United States Tax Court

United States Tax Court

T.C. Memo. 2022-97

JOHN E. VORREYER AND MELISSA D. VORREYER, ET AL., 1

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos. 19332-16, 27307-16,

27314-16, 27846-16,

2634-19, 2636-19,

2666-19, 2670-19.

Filed September 21, 2022.

—————

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. 266619; 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.

dollar.

4 Unless otherwise indicated, all monetary amounts are rounded to the nearest

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 longestablished 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.