Internal Revenue Code Section 1221 Case Study

The Internal Revenue Code states that there is an allowed deduction for all ordinary and necessary expenses paid or incurred during the taxable year in order to carry on a trade or business. IRC § 162(a). The Internal Revenue Code also states that a capital asset is property held by a taxpayer, whether or not connected with the taxpayer’s trade or business and lists exclusions from the general definition. IRC § 1221(a). Code section 163 states that all interest paid or accrued within the taxable year on indebtedness shall be allowed as a deduction. IRC § 163(a). Interest paid on a mortgage upon real estate of which the taxpayer is the legal owner, even if the taxpayer is not directly liable to such mortgage, can be deducted as interest on his indebtedness. Reg. 1.163-1(b). Section 165(a) of the Internal Revenue Code allows taxpayers to deduct any loss that hasn’t been compensated by insurance, unless the loss is from the disposition of a capital asset. IRC § 165(a). It should be noted …show more content…
Commissioner, Azar purchased a terminated employee’s home per terms of the employment contract and incurred a loss on the sale of the home. Azar took an ordinary loss on the sale of the home but the court ruled that the resale of the home was a capital loss and therefore was not deductible as an ordinary loss. Azar argued that the loss on the home should be fully deductible because it was an ordinary and necessary business expense under section 162(a) or an ordinary loss under section 165(a). The court held that since the house was to be considered a capital asset under the general definition of section 1221, and not subject to any of the exclusions provided, the loss on the sale was to be considered a capital loss, not an ordinary loss. Azar Nut Company v. Commissioner, 94 T.C. No. 26 (1990). Azar appealed the tax court’s ruling and the 5th Circuit of Appeals Court affirmed. This has case has been cited numerous times and has a favorable