Ask The California Employment Tax And Payroll Tax Attorney – May A Shareholder Deduct Payments Made On Behalf Of A Corporate Taxpayer?
By Robert S. Schriebman
2022
Introduction
Will the IRS allow an otherwise deductible expense paid on behalf of another taxpayer? This issue recently came up in the case of John E. and Melissa D. Vorreyer v. Commissioner, TC Memo 2022-97, September 21, 2022.
The Vorreyer Case
The Vorreyers operated an Illinois family farm known as C&J Farms, an S Corporation. In 2012, the farm was in questionable financial shape. It owed about $109,000 in unpaid property taxes and close to $21,000 in unpaid utility bills. The Vorreyers and other shareholders personally paid these debts and sought to deduct them on their individual income tax return. The IRS disallowed these deductions because they were not directly owed by the paying individuals. The Vorreyers filed a petition in the US Tax Court challenging the IRS’ determination. They lost.
The Tax Court held that a shareholder is not allowed to deduct an expense personally paid on behalf of a corporation unless the corporation was financially unable to “protect or promote” its business. C&J Farms was not in that position.
The Vorreyers cited the case of Rink v. Commissioner, 51 T.C. 746 (1969) to support their position. But that case followed a well-established rule that a shareholder is not entitled to a deduction from his personal income for his payment of the expense of his corporation and such payments constitute either a loan or a contribution to the capital of the corporation. Neither a loan nor a contribution to capital are deductible expenditures.
If the expenses are in fact deductible, they are deductible by the corporation, when the corporation makes the payment. The Rink case applies to a C Corporation, but the Tax Court ruled that the principle also applies to an S Corporation.
Conclusion
The Vorreyers should have loaned the money to the corporation and made sure that there were adequate corporate minutes reflecting the loan as well as a written promissory note given by the corporation to the shareholders. If the corporation failed to repay the loan, the Vorreyers may have had a business bad debt loss. That strategy would have created two deductions for one transaction.
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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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