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Pursuant to section 162(a), a taxpayer is entitled to deduct
all of the ordinary and necessary business expenses paid or
incurred during the taxable year in carrying on a trade or
business. The taxpayer bears the burden of proving that the
expenses were ordinary and necessary according to section 162.
In certain circumstances, the taxpayer must meet specific
substantiation requirements in addition to section 162. See sec.
274.
To be “ordinary” the transaction which gives rise to the
expense must be of a common or frequent occurrence in the type of
business involved. Deputy v. Dupont, 308 U.S. 488, 495 (1940).
To be “necessary” an expense must be “appropriate and helpful” to
the taxpayer’s business. Welch v. Helvering, supra at 113.
Additionally, the expenditure must be “directly connected with or
pertaining to the taxpayer’s trade or business”. Sec. 1.162-
1(a), Income Tax Regs.
Generally, a claimed expense (other than those subjected to
heightened scrutiny under section 274) may be deductible even
where the taxpayer is unable to fully substantiate it, if there
is an evidentiary basis for doing so. Cohan v. Commissioner, 39
F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85
T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,
827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);
sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
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Last modified: March 27, 2008