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related to, the taxpayer’s trade or business activities.
Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 197,
200 (2000), affd. 255 F.3d 495 (8th Cir. 2001).
As a general rule, a taxpayer’s payment of another person’s
obligation is not an ordinary and necessary business expense.
Deputy v. duPont, 308 U.S. 488 (1940); Welch v. Helvering, 290
U.S. 111, 114 (1933). Under this rule, a shareholder, even a
majority or sole shareholder, is not entitled to deduct his
payments of his corporation’s expenses. Rink v. Commissioner, 51
T.C. 746, 751 (1969).2 An exception (the so-called Lohrke
exception) to this general rule may apply if a taxpayer pays
someone else’s expenses to protect or promote his own separate
trade or business. See, e.g., Gould v. Commissioner, 64 T.C.
132, 134-135 (1975); Lohrke v. Commissioner, supra.3 In a recent
opinion, the U.S. Court of Appeals for the First Circuit
described this exception as involving a twofold test:
2 Moreover, “Payments made * * * with the purpose of keeping
in business a corporation in which the taxpayer holds an interest
are not deductible.” Betson v. Commissioner, 802 F.2d 365, 368
(9th Cir. 1986) (citing Madden v. Commissioner, T.C. Memo. 1980-
350), affg. on this issue T.C. Memo. 1984-264. Such amounts
constitute either a loan or a contribution of capital to the
corporation and are deductible, if at all, by the corporation.
Id.; Bronston v. Commissioner, T.C. Memo. 1975-5.
3 This exception typically applies only where the taxpayer
pays the obligations of another person or entity in financial
difficulty and where the obligor’s inability to meet his
obligations threatens the taxpayer’s own business with direct and
proximate adverse consequences. Hood v. Commissioner, 115 T.C.
172, 180-181 (2000); see also Square D Co. v. Commissioner, 121
T.C. 168, 200 (2003).
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