Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-92-09007/USCOURTS-ca10-92-09007-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
James E. Stewart
Appellant

Document Text:

FILLD 

United States Court of Appeal!I UNITED STATES COURT OF APPEALS Tenth Circuit 

FOR THE TENTH CIRCUIT 

JAMES E. STEWART, 

Petitioner-Appellant, 

v. 

FEB 2 3 1993 

ROBERT L. HOECKER 

Clerk . 

No. 92-9007 

COMMISSIONER OF INTERNAL REVENUE, 

Respondent-Appellee. 

Appeal from U.S. Tax Court 

(No. 28499-89) 

ORDER AND JUDGMENT* 

Before TACHA and BALDOCK, Circuit Judges, and BROWN,** Senior 

District Judge . 

**Honorable Wesley E. Brown, Senior District Judge, United States 

District Court for the District of Kansas, sitting by designation. 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this petition for review. See 

Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The case is therefore 

ordered submitted without oral argument. 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

Appellate Case: 92-9007 Document: 010110175862 Date Filed: 02/23/1993 Page: 1 
Petitioner James E. Stewart appeals from an order of the 

United States Tax Court denying deductions taken for employee 

business expenses on his individual tax return. We affirm. 

Petitioner was president, sole shareholder, director, and a 

paid employee of Twashakarris, Inc., 1 which was incorporated under 

the laws of Oklahoma in 1982. The corporation was suspended from 

1985 to 1990. It continued to operate during this time and filed 

federal corporate tax returns. 

In 1985, petitioner personally paid the corporation's 

expenses for rent, supplies and equipment, commissions, and travel 

and entertainment because the corporation was financially unable 

to meet these expenses. Petitioner was not reimbursed, nor did he 

receive a salary. On his 1985 individual tax return, petitioner 

claimed a deduction pursuant to 26 U.S.C. § 162(a) 2 for those 

expenditures, which was disallowed. 

The tax court entered judgment for respondent. The court 

held that § 162 permits deauctions of a taxpayer's own business 

expenses only; it does not permit the deduction of expenses paid 

or incurred for the benefit of another person or identity. 

On appeal, petitioner argues that, under Oklahoma law, the 

corporation forfeited all its rights while it was suspended. 

1 Twashakarris, Inc . operates a language school in which 

English is taught to foreign students planning to enter American 

colleges and universities. 

2 26 U.S.C. § 162(a) provides that all "ordinary and necessary 

expenses paid or incurred during the taxable year in carrying on 

any trade or business" shall be deductible. 

2 

Appellate Case: 92-9007 Document: 010110175862 Date Filed: 02/23/1993 Page: 2 
Therefore, because he was personally liable for all debts 

incurred, he is entitled to take the§ 162 deduction. 

As petitioner recognizes, in Oklahoma, each director or 

officer of a suspended corporation is personally liable for any 

debts incurred by the corporation with his approval and consent 

during the suspension. Okla. Stat. tit. 68, § 1212(c); Bethlehem 

Steel Corp. v. Giese, 681 P.2d 769 (Okla. 1984). 

However, state law does not control the application of 

federal tax law. "A corporation is subject to federal corporate 

income tax liability as long as it continues to do business in a 

corporate manner, even if its recognized status under state law is 

terminated." United States v. Young, 604 F. Supp. 164, 170 (N.D. 

Okla. 1984) (citing Messer v . Commissioner, 438 F.2d 774 (3d Cir. 

1971)) (emphasis added). "A valid corporation will be disregarded 

for federal tax purposes only after the state has formally revoked 

[its] charter." 604 F. Supp. at 170. Twashakarris's charter was 

not revoked. Therefore, federal tax law control s. 

Section 162 permits deduction of a taxpayer's own necessary 

and ordinary business expenses. Welch v. Helvering. 290 U.S . 111, 

113 (1933). It does not permit deduction of expenses paid or 

incurred for the benefit of another person or entity. Id. at 114; 

see also Deputy v . du Pont, 308 U.S . 488, 494 (1940) (individual 

cannot deduct 

expenses) . 

from p e rsonal 

Payments made 

income his payment of corporate 

with the purpose of keeping a 

corporation in which the taxpayer holds an inter est, in business, 

are not deduc tible. Bet s on v . Commissioner, 802 F . 2d 365, 368 

(9th Cir. 1986) . 

3 

Appellate Case: 92-9007 Document: 010110175862 Date Filed: 02/23/1993 Page: 3 
Further, "for tax purposes a salaried corporate officer is 

engaged in a trade or business separate and distinct from that of 

his corporation. . 11 Fischer v. United States, 490 F.2d 218, 

221 (7th Cir. 1973). Therefore, when he "undertakes to discharge 

the responsibility of the corporation, he is not incurring an 

expenditure of his trade or business within the meaning of Section 

162." Id. "[W]here a corporate officer pays the debts of his 

employer-corporation, however 'necessary' that may be from a 

practical standpoint, such payments are not 'ordinary' 

expenditures of the corporate officer." Id. at 221-22. 

Similarly, corporate expenses paid by a shareholder are not 

ordinary and necessary expenses of the shareholder, but rather are 

ordinary and necessary expenses of the corporation. 

U.S. at 494. 

Deputy. 308 

Petitioner argues that his situation is not controlled by 

these cases because the corporation's financial difficulties were 

caused by the federal government. ~etition8r contends the 

Immigration and Naturalization Service caused the corporation's 

business losses by waiting over six years to notify the Department 

of State that his school was not closed as it had earlier 

reported. As a result, petitioner states he lost referrals from 

foreign embassies and consulates and was unable to pay Oklahoma 

taxes as required. Petitioner cites no cases permitting such an 

exception, nor do we find any. 

4 

Appellate Case: 92-9007 Document: 010110175862 Date Filed: 02/23/1993 Page: 4 
The judgment of the United States Tax court is AFFIRMED. The 

mandate shall issue forthwith. 

- - -----

Entered for the Court 

Deanell Reece Tacha 

Circuit Judge 

5 

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Appellate Case: 92-9007 Document: 010110175862 Date Filed: 02/23/1993 Page: 6