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failed to produce evidence allocating any portion of the $80,000
to such incidental items so as to allow them to be deducted. See
sec. 1.162-3, Income Tax Regs.18 Therefore, the Court finds
petitioner is not entitled to deduct any of the $80,000 as an
ordinary and necessary business expense under section 162(a).
In the alternative, petitioner contends the $80,000 was used
to purchase property which is depreciable over a 7-year recovery
period under the modified accelerated cost recovery system
(MACRS). Respondent does not dispute that the property is
depreciable under section 167(a) but contends that the $80,000
was used to purchase property with a 39-year recovery period
under the MACRS.19
Section 167(a) generally allows as a depreciation deduction
a reasonable allowance for the exhaustion, wear, tear, and
obsolescence of property used in a trade or business. MACRS
provides that the depreciation deduction provided by section
167(a) for any tangible property must be determined by using the
applicable depreciation method, the applicable recovery period,
18 “Taxpayers carrying materials and supplies on hand should
include in expenses the charges for materials and supplies only
in the amount that they are actually consumed and used in
operation during the taxable year.” Sec. 1.162-3, Income Tax
Regs. In contrast, the cost of acquiring “equipment * * * and
similar property having a useful life substantially beyond a
taxable year” is a capital expenditure. Sec. 1.263(a)-2(a),
Income Tax Regs.
19 Respondent did not delineate what type of property
petitioner may have purchased with the $80,000.
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Last modified: November 10, 2007