That’s the lesson Judge Travis A (“Tag”) Greaves has for the eight (count ’em, eight) family-farmer petitioners in John E. Vorreyer and Melissa D. Vorreyer, et al., T. C. Memo. 2022-97, filed 9/21/22. They ran the farm in a bunch entities (hi, Judge Holmes), but we’re concerned here with a Sub S Corp and a general partnership, in which all petitioners had various interests.

But Chris & John were the only shareholders in the SD Corp who ponied up $108K in property taxes on said farm, and $20K for the back utilities bill in Year One. They claim these were contributions to capital, wherefore passed through as deductions to Chris & John on their personal 1040s.

No, says Judge Tag Greaves.

“A taxpayer cannot deduct expenses paid on behalf of another taxpayer. This long-established principle extends to corporations as a corporation’s business is distinct from its shareholders. Thus, a shareholder may not deduct as personal expenses those expenses that further the business of the corporation.” T. C. Memo. 2022-97, at p. 4 (Citations omitted).

Chris & John don’t claim the “further the corporate business” exception, but Taishoff says it’s worth a try. If the county forecloses for back taxes, there goes the farm.

Judge Tag Greaves says a Sub S Corp is no different than a C Corp when it comes to shareholders paying corporate expenses. The S Corp is on its own.

“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.” T. C. Memo. 2022-97, at p. 5.

In Year Two, the partnership bought two “semi-trucks” for $70K. I take that means the motive power component of an 18-wheeler. They wrote off the expense on their Sched F (farming) as repairs and maintenance, but everybody agrees it wasn’t. The two vehicles would have qualified for a Section 179 deduction as business property. But the partnership never amended to take the deduction, and the time to amend has run out.

Judge Tag Graves can’t help.

“Petitioners… request that this Court make the election retroactively on [partnership]’s behalf on the basis of principles of equity. We decline to do so as [partnership]’s circumstances are of its own making.” T. C. Memo. 2022-97, at p. 7.

Remember, pore l’il ol’ Tax Court has no equitable powers.

But check out footnote 10 at page 7. Judge, didn’t you mean that “Respondent does not dispute that the truck expenses are qualifying property, e.g., that the semi-trucks constitute qualifying property whose costs are otherwise eligible for deduction” ?