Is Section 265(a)(1) of the New York State Tax Code applicable to expenses incurred in the course of earning tax-exempt income?

The principal application of Section 265(a)(1) is to bar the deduction of expenses incurred in the course of earning tax-exempt income. See Church v. Commissioner, 80 T.C. 1104, 1983 WL 13864 (1983) (disallowing deduction of legal fees incurred in obtaining a personal injury judgment); Manocchio v. Commissioner, 78 T.C. 989, 994, 1982 WL 11107 (1982) ("Unquestionably, a principal target of the legislation was expenses incurred in connection with an ongoing trade or business or investment activity, the conduct of which generates exempt income."), aff'd on other grounds, 710 F.2d 1400 (9th Cir.1983) (emphasis in original).