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customer. Because the corporation was unable to pay, the
taxpayer guaranteed, and ultimately paid, the customer’s losses
because he was concerned that otherwise his reputation in the
industry, and that of his patented process, would be damaged. We
held that an exception existed to the general rule that a
taxpayer may not deduct the expenses of another. The cases
relied on in Lohrke likewise involved the taxpayers’ payment of
the obligations of others in financial difficulty. See, e.g.,
Lutz v. Commissioner, 282 F.2d 614 (5th Cir. 1960), revg. and
remanding T.C. Memo. 1959-32; Pepper v. Commissioner, 36 T.C. 886
(1961); Snow v. Commissioner, 31 T.C. 585 (1958); Dinardo v.
Commissioner, 22 T.C. 430 (1954). Thus, under the Lohrke line of
cases, the adverse consequences for the payor taxpayer’s business
must be direct and proximate, as is demonstrated in these cases
by the impact on a payor’s business of an obligor’s inability to
meet his obligations. See also AMW Invs., Inc. v. Commissioner,
T.C. Memo. 1996-235 (adverse effect on payor’s business must be
“clear, direct, and proximate”); Concord Instruments Corp. v.
Commissioner, T.C. Memo. 1994-248 (same).
The “primary benefit” test for a constructive dividend and
the standards under which a taxpayer may deduct the expenses of
another both indicate that the showing a corporation must make to
deduct the expenses of its shareholder is a strong one. To avoid
constructive dividend treatment, the taxpayer must show that the
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