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Petitioners, however, offered no testimony or other evidence to
demonstrate that the $888.75 was a deductible legal expense or
otherwise constituted an ordinary and necessary business expense.
Accordingly, petitioners are not entitled to a deduction for this
amount.
With respect to the purported payments to Roderick,
compensation is deductible as a trade or business expense only if
it is (1) reasonable in amount, (2) based on services actually
rendered, and (3) paid or incurred. See O’Connor v.
Commissioner, T.C. Memo. 1986-444; sec. 1.162-7(a), Income Tax
Regs. When the compensation is paid to a family member, the
Court carefully scrutinizes the transaction. Denman v.
Commissioner, 48 T.C. 439, 450 (1967); Hamdi v. Commissioner,
T.C. Memo. 1993-38, affd. without published opinion 23 F.3d 407
(6th Cir. 1994). In deciding whether payments to a family member
are deductible, we examine all the facts and circumstances.
Eller v. Commissioner, 77 T.C. 934, 962 (1981). Facts that
militate against the deductibility of such payments include
failing to maintain adequate records of the family member’s
hours, duties, and earnings, and failing to file appropriate
information returns. See Haeder v. Commissioner, T.C. Memo.
2001-7; Martens v. Commissioner, T.C. Memo. 1990-42, affd.
without published opinion 934 F.2d 319 (4th Cir. 1991); O’Connor
v. Commissioner, supra.
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