respondent characterizes as the
costs of processing and delivering mail from Guatemala to the
United States. Petitioner contends that these so-called inbound
delivery expenses were incurred for valid business reasons: (1) The
inbound mailings included petitioner's promotional materials which
generated substantial business to petitioner during the year in
issue, and (2) the inbound mailings were used to provide petitioner
with a continuously updated mailing list. Thus, petitioner asserts
that the "inbound delivery expenses" were tied directly to its
outbound courier business inasmuch as they were incurred both to
develop new business and maintain (or protect) its ability to
contact current or previous customers. Respondent, on the other
hand, argues that petitioner was not in the business of delivering
items from Guatemala to the United States, and thus the expenses
are nondeductible. Respondent further contends that petitioner's
business was not conducted at arm's length but rather as a
"cooperative Guatemala-U.S. venture" between family members.
Section 162(a) provides that "There shall be allowed as a
deduction all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business". The
test is whether a "hardheaded" businessperson, under the
circumstances, would have incurred the expense. See, e.g., Cole v.
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Last modified: May 25, 2011