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disbursement on a note (Nov. 16, 1987), and several transfers
from account No. 109-070-3, totaling $22,509.69. Respondent also
failed adequately to adjust his calculation for the total amount
of rental income, loan repayments, and installment sale income
that petitioner received during 1987. Similar mistakes were made
in the bank deposits analysis for 1989.
Our review confirms that the simplistic bank deposits
analyses prepared and relied upon by respondent to support his
restated income adjustments against petitioner for 1987 and 1989
are simply not credible. We conclude, therefore, that
respondent’s determinations that petitioner had unreported
Schedule C income for 1987 and 1989 are erroneous, and we hold
that respondent’s determinations of unreported income for 1987
and 1989 are not sustained.
C. Schedule C Deductions
1. Applicable Legal Principles
The only basis asserted by respondent in the notices of
deficiency for disallowing petitioner’s Schedule C expenses was
petitioner’s alleged failure to establish that the expenses were
“paid or incurred during the taxable year” and were “ordinary and
necessary to * * * [petitioner’s] business.” Section 162(a)
authorizes a taxpayer to deduct ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on
a trade or business. An “ordinary” expense is one incurred in a
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