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II. The Trade or Business Requirement of Section 162
Section 162(a) authorizes a taxpayer to deduct ordinary and
necessary expenses incurred in carrying on a trade or business.
Petitioners summarily allege that they operated a Schedule C
trade or business, i.e., a restaurant/nightclub facility, and
that they properly deducted expenses incurred in operating the
trade or business on Schedules C to their 1992 and 1993 returns.
Petitioners also summarily allege that they properly deducted
NOLs carried forward from 1990 and 1991 arising from expenses
they incurred and paid with respect to the same business. See
infra part VI. Respondent contends that petitioners had not yet
started their restaurant/nightclub business in 1990, 1991, 1992,
or 1993 and that the expenses in question were not incurred in
carrying on an existing trade or business.
Whether a taxpayer is engaged in a trade or business
requires an examination of the relevant facts and circumstances.
Commissioner v. Groetzinger, 480 U.S. 23, 36 (1987). In
conducting the examination, we look to see whether the taxpayer
has undertaken the activity with the intent to make a profit,
whether the taxpayer is regularly and actively involved in the
activity, and whether the taxpayer’s business activity has
actually commenced. McManus v. Commissioner, T.C. Memo. 1987-
457, affd. without published opinion 865 F.2d 255 (4th Cir.
1988).
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