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No part of the Payments constitutes a capital expenditure.
No part of the Payments is allocable to a class of income wholly
exempt from income taxes. No part of the Payments is interest on
indebtedness incurred or continued to purchase or carry
obligations the interest on which is wholly exempt from income
taxes.
Petitioner’s obligation to make the Payments arose from the
Trustee’s filing of the Third Account. The Payments were
incurred in entirety for, and are proximately related to, the
production or collection of income, or for the management,
conservation, or maintenance of property held for the production
of income.
OPINION
Petitioner contends that the Payments are deductible under
section 212 as expenses arising from an attempt to produce income
or to preserve, maintain, and conserve property held for the
production of income.
Respondent contends that the Payments are not deductible
under section 212 because they were not ordinary and necessary
–-in particular, respondent states that the Payments were not
made “with the purpose and reasonable expectation that income
would flow directly therefrom to” petitioner (sec. 212(1)), and
that petitioner’s “immediate purpose” for making the Payments was
not “the management, conservation, or maintenance of property
held for the production of income”, sec. 212(2). In addition,
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