- 7 -
petitioners' net royalty income, not upon property held for the
production of royalties. Moreover, as the State income taxes
were imposed on petitioners' net royalty income, the State income
taxes were not an expense directly incurred in the production of
that income. See, e.g., Bulloch, Accountants' Cost Handbook 1.9
(3d ed. 1983) (expenses are expired costs that were used to
produce revenue). Accordingly, we find that the State
nonresident income taxes paid by petitioners are not attributable
to property held for the production of royalties.
Furthermore, we find that the taxes are not otherwise
deductible as a trade or business expense in computing
petitioners' adjusted gross income. Section 1.62-1T(d),
Temporary Income Tax Regs., supra, provides that to be deductible
for the purposes of determining adjusted gross income, expenses
must be those directly, and not those merely remotely, connected
with the conduct of a trade or business.
For example, taxes are deductible in arriving at
adjusted gross income only if they constitute
expenditures directly attributable to a trade or
business or to property from which rents or royalties
are derived. Thus, property taxes paid or incurred on
real property used in a trade or business are
deductible, but state taxes on net income are not
deductible even though the taxpayer's income is derived
from the conduct of a trade or business. [Id.]
The committee reports and the regulations specifically state
that State taxes on net income are not deductible for the purpose
Page: Previous 1 2 3 4 5 6 7 8 9 Next
Last modified: May 25, 2011