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partner or shareholder's individual obligation to pay taxes also
includes the personal responsibility to pay any tax deficiency
arising from incorrect returns and the associated penalty
interest. Because the duty to pay penalty interest is personal
to the individual partner or shareholder, penalty interest cannot
constitute a business expense.7
Plaintiffs, having chosen to operate their businesses as
partnerships and S corporations, bear personal responsibility for
tax deficiencies and the associated interest attributable to
their businesses. As a result, they cannot deduct the penalty
interest they paid in 1986 from gross income as a business
expense pursuant to I.R.C. section 62(l). Plaintiffs, therefore,
are not entitled to a refund of their alternative minimum tax.
The judgment of the district court is AFFIRMED.
(...continued)
as ordinary business expenses. Id. at 603. Generally, interest
on a deficiency assessment is not an ordinary by product of
business operations and is not deductible. Id. However,
deficiency interest may be deducted where the nature of the
business leads to the expectation that on numerous occasions a
taxpayer acting in good faith to evaluate inventories, which form
a part of his or her return, will nevertheless fail to evaluate
them properly. Id. at 603 & n.1. The court concluded the
taxpayer's livestock business fit this exception because
"qualified minds" may differ over the valuation of livestock.
Id. at 603.
We believe, as did the panel presiding in Polk, that Polk
settled a unique controversy. The parties have not presented any
facts nor can we imagine another situation in which penalty
interest would be an ordinary and necessary expense of operating
a trade or business. Furthermore, Polk has no relevance here
because it involved a taxpayer operating a sole proprietorship
rather than a partnership or S corporation.
7 This liability is in addition to, and separate from, the
direct liability of a corporate employer. Section 6672 is not in
issue in this case.
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