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amended returns.5 In the notice of deficiency, respondent:
(1) Disallowed all of the deductions claimed on the Schedule C
because petitioner failed to establish “that any amount was paid
for the designated purpose or that the expenditure, if paid,
constitutes an ordinary and necessary business expense”; (2)
disallowed the “carry forward loss” credit because “there is no
provision in the Internal Revenue Code for such a credit” and
because petitioner “did not sustain a net operating loss * * * in
any taxable year prior to 1993”; and (3) determined that the
entire understatement of tax required to be shown on petitioner’s
1993 return is due to negligence and imposed a section 6662
accuracy-related penalty.
Discussion
1. Schedule C Deductions
Section 162(a) allows a deduction for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on
a trade or business. In the case of a taxpayer who uses the cash
method of accounting, entitlement to a section 162(a) deduction
presupposes that the taxpayer can substantiate by sufficient
records that the underlying expense has been paid. Sec. 6001;
sec. 1.6001-1(a), (e), Income Tax Regs.; see also sec. 446; sec.
5 E.g., according to the notice of deficiency, the gain
realized from the sale of the condominium is includable in
petitioner’s 1993 income because he has “not established the
requirements of section 121 or section 1034 * * * have been met”.
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Last modified: May 25, 2011