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Respondent examined petitioners’ 1999 Federal income tax
return and requested substantiation of the deductions claimed on
the Schedule C. Petitioners failed to offer substantiation, and
on May 25, 2001, respondent issued a statutory notice of
deficiency disallowing the Schedule C deductions, including the
claimed “bad debts”.
OPINION
Petitioner, on a Schedule C attached to petitioners’ joint
Federal income tax return, reported no income and claimed
deductions nearly equaling the amount of their wages reflected on
Forms W-2, Wage and Tax Statement. The claimed deductions must
be tested under sections 162(a), 165(a) and (c), and 166(a)(1).
We first address the section 162 deductions.
Section 162(a) provides deductions for “all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business”. Deductions are strictly a
matter of legislative grace, and taxpayers must comply with
specific requirements for any deduction claimed. INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992). Respondent determined
that petitioners failed to substantiate the claimed deductions
and/or to show that they were incurred in a trade or business.2
2 No question has been raised with respect to the burden of
proof under sec. 7491(a).
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