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two partnerships (Orange Tree Commerce Center Partnerships and
Solano Commercial Investors) which owned certain commercial real
properties in Vacaville, California.
During 1995 and 1996, Mr. Griffin personally paid delinquent
real property taxes that had accrued with respect to the
partnerships’ Vacaville real properties. These payments (the tax
payments) totaled $426,566 in 1995 and $501,742 in 1996. On
Schedules E, Supplemental Income and Loss, attached to
petitioners’ 1995 and 1996 joint Federal income tax returns,
petitioners claimed the tax payments as deductible expenses.
Petitioners also attached Schedules C, Profit or Loss From
Business, to their 1995 and 1996 joint returns reporting income
and loss from certain “construction” activities.
In the notice of deficiency, respondent disallowed
petitioners’ claimed deductions for the tax payments and instead
treated the tax payments as petitioners’ capital contributions to
Griffin California and as deductible expenses of the
partnerships, resulting in a flowthrough of 60 percent of the
deductions to Griffin California.
Discussion
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. An expenditure is “ordinary
and necessary” if it is directly connected with, or proximately
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