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The rent or lease expense was based primarily on petitioners’
monthly rent of $550 for their personal residence.
In the notice of deficiency, respondent disallowed the
Schedule C deductions claimed by petitioners. However, to the
extent of the income realized from the activity, respondent
allowed certain of these expenses as miscellaneous itemized
deductions.1 Respondent further determined that petitioners are
liable for an accuracy-related penalty under section 6662(a).
Discussion
In general, section 162(a) allows a deduction for all
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on a trade or business. The term “trade
or business” is not precisely defined in the Internal Revenue
Code or the regulations promulgated thereunder; however, it is
well established that in order for an activity to be considered a
taxpayer’s trade or business for purposes of section 162, the
activity must be conducted “with continuity and regularity”, and
“the taxpayer’s primary purpose for engaging in the activity must
be for income or profit.” Commissioner v. Groetzinger, 480 U.S.
23, 35 (1987). Personal, living, or family expenses may not be
deducted. Sec. 262(a).
1 However, as the expenses allowed as itemized deductions
are less than the standard deduction, the deficiency here in
dispute takes into account the standard deduction.
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Last modified: May 25, 2011