Frank and Virginia Muhich - Page 23

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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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