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onto their owners rather than pay taxes themselves, plaintiffs
point out these entities cannot account for deficiency interest
in determining distributable income. The partners and
shareholders, therefore, may deduct deficiency interest
attributable to the entities as a business expense on their
individual returns.
The government argues the interest payments are a personal
rather than a business expense. Partnerships and S corporations
are entities separate from their owners for the purposes of
calculating income and deductions. Therefore, if the 1986
interest represents a business expense, the expense and deduction
belong to the partnership or corporate entities. However,
because partnerships and S corporations have no federal income
tax liability, they bear no responsibility for interest on unpaid
taxes and, thus, they cannot consider penalty interest a business
expense. The government adds, contrary to the district court's
conclusion, sole proprietors generally cannot deduct deficiency
interest as a business expense because deficiency interest does
not constitute an ordinary and necessary expense of operating a
business.3 Penalty interest constitutes the cost of not paying
the correct amount of taxes and not the cost of producing the
taxable income. Therefore, a sole proprietor, like an employee,
cannot deduct this interest as a business expense and neither can
partners and S corporation shareholders.
We review de novo a grant of summary judgment. Phillips
Petroleum Co. v. Lujan, 4 F.3d 858, 860 (10th Cir. 1993)
(citation omitted). Summary judgment is appropriate if no
genuine issue of material fact exists and the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c).
The alternative minimum tax imposes additional income taxes
on individual taxpayers for whom a portion of their alternative
minimum taxable income exceeds their regular tax liability.
I.R.C. section 55(a).4 Adjusted gross income serves as the
starting point for calculating alternative minimum taxable income
and, thus, the alternative minimum tax. I.R.C. section 55(b).
To determine adjusted gross income, a taxpayer lessens gross
income by several "above the line" deductions including allowable
deductions "attributable to a trade or business carried on by the
taxpayer" if the trade or business does not amount to the
taxpayer's services as an employee. I.R.C. section 62(l). The
code defines business expenses as "all the ordinary and necessary
3 The government goes on to contend an individual taxpayer
can never deduct deficiency interest from gross income as a
business expense.
4 Citations to the tax code refer to the amended provisions
of the 1954 code effective in 1986.
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