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To be deductible as a trade or business expenses under section
162(a), the expense must be ordinary and necessary. See
Commissioner v. Tellier, 383 U.S. 687, 689 (1966); Deputy v. du
Pont, 308 U.S. 488, 495 (1940). Both petitioners testified at
trial. Petitioners’ return preparer was present at trial and was
allowed to sit at counsel table to assist petitioners in the
presentation of their case; she was not called as a witness.
Although questioned on the points, petitioners failed to
establish that the following deductions were ordinary and
necessary to the operation of their horse racing activity:
Custom hire--$1,600; insurance--$817.92; interest (other)--
$1,494.67; repairs--$2,274.82; and taxes--$1,892. Consequently,
petitioners are not entitled to deductions for those items.
Petitioners’ horse racing activity was conducted at their
farm, which was also their residence. Deductions attributable to
the use of a taxpayer’s residence in the taxpayer’s trade or
business are limited by the amount of gross income derived from
such use. See sec. 280A(c)(5). As best as can be determined
from the record, the mortgage interest deduction of $1,665.96
claimed on the Schedule F relates to the mortgage on petitioners’
residence. Some or all of the amount might be allowable as an
itemized deduction. See section 163. (Petitioners did not elect
to itemize deductions on their 1994 return.) Nevertheless,
because of the amount of gross income earned by petitioners in
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