Claude D. Mayo, Sr. and Lessie M. Mayo - Page 5

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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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