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the period of January 1, 1995 through December 31, 1996. Two of
those vehicles were sold to petitioners’ relatives.
Upon examination of both years respondent disallowed the
deductions claimed on Schedule C with respect to Mayo’s Auto
Sales on the ground that the activity was not engaged in for
profit. With respect to Schedule A, Itemized Deductions,
deductions for 1995, respondent disallowed $2,663 of the $6,764
claimed for mortgage interest for lack of substantiation. With
respect to the 1996 Schedule A deductions, respondent disallowed
$6,817 of the $7,879 claimed for medical expenses for lack of
substantiation. Respondent also determined that petitioners are
liable for penalties under section 6662(a) for the years in
issue.
Discussion
1. Mayo’s Auto Sales
Section 162(a) allows a deduction for ordinary and necessary
expenses paid or incurred in carrying on a trade or business.
Generally, under section 183(a) and (b) an individual is not
allowed deductions attributable to an activity “not engaged in
for profit” except to the extent of gross income generated by the
activity. Section 183(c) defines an activity “not engaged in for
profit” as any activity other than one for which deductions are
“allowable * * * under section 162 or under paragraph (1) or (2)
of section 212.” Essentially the test for determining whether an
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Last modified: May 25, 2011