John J. Dowson & Nancy R. Dowson ( 2022 )

United States Tax Court
T.C. Memo. 2022-97JOHN E. VORREYER AND MELISSA D. VORREYER, ET AL., 1
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket Nos. 19332-16, 27307-16, Filed September 21, 2022.
27314-16, 27846-16,
2634-19, 2636-19,
2666-19, 2670-19.
—————
Philip D. Speicher, Rebecca K. Wohltman, Laura E. Schrick, Elizabeth
Ann Smith, Paul Michael Schmidt, Patrick Bischof Mathis, and
Nicholas C. Mowbray, for petitioners.
Vicky Diaz, Maha Sadek, Marcus M. Clinkscales, and David A. Lee, for
respondent.
MEMORANDUM OPINION
GREAVES, Judge: These cases are before the Court on
petitioners’ Motion for Partial Summary Judgment, filed December 20,
2021, and respondent’s Motion for Partial Summary Judgment, filed
May 24, 2022. In filing the Motions, the parties seek review of certain
determinations by respondent, specifically (1) whether petitioners John
1 Cases of the following petitioners are consolidated herewith: John C. Dowson
and Lisa M. Dowson, Docket No. 27307-16; John J. Dowson and Nancy R. Dowson,
Docket No. 27314-16; Darrel L. Thoma and Amy D. Thoma, Docket No. 27846-16; John
J. Dowson and Nancy R. Dowson, Docket No. 2634-19; John C. Dowson and Lisa M.
Dowson, Docket No. 2636-19; Darrel L. Thoma and Amy D. Thoma, Docket No. 2666-
19; and John E. Vorreyer and Melissa D. Vorreyer, Docket No. 2670-19.
Served 09/21/22
2
[*2] C. Dowson (Chris Dowson) and John J. Dowson (John Dowson) are
entitled to passthrough deductions on their 2012 individual income tax
returns for certain property taxes and utility expenses they paid on
behalf of Chris & John Farms, Inc. (C&J Farms), and (2) whether
expenses incurred by Prairieland Farms (Prairieland) related to the
purchase of semi-trucks in tax year 2014 are fully deductible by
Prairieland under section 179. 2 For the reasons set forth below, we
answer both questions in the negative.
Background
The following undisputed facts are based on the record, including
multiple stipulations of facts. When the Petitions were filed, all
petitioners, except for John and Nancy Dowson, 3 resided in Illinois.
Petitioners operated an Illinois family farm individually and
through several related entities, including C&J Farms and Prairieland,
at all relevant times. In 2012 C&J Farms was an S corporation for
federal income tax purposes and owned equally by petitioners Chris and
John Dowson. In 2014 Prairieland was treated as a general partnership
for federal income tax purposes and owned equally by petitioners Lisa
Dowson, Chris Dowson, Darrel Thoma, and Amy Thoma.
In tax year 2012 C&J Farms owed a total of $108,965 4 in property
taxes to Sangamon County, Illinois, and $20,866 in utility expenses to
the power company Ameren. Shareholders Chris and John Dowson
directly paid these costs in 2012 on behalf of C&J Farms in proportion
to their respective ownership interests in C&J Farms. Both Chris and
John Dowson claimed section 162 deductions on their 2012
2 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all Rule references are to
the Tax Court Rules of Practice and Procedure, and all regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times.
3 John and Nancy Dowson resided in Florida when they filed their Petitions.
4 Unless otherwise indicated, all monetary amounts are rounded to the nearest
dollar.
3
[*3] Forms 1040, U.S. Individual Income Tax Return, for their
respective payments. 5
In tax year 2014 Prairieland purchased two semi-trucks for a
total of $70,126 (truck expenses). Prairieland included the truck
expenses as part of its claimed repairs and maintenance expense
deduction on Schedule F, Profit or Loss From Farming, of its 2014 Form
1065, U.S. Return of Partnership Income.
Following an audit of petitioners’ 2012 to 2014 returns,
respondent determined more than $14 million in collective deficiencies
in petitioners’ income tax and over $2.8 million in penalties.6
Respondent then issued petitioners notices of deficiency with respect to
the determined deficiencies and penalties which, among other things,
disallowed the deductions for the property taxes and utility expenses on
Chris and John Dowson’s 2012 individual returns and the deduction for
the truck expenses as a repair expense on Prairieland’s 2014 return. 7
Petitioners shortly thereafter filed eight Petitions with this Court
seeking redetermination of the deficiencies and penalties. Following the
consolidation of these eight cases, the parties filed their respective
Motions for Partial Summary Judgment. 8
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and
avoid costly and unnecessary trials. FPL Grp., Inc. & Subs. v.
Commissioner, 116 T.C. 73, 74 (2001). We may grant a motion for
partial summary judgment regarding an issue when there is no genuine
5 C&J Farms filed Form 1120S, U.S. Income Tax Return for an S Corporation,
for the 2012 tax year but did not claim a deduction on the return for the property taxes
and utility expenses paid by Chris and John Dowson.
6 The record does not reflect, and the parties do not contend, that any of
respondent’s determinations in these eight consolidated cases should be subject to the
partnership regime under the Tax Equity and Fiscal Responsibility Act of 1982, Pub.
L. No. 97-248, § 402(a), 96 Stat. 324, 648 (codified as amended at sections 6221–6234).
7 Respondent does not dispute that the semi-trucks are depreciable assets and
thus allowed a $23,373 depreciation expense deduction for these assets for
Prairieland’s 2014 tax year.
8 Petitioners previously filed a separate Motion for Partial Summary Judgment
on September 3, 2020, that we addressed as part of our Order dated March 2, 2021.
4
[*4] dispute of material fact and a decision may be rendered as a matter
of law. Rule 121(b); Elec. Arts, Inc. & Subs. v. Commissioner, 118 T.C.
226, 238 (2002); see also Take v. Commissioner, 82 T.C. 630, 633 (1984),
aff’d, 804 F.2d 553 (9th Cir. 1986) (explaining that this rule applies to
each motion where both parties move for summary judgment). We
construe the facts and draw all inferences in the light most favorable to
the nonmoving party to decide whether summary judgment is
appropriate. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The nonmoving party may not
rest upon the mere allegations or denials in its pleadings but must set
forth specific facts showing that there is a genuine dispute for trial. Rule
121(d); Sundstrand, 98 T.C. at 520.
II. Property Taxes and Utility Expenses
A taxpayer may deduct ordinary and necessary expenses paid or
incurred during the taxable year in carrying on a trade or business.
§ 162(a). Deductions for personal, living, or family expenses, on the
other hand, are prohibited. § 262(a).
Petitioners contend that the payments by Chris and John Dowson
in 2012 for C&J Farms’ property taxes and utility expenses should be
considered capital contributions to C&J Farms, and C&J Farms would
be entitled to treat the property taxes and utility expenses as deductible
under section 162. According to petitioners, this reduces the income
flowing from C&J Farms, an S corporation, to Chris and John Dowson.
Respondent does not dispute this characterization but challenges the
deduction of these business expenses on the personal returns of Chris
and John Dowson.
A taxpayer cannot deduct expenses paid on behalf of another
taxpayer. Deputy v. du Pont, 308 U.S. 488, 493–99 (1940); Columbian
Rope Co. v. Commissioner, 42 T.C. 800, 815 (1964). This long-
established principle extends to corporations as a corporation’s business
is distinct from its shareholders. Westerman v. Commissioner, 55 T.C.
478, 482 (1970). Thus, a shareholder may not deduct as personal
expenses those expenses that further the business of the corporation.
Id.; Kahn v. Commissioner, 26 T.C. 273, 274–75 (1956). Although there
is a recognized exception to this rule, see, e.g., Lohrke v. Commissioner,
48 T.C. 679, 684–85 (1967) (allowing a deduction by a shareholder on
behalf of a corporate taxpayer for an expenditure the corporation was
financially unable to pay to “protect or promote” the business),
5
[*5] petitioners do not contend that the present situation should fall
within this limited exception.
Petitioners cite Rink v. Commissioner, 51 T.C. 746 (1969), to
support their position, but that case reiterates the “well established
[rule] that a shareholder . . . is not entitled to a deduction from his
personal income for his payment of the expenses of his corporation; such
amounts constitute either a loan or a contribution to the capital of the
corporation and are deductible, if at all, by the corporation.” Id. at 751(emphasis added). By relying on Rink, which involved a C corporation,
petitioners are asking us to recognize an exception for S corporations,
but they fail to establish how such a result is clearly supportable under
the law. See Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593
(1943); Int’l Trading Co. v. Commissioner, 275 F.2d 578, 584 (7th Cir.
1960) (“[U]nless the claimed deductions come clearly within the scope of
the statute, they are not to be allowed.”), aff’g T.C. Memo. 1958-104.
Unlike income (or loss) of a C corporation, income (or loss) of an
S corporation escapes corporate-level taxation and gets “passed
through” to the shareholder on a pro rata basis. §§ 1363(a), 1366(a)(1);
Mourad v. Commissioner, 121 T.C. 1, 3 (2003), aff’d, 387 F.3d 27 (1st
Cir. 2004); Berry v. Commissioner, T.C. Memo. 2021-52, at *5.
Although an S corporation’s income or loss eventually flows
through to the shareholders, a corporation “remains a separate taxable
entity [from its shareholders] regardless of whether it is a subchapter
S corporation or a subchapter C corporation.” Russell v. Commissioner,
T.C. Memo. 1989-207, 1989 Tax Ct. Memo LEXIS 207, at *10. This
means that the business expenses of an S corporation cannot be
disregarded at the corporate level for section 162 purposes. See id.Consequently, the income reaped by an S corporation must be matched
at the corporate level against the S corporation’s expenses that were
incurred to produce that income before the net income or loss amount
can flow through to the shareholders. See § 1366(a)(2) (generally
defining the income or loss that flows through to an S corporation
shareholder as the S corporation’s “gross income minus the deductions
allowed to the [S] corporation” (emphasis added)). This matching is
accomplished by reporting such items on an S corporation’s corporate
return: Form 1120S.
Petitioners have not shown, and we are not aware of, an instance
in which a court, including this one, has upheld a business expense
deduction of an S corporation on a shareholder’s personal return under
facts comparable to the ones presented to us now. Petitioners rely
6
[*6] heavily on Ferguson v. Commissioner, T.C. Memo. 2019-40, but we
upheld the passthrough of a loss to a shareholder of an S corporation
after the S corporation deducted on its corporate return an expenditure
paid by its shareholder on behalf of the S corporation. 9 See id. at *23–24.
Petitioners also cite Griffin v. Commissioner, T.C. Memo. 2004-64,
supplementing T.C. Memo. 2002-6, but Griffin involved the limited
exception mentioned above where a taxpayer paid an obligation of
another on the basis of financial difficulty to protect a business interest,
which has not been shown to be applicable here. An argument similar
to the one petitioners bring before us now was expressly rejected by this
Court in Russell, T.C. Memo. 1989-207, in which we refused to treat an
S corporation differently from a C corporation where the shareholders
of an S corporation disregarded deductions at the corporate level for
business expenses they paid on behalf of the S corporation. Finally, even
petitioners acknowledge that Chris and John Dowson would not be
entitled to a “direct” deduction for their payment of C&J Farms’ property
taxes and utility expenses, yet this is exactly what they claimed when
they deducted the expenses on their personal returns.
We accordingly uphold the disallowance of C&J Farms’ property
taxes and utility expenses as deductible expenses on the personal
returns of Chris and John Dowson.
III. Truck Expenses
Prairieland categorized the truck expenses as a deductible section
162 “[r]epairs and maintenance” expense on Schedule F of its 2014
return. Petitioners concede that the truck expenses are not deductible
under section 162; however, they maintain that Prairieland should still
be entitled to a deduction for the full amount of the truck expenses
during its 2014 tax year under section 179.
A taxpayer may elect under section 179 to deduct as a current
expense the cost of certain property acquired and used in the active
conduct of a trade or business and placed in service during the taxable
year. § 179(a), (c); Treas. Reg. § 1.179-5. The taxpayer bears the burden
of proving entitlement to the deduction. See INDOPCO, Inc. v.
9 Ferguson did allow a shareholder to deduct on his personal income tax return
an expenditure the shareholder paid on behalf of a C corporation on the basis that the
item qualified as an unreimbursed employee business expense. See Ferguson, T.C.
Memo. 2019-40, at *24. Petitioners, however, do not contend that the property taxes
and utility expenses represent a similar expense.
7
[*7] Commissioner, 503 U.S. 79, 84 (1992); Sievers v. Commissioner,
T.C. Memo. 2014-115, at *4–5.
Petitioners recognize that a taxpayer must make an election to
take advantage of a section 179 deduction with respect to qualifying
expenses and that Prairieland did not make such an election on its 2014
return for the truck expenses. Petitioners nevertheless contend that
this failure does not bar Prairieland from a section 179 deduction for the
full amount of the truck expenses for its 2014 tax year because the
election is not required to be made on a taxpayer’s “first” or original
return, i.e., a taxpayer can make the election on an amended return. 10
Petitioners, however, did not file an amended 2014 return with a section
179 election for the truck expenses, and thus the question of whether
the election can be made on a taxpayer’s original or amended return is
moot under these facts. Neither do petitioners contend that the period
for Prairieland to file an amended return correcting their alleged
election error remains open, and thus we need not examine that
question. Petitioners do, however, request that this Court make the
election retroactively on Prairieland’s behalf on the basis of principles of
equity. We decline to do so as Prairieland’s circumstances are of its own
making. See Commissioner v. McCoy, 484 U.S. 3, 7 (1987) (stating the
Tax Court “lacks general equitable powers”); Patton v. Commissioner,
116 T.C. 206, 211 (2001) (upholding the Commissioner’s refusal to
consent to modification of section 179 election after taxpayer discovered
misclassification error with respect to certain assets intended to fall
within election); see also INDOPCO, Inc. v. Commissioner, 503 U.S.
at 84 (noting the “familiar rule” that income tax deductions are “a
matter of legislative grace”). Accordingly, we uphold respondent’s
disallowance of the deduction for the truck expenses as repair expenses
under section 162.
To reflect the foregoing,
An appropriate order will be issued.
10 Respondent does not dispute that the truck expenses are not qualifying
property, e.g., that the semi-trucks constitute qualifying property whose costs are
otherwise eligible for deduction.