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expenses were both ordinary and necessary. See Northwestern Ind.
Tel. Co. v. Commissioner, 127 F.3d 643, 646 (7th Cir. 1997),
affg. T.C. Memo. 1996-168. Deductions are a matter of
legislative grace. See INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992).
In the context of section 162, an expense is necessary if it
is appropriate or helpful for the development of the taxpayer's
business. See Welch v. Helvering, 290 U.S. at 114. An expense
is ordinary if it relates to a transaction commonly or frequently
occurring in the taxpayer's business community. See INDOPCO,
Inc. v. Commissioner, supra at 85 (discussing the requirements of
section 162).
It follows from our holding that the trusts were shams and
should be ignored for tax purposes that the payments in pursuance
of the scheme were not ordinary and necessary business expenses
under section 162. The expenses were not appropriate or helpful
for the development of Midwest's photography business, nor was
there any evidence they were a usual expense within Midwest's
business community. We hold the payments to the trust promoters
(Bartoli and Aegis) are not deductible under section 162.
Turning to constructive dividends, taxpayers must include
dividends in gross income. See sec. 61(a)(7). When a
corporation distributes property to a shareholder as a dividend,
the shareholder must include in gross income the distribution to
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