Universal Marketing, Inc. - Page 14




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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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