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F. Conclusion
Petitioner has failed to meet its burden of proving that the
$509,000 payment to Mr. Reeves constituted reasonable
compensation. Therefore, the Court finds that the payment of
$100,000 in petitioner’s FYE May 31, 1996, as allowed by
respondent, is deductible under section 162(a)(1).13
III. Petitioner’s $80,000 Expense Deduction
Under section 162(a), a taxpayer may deduct ordinary and
necessary business expenses incurred or paid during the taxable
year. Generally, a taxpayer carrying materials and supplies on
hand is allowed to deduct expenditures for them only in the
amount that they are actually consumed and used in operation
during the taxable year.14 Sec. 1.162-3, Income Tax Regs.
However, the cost of acquiring property having a useful life
beyond a taxable year is a nondeductible capital expenditure,
except as otherwise provided in chapter 1 of the Code.15
Prudential Overall Supply v. Commissioner, T.C. Memo. 2002-103;
13 Conversely, the Court finds $409,000 of the $509,000
claimed as a deduction for FYE May 31, 1996, to be
nondeductible.
14 Sec. 1.162-3, Income Tax Regs., also allows costs of
incidental materials and supplies to be deducted when purchased
if inventories and records of consumption are not kept and
taxable income is clearly reflected.
15 For instance, sec. 167(a) provides that there shall be
allowed as a depreciation deduction a reasonable allowance for
the exhaustion, wear, and tear of property used in a trade or
business.
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