Business and Profit Seeking Expenses

Question 1

§ 61 (a)(2) Gross income derived from business means __________________.

Answer 1

total sales less the cost of goods sold

§ 1.61-3(a)

Question 2

More dollars are decucted on the authority of _______ provision than any other in the IRS Code.

Answer 2

§ 162 Business Deductions

Question 3

Requirements for the deduction costs associated with business

Answer 3

1. the cost must be an expense
2. the expense must be ordinary (Welch v Helvering)
3. it must be necessary
4. it must be paid or incurred during the taxable year
5. it must be pair or incurred in carrying on a trade or business

Question 4

Jenkins v Commisioner

Answer 4

Conway Twitty paid off the debts of Twitty Burger to preserve his reputation as a country music singer. Normally this isn’t allowed, but here the court found there was a proximate relationship b/w the payments made to the holders of Twitty Buger debentures and Conway’s trade or business as a country music entertainer so as to render those payments “ordinary and necessary expense of that business”

Question 5

Jenkins test

Answer 5

In order to determine whether the disallowed expenditures are deductible under § 162, have to look to

1. ascertain the purpose or motive of the TP in making the payments and
2. determine whether there is a sufficient connection between expenditures and TP’s trade or business

Question 6

Deputy v Dupont

Answer 6

Ordinary has the connotation of normal, usual or customary

Question 7

*King v Commisioner *

Dealers vs Traders

Answer 7

Dealers:

• middlemen performing the usual services of retailers of wholesalers of goods
• purchase stock or other securities with the intent of selling the stock to “customers” at a price in excess of their cost
• “excess” reflects compensation for services as middleman

**Traders: **perform no services and make their money based on either (or both) a purchase at an advantageous price or a rise in market value

Question 8

Endicott v Commissioner

Traders vs Investors

Answer 8

**Traders: **engaged in the trade or bus of selling securities for their own account, , but trader’s profits are derived from the very acts of trading, direct management of purchasing & selling

**Investors: ** purchase & selling for their own account, but ther are not considered to be in the trade or business of selling securities