James M. and Ruth J. Riley - Page 12

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          A.   Deductions Generally                                                   
               A taxpayer may not deduct personal, living, and family                 
          expenses unless the Internal Revenue Code expressly provides                
          otherwise; e.g., State and local real property taxes are                    
          deductible pursuant to section 164(a)(1).  Sec. 262(a).  Nor may            
          a taxpayer deduct capital expenditures; i.e., amounts paid for              
          new property or for permanent improvements or betterments made to           
          increase the value of any property or estate.  Sec. 263(a)(1).              
          Instead, if the capital expenditure is for property used in a               
          trade or business or held for the production of income, the                 
          taxpayer may be allowed a deduction for depreciation under                  
          section 167.  See, e.g., INDOPCO, Inc. v. Commissioner, supra at            
               Taxpayers generally may deduct expenses that are ordinary              
          and necessary in carrying on a trade or business under section              
          162(a), for the production or collection of income under section            
          212(1), or for the management, conservation, or maintenance of              
          property held for the production of income under section 212(2).            
          The statutory prohibitions of sections 262 and 263 regarding                
          deductibility of personal and capital expenses take precedence              
          over the allowance provisions of sections 162 and 212.                      
          Commissioner v. Idaho Power Co., 418 U.S. 1, 17 (1974); Sharon v.           
          Commissioner, 66 T.C. 515, 523 (1976), affd. 591 F.2d 1273 (9th             
          Cir. 1978).                                                                 

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