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transportation”. Alternatively, petitioners contend that the
amounts claimed on their Schedules C qualify as either a theft
loss under section 165(c)(2) or (3), a business bad debt under
section 166, or, at a minimum, a capital loss under section
165(f). Respondent rejects the proposition that petitioners were
actively engaged in a trade or business reportable on Schedule C
with respect to buying and selling Russian airplanes in 1992,
claiming instead that the business activity was conducted by a
corporation, Quotum, and that James participated in that activity
as Quotum’s president. Respondent also contests the alternative
grounds for deducting the amounts at issue, arguing that
petitioners have failed to satisfy their burden of proof. We
consider each of petitioners’ arguments below.
Did Petitioners Incur Deductible Losses in a Trade or Business?
As a general rule, ordinary and necessary expenses paid or
incurred during a taxable year in carrying on a trade or business
are deductible. See sec. 162(a). A taxpayer is engaged in a
trade or business if the taxpayer is involved in the activity (1)
with continuity and regularity, and (2) with the primary purpose
of making income or a profit. See Commissioner v. Groetzinger,
480 U.S. 23, 35 (1987). Petitioners have the burden of proving
that they were involved in a trade or business with respect to
the purchase and sale of Russian airplanes. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111 (1933).
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