Chapter 07N Solutions - SOLUTIONSTOCHAPTERSEVEN 7-22 The...

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SOLUTIONS TO CHAPTER SEVEN 7-22 The first three of these questions was derived from the facts of actual cases. The fourth is hypothetical. Their purpose is to illustrate the difficulty in interpreting and applying the general requirements. a. In this situation, the issue is whether the additional expenses of commuting are sufficiently related to the officer’s trade or business to satisfy the test of § 162. Although the expense would not be incurred “but for” the employer’s requirement to carry a gun, the additional commuting resulted from the taxpayer’s choice of where to live—a purely personal matter. For this reason, the Court held that the expenses were not directly connected with the pursuit of business, and thus not deductible. [See Dennis McCabe , 82-1 USTC ¶9331, 49 AFTR 2d 82-1192, 676 F2d 915 (CA-2, 1982).] b. In this case, there are several possible arguments supporting disallowance. The primary question is whether the expense is sufficiently related to, or incurred while “carrying on,” the duties of a union president. The courts have consistently ruled that campaign costs are not sufficiently related to the performance of the functions of an office, and thus, are not deductible. The expenses are incurred in “trying to become” president rather than in “being” president. See James B. Carey , 56 T.C. 477 (1971). In addition, it might be argued that the expenses are not deductible under the public policy doctrine, since the union position is of such public interest that government support through allowance of deductions contradicts public policy. The courts, however, have not accepted this argument—see Carey. It also could be argued that the union president is not in a trade or business, but the Courts have ruled otherwise—see Carey. [Also see § 162(a).] c. In Trebilcock v. Comm. , [77-2 USTC ¶9530, 40 AFTR2d 77-5243 557 F2d 1226 (CA-6, 1977)], the Court denied the deduction for such expenditures. Although the minister’s aid may have allowed the taxpayer to cope more easily with the strain of running a large business, it did not sharpen his business skills. The court believed that all the benefits to be derived from the expenses were inherently personal in nature, and thus, not deductible under § 262. The court also believed that the expenditures for the minister’s solutions to business problems, considering the method used (heightening spiritual awareness so that he could better understand the problems), were not ordinary in this line of business. d. Under the general positive criteria of § 162, the taxpayer’s expenditures for “insurance” appear to qualify for deductibility, although this conclusion is subject to debate. First, the taxpayer is engaged in a trade or business. Second, the expenditures are probably ordinary because they are normally incurred by similar businesses in that particular geographic location. Third, they certainly are necessary (if not made, the taxpayer could be out of business very soon). And fourth, the expenditures
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This note was uploaded on 09/26/2011 for the course BA 101 taught by Professor Jackson during the Summer '06 term at University of Nevada, Las Vegas.

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Chapter 07N Solutions - SOLUTIONSTOCHAPTERSEVEN 7-22 The...

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