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Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving the entitlement to any deduction
claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Section 162(a) allows a deduction for a taxpayer’s “ordinary and
necessary” business expenses paid or incurred during the taxable
year. However, deductions allowed under section 162(a) are also
“subject to the exceptions provided in part IX (sec. 261 and
following, relating to items not deductible).” Sec. 161.
The uniform capitalization rules of section 263A(a)(1)
require that all direct costs and certain indirect costs
allocable to certain property be included in inventory, or
capitalized if such property is not inventory. Taxpayers subject
to section 263A must capitalize all direct costs and certain
indirect costs properly allocable to property produced or
property acquired for resale. Sec. 1.263A-1(e)(1), Income Tax
Regs. “Direct costs”, as they are relevant to “producers”,
include “direct material costs and direct labor costs.” Sec.
1.263A-1(e)(2)(i), Income Tax Regs. “Direct material costs”
include the costs of those materials that become an integral part
of specific property produced and those materials that are
consumed in the ordinary course of production and that can be
identified or associated with particular units or groups of units
of property produced. Sec. 1.263A-1(e)(2)(i)(A), Income Tax
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Last modified: May 25, 2011