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paid by you during the taxable year for ordinary and necessary
business purposes.”
It is axiomatic that a taxpayer does not have an inherent right
to take tax deductions. Deductions are a matter of legislative
grace, and a taxpayer must show that the deduction sought comes
within the express provisions of the statute. See INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Section 162(a) provides a
deduction for all ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business. A
cash basis taxpayer is entitled to a deduction for such expenses in
the year actually paid. See sec. 461(a); sec. 1.461-1(a)(1), Income
Tax Regs. We look to whether a “hardheaded” businessperson, under
the circumstances, would have incurred the expense. See, e.g., Cole
v. Commissioner, 481 F.2d 872, 876 (2d Cir. 1973), affg. T.C. Memo.
1972-177.
At the outset, we are mindful that HPD-Latigo employed the cash
method of accounting. The profit participation fee was not paid in
cash, but rather through an accounting entry–-an adjusted journal
entry. Assuming arguendo that the fee was paid in 1989, we agree
with respondent that the fee is not deductible because there has
been no showing that the fee constituted an ordinary and necessary
business expense.
First, there was no written agreement reflecting that HPD was
to provide services to HPD-Latigo. The two undated memoranda
petitioners introduced into evidence are suspect and not reliable.
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