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connection with repossessing vehicles that secured the 1994 and
1995 notes. Respondent determined that CFC improperly deducted
the costs under section 162 because CFC did not incur or pay the
costs in connection with its trade or business. Petitioners
contend that CFC owned the notes and that CFC paid and properly
deducted the costs in connection with its trade or business.
Section 162(a) provides for a deduction from income of all
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on a trade or business. Section 1.162-
1(a), Income Tax Regs., provides that the expenses deductible
from income include those pertaining to the taxpayer’s trade or
business. In the instant cases, we have held Mr. Cordes, not
CFC, owned the notes associated with these costs. It follows
that CFC did not incur or pay these costs in connection with its
own trade or business, but in connection with an activity carried
on by Mr. Cordes. Petitioners have cited no authority allowing
one party (CFC) a deduction for costs paid in connection with
another party’s (Mr. Cordes’s) trade or business, or other
activity. We hold, therefore, CFC may not deduct those costs
under section 162.22
22Petitioner contends that if CFC may not deduct the costs,
then we must allow Mr. Cordes to deduct them. This issue was not
formally raised by either party, but both parties have addressed
it, and we treat it as tried by consent.
Because Mr. Cordes is a cash method taxpayer, he can deduct
the costs in the year in which he pays them. Sec. 461(a); United
States v. Hughes Props., Inc., 476 U.S. 593, 599 (1986). Because
Mr. Cordes did not pay the costs in 1994 or 1995, he may not
deduct the costs in those taxable years.
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