                           T.C. Summary Opinion 2016-21



                           UNITED STATES TAX COURT



LAWRENCE M. ALEAMONI AND MARJORIE C. ALEAMONI, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 10396-15S.                           Filed May 12, 2016.



      Lawrence M. Aleamoni and Marjorie C. Aleamoni, pro sese.

      Derek S. Pratt, for respondent.



                                SUMMARY OPINION


      ARMEN, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, all subsequent section references, as well as all
                                                                        (continued...)
                                        -2-

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      Respondent determined deficiencies in petitioners’ Federal income tax as

follows:

                          Year         Deficiency

                          2010         $13,615
                          2011           9,952
                          2012           8,697

As stated in the notice of deficiency, the deficiency for 2010 does not take into

account two specific payments made by petitioners, “which amounts will be

applied upon the final disposition of this case.”

      After concessions by petitioners,2 the sole issue for decision is whether

petitioners are entitled to deduct on their individual income tax returns advances

made to a so-called C corporation in which they held a 50% interest.




      1
      (...continued)
subchapter references, are to the Internal Revenue Code in effect for 2010, 2011,
and 2012, the three taxable years in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
      2
        Petitioners concede all of the adjustments made by respondent in the
notice of deficiency for each of the years in issue except for the disallowance of
the deductions claimed for amounts advanced to their C corporation.
                                        -3-

                                    Background

      Some of the facts have been stipulated, and they are so found. The Court

incorporates by reference the parties’ stipulation of facts and accompanying

exhibits.

      Petitioners resided in the State of Arizona at the time that the petition was

filed with the Court.

      Petitioner Lawrence M. Aleamoni holds a Ph.D. and is a professor emeritus

in the College of Education at the University of Arizona (UA) in Tucson. With

training and knowledge in the fields of psychology, mathematics, and statistics,

Professor Aleamoni is what is known as a psychometrician. Since 1966 Professor

Aleamoni’s main focus in his professional career has been devising measures and

appraisal methods in the field of faculty and personnel evaluation and

improvement.

      In addition to his teaching, research, and writing duties at the UA College of

Education, Professor Aleamoni has served both nationally and internationally as a

consultant to numerous other colleges, universities, corporations, organizations,

and governments in designing and implementing comprehensive faculty and

personnel evaluation systems. Professor Aleamoni has also conducted numerous
                                        -4-

workshops and other programs, published extensively, and presented many papers

in his field of expertise.

       In the mid-1980s, and in order to handle his “outside” consulting and work

activities, Professor Aleamoni created Comprehensive Data Evaluation Services,

Inc. (CODES, Inc.), an Arizona corporation. At all relevant times Professor

Aleamoni and Mrs. Aleamoni have each owned 25% of the shares of CODES, Inc.

and their children have owned the remaining 50%. Also, at all relevant times for

tax purposes CODES, Inc. has been a so-called C (or subchapter C) corporation

that reports on a fiscal year ending June 30.

       Over the years petitioners have advanced sums of money to CODES, Inc.,

which the corporation has reflected on its general ledger as loans from

shareholders. In the mid-1990s petitioners began to attach a Schedule C, Profit or

Loss From Business, to their individual income tax return, and on each such

Schedule C petitioners claimed a deduction for money advanced to CODES, Inc.

during the calendar year.

       Specifically for 2010, 2011, and 2012, the taxable years in issue, petitioners

filed Forms 1040, U.S. Individual Income Tax Return, and attached to each such

return a Schedule C. Petitioners did not report any gross receipts or sales on any
                                       -5-

of the Schedules C; however, petitioners did claim thereon a variety of deductions,

among them the following:

            Year                 Deduction                 Amount

            2010         Personal Loan to Business        $47,978.21
            2011         Personal Loan to Business         36,683.90
            2012         Personal Loan to Business         25,200.00

In each instance “Personal Loan” represented the advance of money made by

petitioners to CODES, Inc. and “Business” represented the corporation.

      CODES, Inc. filed Forms 1120, U.S. Corporation Income Tax Return, for its

fiscal years ended June 30, 2010 through 2012. On each of its corporate returns

CODES, Inc. reported gross receipts or sales, claimed various deductions, and

ultimately reported negative taxable income. The Schedules L, Balance Sheets per

Books, of the Forms 1120 for FYE June 30, 2011, and FYE June 30, 2012, reflect

“Loans from shareholders” in increasing amounts.3

                                    Discussion

      The Court decides the disputed issue in this case on the basis of the

preponderance of the evidence and without regard to the burden of proof. See




      3
       The record does not include a completed Schedule L for the Form 1120
for CODES, Inc. for its FYE June 30, 2010.
                                        -6-

Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933); cf. sec. 7491(a).

      Petitioners contend that their advances to CODES, Inc. constitute loans to

the corporation. Petitioners further contend that the advances are deductible on

their individual income tax returns (on Schedules C) as business expenses. In

contrast, respondent contends that the advances are not deductible whether they

are characterized as loans or as capital contributions. The Court agrees with

respondent that the advances are not currently deductible regardless of their

characterization.4 Accordingly, as discussed below the Court is obliged to sustain

respondent’s disallowance of the claimed deductions.

      Section 162(a) allows as a deduction “all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or


      4
         If the advances were in fact loans, then petitioners might be entitled to a
bad debt deduction in the future for any debt that becomes wholly or partially
worthless. See sec. 166; secs. 1.166-1 through 1.166-3, 1.166-5, Income Tax
Regs. Or if the advances were capital contributions, then petitioners might be
entitled to a capital loss deduction in the future if their stock becomes worthless.
See sec. 165(g); sec. 1.165-5, Income Tax Regs.; see also secs. 1211 and 1212.
But at trial petitioners made clear that CODES, Inc. remains in existence and that
they do not regard their advances to CODES, Inc. to be bad debts; rather,
petitioners testified that they expect their advances to be repaid in due course and
that, over the years, some amounts have in fact been repaid from time to time. In
addition, at trial petitioners never intimated that their stock in CODES, Inc. is
worthless, and the record would not support a finding that it is.
                                         -7-

business”. Thus, for an advance to be deductible under section 162(a) the advance

must satisfy several requirements, among them that it be an “expense” that is paid

or incurred in carrying on a trade or business.

      Neither section 162 nor the regulations promulgated thereunder define the

term “expense” other than through exemplification. But, however challenging it

may be to define what an expense is, it is possible to say what an expense is not.

And in the context of the instant case it may be said that an expense is not an

investment. In other words, an advance made by a shareholder to a corporation for

the use of the corporation in furtherance of its business is an investment in the

corporation, whether the advance is in the form of a loan (giving rise to an asset--a

loan receivable--owned by the shareholder) or a capital contribution (giving rise to

an increase in the shareholder’s basis in his or her stock in the corporation). In

either instance the shareholder hopes to profit as an investor through (1) the

receipt of interest on the loan or the receipt of dividends on the stock and,

regardless of the nature of the investment as debt or equity, (2) an increase in the

value of the stock through the corporation’s becoming a more viable profit-making

enterprise.

      Petitioners might argue that CODES, Inc. is little more than Professor

Aleamoni’s alter ego. However, as the U.S. Supreme Court made clear many
                                         -8-

decades ago, a corporation formed for legitimate business purposes--as CODES,

Inc. undoubtedly was--and the corporations’s shareholders are separate entities,

Moline Props., Inc. v. Commissioner, 319 U.S. 436 (1943), and the business of the

corporation is separate and distinct from the business of its shareholders, id. at

438-439; Deputy v. du Pont, 308 U.S. 488, 494 (1940). These fundamental

principles have been applied by the Court even if a corporation is formed to

perform personal services rendered by its shareholders and even if the corporation

has only one shareholder who exercises total control over its affairs. See Dennis

Katz, D.D.S., P.C. v. Commissioner, T.C. Memo. 2002-118. Thus, “[b]ecause a

corporation’s business is distinct from that of its shareholders, officers and

employees, they may not deduct expenses which promote the business of the

corporation.” Russell v. Commissioner, T.C. Memo. 1989-207, 1989 Tax Ct.

Memo LEXIS 207, at *9; see Deputy v. du Pont, 308 U.S. 488.5

      5
         It may be that petitioners would have benefited tax-wise if CODES, Inc.
had been formed as a so-called S (or subchapter S) corporation rather than as a C
corporation. See generally secs. 1361 et seq.; Bittker & Eustice, Federal Income
Taxation of Corporations and Shareholders, paras. 6.01 et seq. (7th ed. 2000).
However, it was not, and as the caselaw makes clear, “[t]ax consequences are
determined on the basis of what happened in fact, not what might have happened.”
Noonan v. Commissioner, T.C. Memo. 1986-449, 1986 Tax Ct. Memo LEXIS 158
at *43, aff’d without published opinion, 976 F.2d 737 (9th Cir. 1992); see
Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149
(1974) (“[W]hile a taxpayer is free to organize his affairs as he chooses,
                                                                       (continued...)
                                         -9-

      Finally, at trial petitioners testified that respondent had previously examined

their Schedules C for at least two prior years and that the deductions claimed for

advances to CODES, Inc. had been allowed. Petitioners stated that it was

unsettling to be in court now litigating a matter that they thought had been

resolved administratively in their favor some time ago.

      Although the Court can appreciate petitioners’ frustration, the U.S. Supreme

Court has again provided definitive guidance. Thus, in Auto. Club of Mich. v.

Commissioner, 353 U.S. 180, 183 (1957), the Supreme Court held that the

Commissioner’s failure to challenge a taxpayer’s treatment of an item in an earlier

year does not preclude an examination of the correctness of the treatment of that

item in a later year because “[t]he doctrine of equitable estoppel is not a bar to the

correction by the Commissioner of a mistake of law.” Indeed, the Supreme Court

has held that the Commissioner may correct mistakes of law “even where a

taxpayer may have relied to his detriment on the Commissioner’s mistake.” Dixon

v. United States, 381 U.S. 68, 73 (1965); see Greenfeld v. Commissioner, T.C.

Memo. 1966-83 (“[A]cquiescence in a taxpayer’s treatment of an item in prior

years does not prevent the Commissioner from attacking such treatment in later

      5
       (...continued)
nevertheless, once having done so, he must accept the tax consequences of his
choice, whether contemplated or not[.]”).
                                          - 10 -

years.”). In short, in a tax case the doctrine of estoppel is to be applied against the

Commissioner “with utmost caution and restraint” and “such situations must

necessarily be rare, for the policy in favor of an efficient collection of the public

revenue outweighs the policy of the estoppel doctrine in its usual and customary

context.” Schuster v. Commissioner, 312 F.2d 311, 317 (9th Cir. 1962), aff’g in

part, rev’g in part 32 T.C. 998 (1959).

        In order to give effect to the Court’s disposition of the disputed issue, as

well as petitioners’ concessions, see supra note 2,


                                                         Decision will be entered for

                                                   respondent.6




        6
            See supra p. 2 regarding payments to be credited against the deficiency for
2010.
