David E. and Rebecca Newman - Page 9

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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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