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expenditure is a capital expenditure when its origin “is in the
process of acquisition itself”, we understand the phrase “in
connection with” in the third situation to mean that the
expenditure must be directly related to the acquisition.
Our analysis begins with the relevant statutory text. We
apply that text in accordance with the related Treasury income
tax regulations, the validity of which has not been challenged by
either party, and the interpretation of that text and those
regulations primarily by the United States Supreme Court.
Section 162(a) provides that “There shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business”. The Treasury regulations specify that ordinary and
necessary business expenses include “the ordinary and necessary
expenditures directly connected with or pertaining to the
taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs.,
such as “a reasonable allowance for salaries or other
compensation for personal services actually rendered”, sec.
1.162-7(a), Income Tax Regs. The Supreme Court has explained
that a cash method taxpayer such as ACC may deduct an expenditure
under section 162(a) if the expenditure is: (1) An expense,
(2) an ordinary expense, (3) a necessary expense, (4) paid during
the taxable year, and (5) made to carry on a trade or business.
See Commissioner v. Lincoln Sav. & Loan Association, supra at
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