David M. and Teri L. Saykally - Page 18

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          Welch v. Helvering, 290 U.S. 111, 115 (1933).  Deductions are a              
          matter of legislative grace, and the taxpayer generally bears the            
          burden of proving entitlement to such claimed deductions.                    
          INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New                   
          Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).                     
          Furthermore, a taxpayer is required to maintain records                      
          sufficient to establish the amount of his income and deductions.             
          Secs. 274(d), 6001; sec. 1.6001-1(a), (e), Income Tax Regs.                  
          A.  Section 174--Research and Development Deductions                         
               With regard to the claimed research and development (R&D)               
          expenses for 1995 and 1996, the notice of deficiency states:                 
                 Schedule C - DMS Loss                                                 
                 Year                 9512           9612                              
                 Claimed on return    $67,534        $1,421,645                        
                 Allowed per audit    -0-            -0-                               
                 Adjustment           67,534         1,421,645                         
                 You have not shown that these expenses were                           
                 ordinary and necessary expenses paid or incurred                      
                 in connection with carrying on a trade of                             
                 business.                                                             
                 Since you have not established that the expenses                      
                 claimed were paid or incurred for research and                        
                 experimental expenditures in connection with your                     
                 trade or business, they are not deductible.                           
                 Loss is limited to amount of capital you have at                      
                 risk.                                                                 




               13(...continued)                                                        
          the returns at issue commenced before the statute’s effective                
          date.                                                                        





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