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I.R.C. § 23 (a)(1)(A) states that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; and traveling expenses, including the entire amount expended for meals and lodging, while away from home in the pursuit of a trade or business. I.R.C. § 23(a)(2) states that in computing net income there shall be allowed as deductions, in the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.
The taxpayers attempted to deduct $ 5,965 in traveling expenses and legal fees from their federal income taxes for 1946. The taxpayers had incurred the expenses and fees while searching for and investigating newspaper and radio properties to purchase. The taxpayers based their claim for deductions upon I.R.C. §§ 23(a)(1), 23(a)(2), 23(e)(2). The Commissioner disallowed the deductions and determined an income tax deficiency against the taxpayers for 1946 in the amount of $ 2,914. The taxpayers sought review of the Commissioner's decision.
Were the taxpayers, who had no business and no permanent home, entitled to deduct traveling expenses and legal fees incurred during the taxable year on a trip to investigate numerous business properties with the purpose in mind of finding a suitable enterprise to purchase and operate?
The court entered a decision in the Commissioner's favor. The court held in part that: (1) the travel expenses and legal fees were not deductible under I.R.C. § 23(a)(1) because the taxpayers were not engaged in any trade or business at the time the expenses were incurred; and (2) the travel expenses and legal fees were not deductible under I.R.C. § 23(e)(2) because the only transaction entered into by the taxpayers for profit was the actual purchase of an Ohio newspaper in November 1946.