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Section 162 allows a deduction for all ordinary and
necessary expenses incurred in carrying on a trade or business.
As a general rule, payment by one taxpayer of the obligation of
another taxpayer is not an ordinary and necessary expense. See
Welch v. Helvering, 290 U.S. 111, 114 (1933). Generally, courts
have held that where one taxpayer pays expenses on behalf of
another taxpayer, the expenses are not deductible. See Deputy v.
du Pont, 308 U.S. 488 (1940); Dietrick v. Commissioner, 881 F.2d
336, 339 (6th Cir. 1989), affg. T.C. Memo. 1988-180.
Respondent contends that AJCS’s claimed $2,261,555 deduction
on its 1993 tax return represents expenses that AJCS paid to
complete the construction projects that had been transferred to
the four affiliates and, therefore, are not deductible expenses
of AJCS. Petitioners agree that the expenses paid by AJCS were
in aid of the completion of the transferred contracts of the four
affiliates. Nevertheless, petitioners advance several arguments
in support of the position that the expenses are deductible by
AJCS.
First, petitioners argue that the facts of this case fit
within the narrow exception carved out by this Court in Lohrke v.
Commissioner, 48 T.C. 679 (1967). In Lohrke, we held that a
taxpayer may deduct the expenses of another taxpayer in
8(...continued)
affiliates (operational entities), pursuant to sec. 482.
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