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Accordingly, your 1992 and 1994 taxable incomes
are increased $5,000.00 and $3,558.00,
respectively.
Specifically, with respect to the disallowed Amazona loss,
respondent determined that it had not been established that the
entertainment fees, legal fees, travel expenses, and meal and
entertainment expenses claimed for the S corporation on
petitioner’s 1992 return were (1) ordinary and necessary business
expenses, or (2) expended for the purposes indicated. Respondent
further determined that petitioner was liable for a penalty under
section 6662(a) for 1992, 1993, 1994, and 1995 for substantial
understatements of income tax with respect to the entire
underpayment for each year.
OPINION
Issue 1. Villa del Mar Business Deductions
Section 162(a) allows a taxpayer a deduction for all the
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on a business. To be deductible under
section 162, an expense must be directly connected with or
proximately result from the taxpayer’s business. See Kornhauser
v. United States, 276 U.S. 145, 153 (1928). Capital
expenditures, however, may not be deducted under section 162, but
instead, generally must be added to the basis of the capital
asset for which they are incurred. See Woodward v. Commissioner,
397 U.S. 572, 574-575 (1970); see also secs. 263, 261, 161. In
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