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Did he pay his wife and children for working? If not, then he has no deduction in this connection. In calculating your deduction for business expenses, you never deduct the value of what you receive; you deduct the amount you paid.
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Yes, he did pay for their work. His basis cost was the product of their work, which was lost to them in the transaction. This is no "expense"; this is an original pre-paid credit.
It's the same as if I have a pair of shoes and sell them. The basis cost was the fair-market value of the same, as indicated by the sale price.
Had the same item been damaged or stolen this would be a loss in the same amount. It's equally a loss when I give them up. I dont have the shoes anymore. I am out one (1) pair of shoes. The cost here is the sum total of this pair of shoes.