Armando Adames Rivas v. Commissioner, TC Memo 2016-158, really brings the concept of ordinary and necessary under IRC 162 to the forefront. Often tax practitioners may deduct expenses without much verification as to what the expenses are for.
Under IRC 162, any business expense must be 1) ordinary in the course of the business and 2) necessary for the business. For example, a real estate broker deducting depreciation on four Corvettes may not be necessary for the business.
In Rivas, the taxpayer owned a financial consulting business. In 2011, he reported $24,630 of advertising expenses and in 2013, he reported $28,652 of advertising expenses. According to the taxpayer, these expenses "related to 'horses purchased for business use and the losses.'"
This is where the concept of ordinary and necessary really comes in play. Most, if not all, financial consulting businesses do not own horses. Further, if any do, most do not buy them as an advertising expense. The court shutdown any arguments with, "This unsubstantiated assertion does not suffice to create a triable issue of fact concerning his ability to claim horse-related costs as advertising expenses of a financial consulting business."
When working with taxpayers, its good that they have an understanding of what could possibly fall outside of the ordinary and necessary expense requirements for their business.
Relevant Citations: TC Memo 2016-158
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