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Petitioners contend as an alternative argument that if they
are not allowed to treat the $250,000 and $140,000 as cost of
goods sold in 1991 and 1992, respectively, they should either be
allowed a business expense deduction under section 162(a) or a
business bad debt deduction under section 166(a). Respondent
objects to these arguments because petitioners raised them for
the first time in their opening brief.4 While it is true that
respondent had no opportunity to explore facts regarding these
theories with petitioner during his testimony, given the fact
that they do not hold merit and can be quickly addressed, we
shall consider petitioners’ alternative arguments.
With regard to petitioners’ assertion that the claimed cost
of goods sold should be allowed as an ordinary and necessary
business expense under section 162(a), petitioners have failed to
establish that the amounts reported as cost of goods sold are
ordinary or necessary business expenses deductible under section
162. Indeed, the evidence supports a finding that the $250,000
and $140,000 that petitioners claim are deductible represented
simply the expected return on funds that petitioner advanced as
working capital to Lee. As such, the amounts were more akin to a
4 A party may rely upon a theory only if it provided the
opposing party with fair warning that it intended to make an
argument based upon that theory. Pagel, Inc. v. Commissioner, 91
T.C. 200, 211 (1988), affd. 905 F.2d 1190 (8th Cir. 1990).
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