Dennis L. and Sharon E. Hayden - Page 4

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          on the underpayment resulting from disallowance of the portion of            
          the Schedule C deduction expended for Federal income taxes.                  
          1.  Section 179                                                              
               Section 179(a) provides:                                                
               A taxpayer may elect to treat the cost of any section 179               
               property as an expense which is not chargeable to capital               
               account.  Any cost so treated shall be allowed as a                     
               deduction for the taxable year in which the section 179                 
               property is placed in service.                                          
          Under section 179(b)(1), the deduction is limited, inter alia, to            
          $17,500 and "shall not exceed the aggregate amount of taxable                
          income of the taxpayer for such taxable year which is derived                
          from the active conduct by the taxpayer of any trade or business             
          during such taxable year."  Sec. 179(b)(3)(A).  For purposes of              
          section 179(b)(3)(A), taxable income is computed without regard              
          to the section 179 deduction.  See sec. 179(b)(3)(C).  Section               
          179(d)(8) further provides:  "In the case of a partnership, the              
          limitations of subsection (b) shall apply with respect to the                
          partnership and with respect to each partner."  The regulations              
               The taxable income limitation * * * applies to the                      
               partnership as well as to each partner.  Thus, the                      
               partnership may not allocate to its partners as a section               
               179 expense deduction for any taxable year more than the                
               partnership's taxable income limitation for that taxable                
               year, and a partner may not deduct as a section 179 expense             
               deduction for any taxable year more than the partner's                  
               taxable income limitation for that taxable year.  [Sec.                 
               1.179-2(c)(2), Income Tax Regs.]                                        
          Petitioners acknowledge that under section 1.179-2(c)(2), Income             
          Tax Regs., the section 179 deduction claimed here is not                     
          allowable.  They argue, however, that the regulation is invalid.             

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