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expense under section 162(a). Given our conclusion that it is,
we decide second whether its deduction is precluded by section
162(k), which applies to payments made “in connection with” the
reacquisition of stock.
1. Section 162(a)
Section 162(a) allows a deduction for all ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. To qualify for a deduction
under section 162(a), an item must (1) be paid or incurred during
the taxable year, (2) be for carrying on any trade or business,
(3) be an expense, (4) be a necessary expense, and (5) be an
ordinary expense. Commissioner v. Lincoln Sav. & Loan
Association, 403 U.S. 345 (1971); Wells Fargo & Co. v.
Commissioner, 224 F.3d 874 (8th Cir. 2000), affg. in part and
revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89 (1999);
Lychuk v. Commissioner, 116 T.C. 374 (2001).
Respondent argues that petitioner may not deduct its payment
of $3,082,710 to V. Eihusen under section 162(a) for many of the
same reasons respondent advances in connection with section
162(k); namely, that the payment was made in connection with
petitioner’s reacquisition of its stock, or, in other words, in
connection with an acquisition of a capital asset. Respondent
also argues for purposes of section 162(a) that the payment in
question is a capital expenditure because the claims settled by
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