- 28 -
that $2 million and $1,012,000 in the respective fiscal years at
issue are deductible under section 162(a)(1).33
III. Advertising Expenses
Petitioner argues it is entitled to deduct advertising
expenses under section 162(a) of $1,105,276 for its FYE June 30,
1996.
Advertising expenses are a type of ordinary and necessary
expense for which a current deduction is allowed to an active
trade or business. Sec. 162(a); sec. 1.162-1(a), Income Tax
Regs. Advertising expenses are allowed as a deduction under
section 162 if the taxpayer can demonstrate a sufficient
connection between the expenditure and the taxpayer’s business.
See RJR Nabisco Inc. & Consol. Subs. v. Commissioner, T.C. Memo.
1998-252.
Petitioner is an active trade or business that entered into
an exclusive contract with UMI to conduct all of petitioner’s
marketing, advertising, and branding in the fiscal years at
issue. In its FYE June 30, 1996, petitioner paid UMI $1,105,276
and deducted this amount as advertising expenses.
Respondent argues that $831,137 of the advertising expenses
was not for ordinary and necessary advertising expenses because
it was a distribution to Mr. Reeves from UMI and not paid as
33 Conversely, the Court finds $278,000 of the $2,278,000
claimed by petitioner as a deduction for FYE June 30, 1995, to be
nondeductible.
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