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SAMUEL C. STONE AND SUSAN C. STONE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentStone v. CommissionerDocket No. 26039-93.
United States Tax Court T.C. Memo 1996-507; 1996 Tax Ct. Memo LEXIS 517; 72 T.C.M. (CCH) 1248;November 13, 1996, FiledDecision will be entered under Rule 155.
Samuel C. Stone, pro se.Ann L. Baker, for respondent.CARLUZZO, Special Trial JudgeCARLUZZOMEMORANDUM FINDINGS OF FACT AND OPINION
CARLUZZO,
Special Trial Judge : This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. *518 FACTSome of the facts have been stipulated and are so found. Petitioners filed a joint Federal income tax return for the year 1991. They computed their 1991 Federal income tax liability in accordance with the cash receipts and disbursements method of accounting. At the time the petition was filed, petitioners resided in Tulsa, Oklahoma. References to petitioner are to Samuel C. Stone.
Petitioner is, and was during the year in issue, a practicing attorney specializing in the issuance of municipal securities. Petitioner conducted his law practice as a sole proprietor from 1972 until 1981.
In June of 1981, petitioner and two other attorneys, James R. Jessup (Jessup) and Robyn Owens (Owens), incorporated Samuel C. Stone & Associates, P.C., which was a professional corporation organized pursuant to Oklahoma law for the purpose of providing legal services. Petitioner, Jessup, and Owens were the initial shareholders and directors of this corporation. In January of 1985, the corporation's articles were amended to eliminate Owens as a shareholder and director, and the corporation's name was changed to Stone, Jessup & Styron, P.C. In January of 1986, the corporation's articles were amended *519 again, this time changing the corporation's name to Stone Jessup, P.C. (Stone Jessup). Jessup remained a shareholder and director of Stone Jessup until his death in February of 1991. Thereafter, petitioner was the sole shareholder, director, and officer of the corporation.
During 1991, petitioner practiced law as an employee of Stone Jessup, but was not compensated as such. In addition to petitioner, Stone Jessup employed 4 or 5 other individuals on a full-time basis during that year. As an employee of Stone Jessup, petitioner was required to travel for various business-related reasons and to entertain clients of Stone Jessup. On some occasions, Stone Jessup would directly pay for petitioner's travel and client entertainment expenses. On other occasions petitioner would pay his own travel expenses and the expenses he incurred in entertaining Stone Jessup's clients. Stone Jessup only paid petitioner's travel expenses and the client entertainment expenses when corporate funds were available to do so. In prior years, Stone Jessup usually reimbursed petitioner for expenses he incurred on its behalf. Petitioner was not reimbursed for all of the expenses he incurred in 1991 as an employee *520 of Stone Jessup because the corporation did not have sufficient funds to do so. As a director and officer of Stone Jessup, petitioner had the authority to set corporate policy and determine how corporate funds were spent.
During 1991 petitioner incurred the following expenses in connection with his employment with Stone Jessup:
Vehicle $ 2,673.06 Parking fees, tolls, etc. 270.00 Travel 1,242.21 Meals and entertainment 2,603.23 Workshops, forums 90.86 Respondent disallowed petitioners' deduction attributable to the above categories of expenses, explaining in the notice of deficiency that "these expenses are not deductible because they relate to the production of corporate income".
In 1972, in connection with his practice of law as a sole proprietor, petitioner arranged a revolving line of credit with Walnut Valley State Bank of El Dorado, Kansas (the bank). The line of credit was used for payroll and other general operating expenses incurred by petitioner in connection with his law practice. This line of credit was ultimately assumed and used by Stone Jessup. The bank required the line of credit to be secured by accounts receivable and other assets of Stone Jessup, as well as certain business *521 assets owned and used by petitioner in connection with his law practice.
By December of 1987, Stone Jessup's debt to the bank exceeded $ 400,000. Notes evidencing the debt were due and had to be paid or refinanced. Because of Stone Jessup's financial situation at the time, the bank was unwilling to renew Stone Jessup's loans or grant the corporation further extensions of credit unless: (1) Petitioner assumed personal liability for any existing or future debt by acting as a comaker with Stone Jessup on various debt instruments; (2) petitioners agreed to collateralize the debt by placing a mortgage on their residence in favor of the bank; (3) certain stock owned by petitioner was pledged to the bank; and (4) petitioner obtained, at his expense, certain minimum levels of credit life insurance naming the bank as beneficiary. Beginning in 1988, Stone Jessup's and petitioner's credit arrangements with the bank were restructured in accordance with the above terms.
On a Schedule A filed with their 1991 return, petitioners claimed a miscellaneous itemized deduction in the amount of $ 41,906.55 for interest payments made to the bank during that year on account of loans made under the above-discussed *522 credit arrangements. Of the amount deducted, $ 41,496.98 was "paid" to the bank by notes co-made by Stone Jessup and petitioner (the relevant notes were signed by petitioner, individually, and in his capacity as president of Stone Jessup), and $ 409.57 was paid directly to the bank on petitioner's behalf as a gift from petitioner's father, who was a director of the bank. In addition, petitioner's father made a $ 10,521.57 interest payment to the bank on petitioner's behalf, which payment forms the basis for the additional interest deduction claimed by petitioners in this case. All of the interest involved with respect to the interest deductions in dispute in this proceeding; i.e. $ 52,428.12, is attributable to the indebtedness incurred by Stone Jessup and petitioner pursuant to the above-described line of credit with the bank.
Respondent disallowed the interest deduction claimed as a miscellaneous itemized deduction upon the ground that "a note issued as 'payment' for interest is not the equivalent of cash". *523
During 1991, petitioners claimed deductions amounting to $ 1,142.88 for the premiums paid for the credit life insurance policies petitioner was required to obtain pursuant to the above-discussed credit arrangement with the bank. The bank was the named beneficiary with respect to each of the relevant life insurance policies. Respondent disallowed the deductions, explaining in the notice of deficiency that the "expense related to the production of corporate income".
OPINION
Deductions for Interest 1.
Use of Notes To Satisfy Interest Liability Although limited elsewhere in the statute, in general,
section 163(a) permits a taxpayer to deduct "all interest paid or accrued within the taxable year on indebtedness." For cash basis taxpayers, like petitioners, the interest must be paid in cash or its equivalent.Don E. Williams Co. v. Commissioner , 429 U.S. 569">429 U.S. 569Eckert v. Burnet , 283 U.S. 140">283 U.S. 140Menz v. Commissioner , 80 T.C. 1174">80 T.C. 1174Helvering v. Price , 309 U.S. 409">309 U.S. 409Nat Harrison Associates, Inc. v. Commissioner , 42 T.C. 601">42 T.C. 601Davison v. Commissioner , 107 T.C. 35">107 T.C. 35section 163(a) . Interest Paid to Bank by Petitioner's FatherIn 1991, petitioner's father made interest payments of $ 409.57 and $ 10,521.57 to the bank on petitioner's behalf as gifts to him. The former payment was included in the miscellaneous itemized interest deduction claimed on petitioners' 1991 return. The latter payment is the basis for the additional interest deduction petitioners are claiming in this proceeding.
We have previously made reference to
section 163(a) , which generally allows a deduction for all interest paid or accrued within the taxable year. However,section 163(a) is *525 limited bysection 163(h)(1) , which provides that in the case of a taxpayer other than a corporation, no deduction shall be allowed for personal interest.Section 163(h)(2) defines personal interest to include any interest other than interest which arises in connection with five specified situations, none of which is applicable to this case.Petitioners argue that the interest is attributable to petitioner's trade or business, and we agree. But petitioner's trade or business during 1991 was as an employee of Stone Jessup; consequently, the interest is considered personal interest.
Sec. 163(h)(2)(A) . No doubt in petitioner's view the distinction between Stone Jessup's trade or business and his own is less apparent than real. (For a discussion on this point seeSouris v. Commissioner , T.C. Memo 1996-450">T.C. Memo. 1996-450Moline Properties, Inc. v. Commissioner , 319 U.S. 436">319 U.S. 436section 163(h) (1) . *526section 166 . That section generally allows a deduction for any bad debt that becomes worthless during the taxable year. In order to be entitled to asection 166 deduction, petitioners must establish that petitioner was owed a bona fide debt by Stone Jessup on account of the interest payments made, and that such debt became worthless in 1991. Rule 142(a);Crown v. Commissioner , 77 T.C. 582">77 T.C. 582Rude v. Commissioner , 48 T.C. 165">48 T.C. 165section 166 on account of the interest payments made to the bank.Employee Business Expense Deductions During 1991 petitioner paid the following expenses in connection with his employment with Stone Jessup:
Vehicle $ 2,673.06 Parking fees, tolls, other trans. 270.80 Travel 1,242.21 Meals and entertainment 2,603.23 Workshops, forums 90.86 Petitioners argue that the expenses are deductible as employee business expenses pursuant to
section 162(a) .In general, a taxpayer is entitled to deductions pursuant to
section 162(a) for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The term "trade or business" as used insection 162(a) includes the trade or business of being an employee.Primuth v. Commissioner , 54 T.C. 374">54 T.C. 374Christensen v. Commissioner , 17 T.C. 1456">17 T.C. 1456Abraham v. Commissioner , 9 T.C. 222 (1947)Deputy v. du Pont , 308 U.S. 488">308 U.S. 488Commissioner v. Tellier , 383 U.S. 687">383 U.S. 687Carbine v. Commissioner , 83 T.C. 356">83 T.C. 356777 F.2d 662">777 F.2d 662 (11th Cir. 1985). Corporate officers, employees, and shareholders who voluntarily incur corporate expenses are generally not entitled to deductions for these expenditures because such expenditures are not considered necessary.Deputy v. du Pont, supra ;Noland v. Commissioner , 269 F.2d 108">269 F.2d 108Westerman v. Commissioner , 55 T.C. 478">55 T.C. 478Stolk v. Commissioner , 40 T.C. 345">40 T.C. 345326 F.2d 760">326 F.2d 760 (2d Cir. 1964);Jergens v. Commissioner , 17 T.C. 806">17 T.C. 806Harding v. Commissioner , T.C. Memo. 1970-179Thomas v. Commissioner , T.C. Memo 1988-505">T.C. Memo. 1988-505On the other hand, if, as a condition of employment, an employee is required to incur expenses on behalf of his or her employer, the employee is entitled to a deduction for those expenses that are ordinary and necessary to his or her business as an employee to the extent such expenses *529 are not subject to reimbursement.
Schmidlapp v. Commissioner , 96 F.2d 680">96 F.2d 680Eder v. Commissioner , T.C. Memo 1981-408">T.C. Memo. 1981-408Respondent argues that the expenses do not constitute ordinary and necessary employee business expenses within the meaning of
section 162(a) because petitioner, as a corporate officer and employee of Stone Jessup, incurred the expenses voluntarily and not because Stone Jessup required him to do so as a condition of his employment. We do not agree.As the only director and officer of Stone Jessup, it would have been petitioner who would have established the conditions of his own employment. We find that as an officer and director of Stone Jessup petitioner established the requisite corporate policy that would allow him, as an employee of the corporation, to deduct any unreimbursed employee business expenses he incurred in connection with his employment. See
Theodore Souris, P.C. v. Commissioner , T.C. Memo 1996-450">T.C. Memo. 1996-450Credit Life Insurance Premiums Pursuant to the previously discussed line of credit with the bank, petitioner obtained several credit life insurance policies, each naming the bank as beneficiary, and paid $ 1,142.88 in premiums. The manner in which petitioners deducted the expenses for the premiums on their 1991 return, partly on a Form 2106 and partly as a miscellaneous itemized deduction, leads us to conclude that they rely upon
section 162(a) ,section 212(2) , or both, in support of the deductions. However, we need not consider whether the deductions should be allowed under either of those sections because ofsection 264(a)(1) . That section disallows any deduction for life insurance premiums paid if the insured is an employee, officer, or is otherwise financially interested in the trade or business carried on by the taxpayer, and is directly or indirectly a beneficiary under the policy. Obviously, *531 petitioner had a financial interest in his own trade or business. Furthermore he directly or indirectly was a beneficiary of the policies, even though the bank was the named beneficiary. A taxpayer who is required, as a condition of obtaining a loan, to purchase a life insurance policy which names the creditor as beneficiary, is "directly or indirectly" benefited within the meaning ofsection 264 and therefore precluded by the operation of that section from deducting the premiums undersections 162 or212 . SeeJefferson v. Helvering , 121 F.2d 16">121 F.2d 1640 B.T.A. 274">40 B.T.A. 274 (1939);Klein v. Commissioner , 84 F.2d 310">84 F.2d 31031 B.T.A. 910">31 B.T.A. 910 (1934);Rieck v. Heiner , 25 F.2d 453">25 F.2d 453Glassner v. Commissioner , 43 T.C. 713">43 T.C. 713360 F.2d 33">360 F.2d 33 (3d Cir. 1966);Ragan v. Commissioner , T.C. Memo. 1980-94King v. Commissioner , T.C. Memo 1963-267">T.C. Memo. 1963-267To reflect the foregoing,
Decision will be entered under Rule 155 .Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩
2. Respondent's explanation does not address the portion of the interest expense deduction attributable to the payment of interest by petitioner's father on petitioner's behalf. We consider the different ways in which the interest was "paid" in separate sections of this opinion.
3. See
infra↩ note 4.4. As an aside, we note that the provisions of
sec. 163(h)(1)↩ also prohibit petitioners from deducting the interest paid by the notes.
Document Info
Docket Number： Docket No. 26039-93.
Citation Numbers： 72 T.C.M. 1248, 1996 Tax Ct. Memo LEXIS 517, 1996 T.C. Memo. 507
Judges： CARLUZZO
Filed Date： 11/13/1996
Precedential Status： Non-Precedential
Modified Date： 11/20/2020