                        T.C. Memo. 2004-64



                     UNITED STATES TAX COURT



         ROBERT GRIFFIN AND JULIA GRIFFIN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 7315-00.            Filed March 11, 2004.


     James Allen Brown, for petitioners.

     H. Elizabeth Downs, for respondent.



                 SUPPLEMENTAL MEMORANDUM OPINION


     THORNTON, Judge:   This case is before this Court on remand

from the U.S. Court of Appeals for the Eighth Circuit for further

consideration consistent with its opinion in Griffin v.

Commissioner, 315 F.3d 1017 (8th Cir. 2003), vacating and


     *
       This Memorandum Opinion supplements our previously filed
opinion in Griffin v. Commissioner, T.C. Memo. 2002-6, vacated
and remanded 315 F.3d 1017 (8th Cir. 2003).
                                - 2 -

remanding T.C. Memo. 2002-6.   The issue for decision on remand is

whether respondent has met his burden of proving that petitioners

are not entitled to deduct as business expenses certain real

property taxes paid by Mr. Griffin with respect to properties

owned by two partnerships in which petitioners’ wholly owned S

corporation was a partner.

     In our original opinion, we sustained respondent’s

determination that petitioners were not entitled to deduct the

real property tax payments.    In doing so, we held that the burden

of proof was not placed on respondent pursuant to section

7491(a)(1), because we found that petitioners failed to introduce

credible evidence that they were engaged, in their individual

capacities, in a trade or business for which the tax payments

would have represented ordinary and necessary expenses.1    See,

e.g., Lohrke v. Commissioner, 48 T.C. 679 (1967).

     On appeal, the Court of Appeals for the Eighth Circuit held

that petitioners “did produce sufficient ‘credible evidence’ to

support their personal deductions of the real property tax

payments at issue.”   Griffin v. Commissioner, supra at 1021.

Accordingly, the Court of Appeals held that the burden of proof

should be placed on respondent pursuant to section 7491(a)(1) and

remanded this case for further consideration on the merits as to



     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code as amended.
                               - 3 -

whether respondent had met his burden of proof.   Id. at 1021-

1022.   The Court of Appeals stated:

          Our application of 26 U.S.C. § 7491(a) in the
     present case does not resolve the merits of the
     deficiency issues. On the record before us, we cannot
     determine whether the Commissioner has met his burden
     of proof. It is not sufficient to summarily conclude
     that the outcome is the same regardless of who bears
     the burden of proof; if that were the case, § 7491(a)
     would have no meaning. We therefore remand the case to
     the tax court for further proceedings on the merits.
     On remand, the tax court may reconsider all of the
     evidence properly before it or hold a new hearing. In
     either case, the tax court is instructed to make new
     findings of fact in light of the shifted burden of
     proof. If the same conclusion is reached by the tax
     court without a new hearing, an explanation is
     warranted as to how the existing record justifies the
     conclusion that the Commissioner has met his burden of
     proof. [Id. at 1022.]

     After the remand, we afforded the parties an opportunity for

a new hearing.   The parties agreed, however, that a new hearing

was unnecessary and requested that we reconsider the case on the

existing record after further briefing.

                            Background

     Facts with respect to this case were found in our original

opinion in Griffin v. Commissioner, T.C. Memo. 2002-6.   Those

facts, which are not in dispute, are incorporated by this

reference.

     Petitioners owned all the stock of Griffin California

Enterprises, Inc. (Griffin California), an S corporation.    In

turn, Griffin California held a 60-percent interest in each of
                              - 4 -

two partnerships (Orange Tree Commerce Center Partnerships and

Solano Commercial Investors) which owned certain commercial real

properties in Vacaville, California.

     During 1995 and 1996, Mr. Griffin personally paid delinquent

real property taxes that had accrued with respect to the

partnerships’ Vacaville real properties.   These payments (the tax

payments) totaled $426,566 in 1995 and $501,742 in 1996.   On

Schedules E, Supplemental Income and Loss, attached to

petitioners’ 1995 and 1996 joint Federal income tax returns,

petitioners claimed the tax payments as deductible expenses.

Petitioners also attached Schedules C, Profit or Loss From

Business, to their 1995 and 1996 joint returns reporting income

and loss from certain “construction” activities.

     In the notice of deficiency, respondent disallowed

petitioners’ claimed deductions for the tax payments and instead

treated the tax payments as petitioners’ capital contributions to

Griffin California and as deductible expenses of the

partnerships, resulting in a flowthrough of 60 percent of the

deductions to Griffin California.

                           Discussion

     Section 162(a) allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.    An expenditure is “ordinary

and necessary” if it is directly connected with, or proximately
                                - 5 -

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).
                               - 6 -

     First, the tax court must “ascertain the purpose or
     motive which [caused] the taxpayer to pay the
     obligations of the other person.” To meet this prong,
     the expense must have been made primarily to benefit
     the taxpayer’s business; any benefit conferred on the
     party whose expenses are being paid must be only
     incidental. Second, the tax court “must then judge
     whether it is an ordinary and necessary expense of the
     [taxpayer’s] trade or business; that is, is it an
     appropriate expenditure for the furtherance or
     promotion of that trade or business? If so, the
     expense is deductible by the individual paying it.”
     Lohrke, 48 T.C. at 688. [Capital Video Corp. v.
     Commissioner, 311 F.3d 458, 464 (1st Cir. 2002), affg.
     T.C. Memo. 2002-40; some citations omitted.]

The second part of this test requires that the expense arise in

connection with the business activities of the taxpayer paying

the expense.   Id. at 465; see also Lettie Pate Whitehead Found.,

Inc. v. United States, 606 F.2d 534, 538 (5th Cir. 1979)

(observing in the Lohrke line of cases “a direct nexus between

the purpose of the payment and the taxpayer’s business or income

producing activities”).

     In our original opinion, we held that petitioners failed to

introduce “credible evidence”, within the meaning of section

7491(a)(1), that they were engaged in their individual capacities

in a trade or business for which the tax payments would have

represented ordinary and necessary expenses.   Griffin v.

Commissioner, T.C. Memo. 2002-6.   In making this determination,

we adopted the following definition of “credible evidence” as

found in the legislative history of section 7491:

     “Credible evidence is the quality of evidence which,
     after critical analysis, the court would find
     sufficient upon which to base a decision on the issue
                              - 7 -

     if no contrary evidence were submitted (without regard
     to the judicial presumption of IRS correctness).” [Id.
     (quoting H. Conf. Rept. 105-599, at 240-241 (1998),
     1998-3 C.B. 747, 994-995)]

Applying this legal standard, we examined all the evidence that

petitioners introduced, including the “summary and

uncorroborated” testimony of Mr. Griffin, the Schedules C and E

attached to petitioners’ joint Federal income tax returns for

1995 and 1996, and the testimony of William LaRue, petitioners’

accountant and tax return preparer.4   Id.   We concluded that the

“sparse evidence” introduced by petitioners was insufficient upon

which to base a decision that petitioners were “individually

engaged in a trade or business, within the meaning of section




     4
       The evidence in this case consisted then (and consists
now) of 18 numbered stipulations of fact, 4 joint exhibits, and
direct and cross-examination testimonies of Mr. Griffin and Mr.
William LaRue, petitioners’ accountant and tax return preparer
(Mr. LaRue). The joint exhibits consist of: (1) Petitioners’
joint Federal income tax return for 1995, (2) petitioners’ joint
Federal income tax return for 1996, (3) the statutory notice of
deficiency, and (4) an unsigned and undated “Stipulation and
Order” apparently relating to a suit that the City of Vacaville,
Cal., and the County of Solano had apparently brought against
Orange Tree Commerce Center Partnerships, among other defendants
(not including petitioners), with respect to certain delinquent
special assessments. At the trial of this case, petitioners
introduced Mr. Griffin’s and Mr. LaRue’s testimonies.
Petitioners submitted no additional evidence other than these two
witnesses’ testimonies, the stipulated facts, and the joint
exhibits. The evidence offered on behalf of respondent was
limited to the stipulations, joint exhibits, and cross-
examination of Mr. Griffin and Mr. LaRue.
                               - 8 -

162, with respect to which the tax payments would represent

ordinary and necessary expenses.”5     Id.   Accordingly, we

concluded that petitioners had failed to carry their burden of

proof.

      In Griffin v. Commissioner, 315 F.3d at 1021, the Court of

Appeals for the Eighth Circuit employed the same definition of

credible evidence that this Court had adopted from the relevant

legislative history:   “‘the quality of evidence which, after

critical analysis, the court would find sufficient upon which to

base a decision on the issue if no contrary evidence were

submitted (without regard to the judicial presumption of IRS

correctness).’”   Unlike this Court, however, the Court of Appeals

found that petitioners had introduced “credible evidence”,

apparently as to all relevant factual issues, so as to place the

burden of proof on respondent with respect to all factual issues.

Id.   The Court of Appeals stated:

      Viewing Robert Griffin’s testimony in the absence of
      any evidence or presumptions to the contrary, we
      conclude that appellants did produce sufficient

      5
       Further, we found no evidence of some of the remaining
requirements for applying the exception of Lohrke v.
Commissioner, 48 T.C. 679 (1967). For example, we found no
evidence in the record to show that the partnerships themselves
lacked the resources to satisfy the real property taxes. We also
found no credible evidence to indicate to what extent Mr.
Griffin’s failure to make the tax payments would have damaged his
reputation or creditworthiness, particularly in light of the fact
that Mr. Griffin was not personally liable for the tax payments
in question and was only secondarily and contingently liable as
guarantor of the construction loans that were secured by the
partnerships’ real properties.
                               - 9 -

     “credible evidence” to support their personal
     deductions of the real property tax payments
     at issue. [Id.6]

     The relevant legislative history provides that once a

taxpayer has introduced credible evidence sufficient to place the

burden of proof on the Commissioner: “If after evidence from both

sides, the court believes that the evidence is equally balanced,

the court shall find that the Secretary has not sustained his

burden of proof.”   H. Conf. Rept. 105-599, at 241 (1998), 1998-3

C.B. 747, 995.   The record before us now is the same as was

before us originally and as was before the Court of Appeals.    The

Court of Appeals has found petitioners’ evidence credible.

Whatever adverse inferences we might draw from the evidence

     6
       In reaching this conclusion, the Court of Appeals for the
Eighth Circuit did not expressly differentiate between Mr.
Griffin’s direct and cross-examination testimony. In the absence
of any contrary indication, we assume that the Court of Appeals
considered both Mr. Griffin’s direct and cross-examination
testimony.
     We do not construe the opinion of the Court of Appeals as
standing for the proposition that, in assessing the credibility
of evidence for purposes of deciding the placement of the burden
of proof pursuant to sec. 7491(a)(1), the trial court is required
to accept at face value self-serving testimony which it finds
unworthy of belief. See, e.g., Day v. Commissioner, 975 F.2d
534, 538 (8th Cir. 1992) (stating that “The Tax Court is not
required to give credence to the self-serving testimony of
interested parties.”), affg. in part, revg. in part and remanding
T.C. Memo. 1991-140. As stated in the relevant legislative
history of sec. 7491: “The introduction of evidence will not
meet this standard [of credible evidence] if the court is not
convinced that it is worthy of belief.” H. Conf. Rept. 105-599,
at 241 (1998), 1998-3 C.B. 747, 995; cf. Kincade v. Mikles, 144
F.2d 784, 787 (8th Cir. 1944) (“As to the contention that the
evidence is unworthy of belief, it need only be said that it was
the function of the trial court to pass upon the credibility of
the witnesses and the weight to be given their testimony.”).
                               - 10 -

(assuming that the opinion of the Court of Appeals does not

foreclose our drawing such inferences) are insufficient to

overcome petitioners’ evidence, viewed in the light of the degree

of credibility that the Court of Appeals has assigned to it.

     For example, on remand, respondent places considerable

reliance on the fact that petitioners reported the tax payments

in question on Schedules E as S corporation expenses relating to

misidentified real properties, rather than on Schedules C as

expenses of a business conducted by petitioners in their

individual capacity.    Ultimately, however, whatever adverse

inferences we might draw from such facts appear to be overcome by

what the Court of Appeals believed to be credible testimony by

Mr. Griffin that the tax payments in question were made with

respect to a separate trade or business in which Mr. Griffin was

individually engaged.

     Likewise, the remaining evidence in the record, consisting

largely of the stipulated facts and the joint exhibits, does not

directly establish or refute petitioners’ allegation that they

were individually engaged in a separate trade or business apart

from their investments in S corporations and partnerships.      Any

inferences that we might draw from this evidence (or lack

thereof) would not overcome Mr. Griffin’s testimony in light of

the degree of credibility assigned to it by the Court of Appeals.

     Giving effect to the Court of Appeals’ conclusion that Mr.

Griffin’s testimony was credible and sufficient to place the
                               - 11 -

burden of proof on respondent, we conclude that respondent has

offered insufficient contrary evidence to overcome petitioners’

evidence.7   Accordingly, respondent has failed to sustain his

burden of proof.


                                         Decision will be entered

                                    for petitioners.




     7
       In our original opinion, we noted: “Even if the burden of
proof were placed on respondent, we would decide the issue [as to
the deductibility of the tax payments] in his favor based on the
preponderance of the evidence.” T.C. Memo. 2002-6 n.4. This
statement reflected this Court’s conclusion that Mr. Griffin’s
testimony was not only insufficient to support petitioners’ claim
to ordinary and necessary business deductions but indeed
undermined their claim, insofar as Mr. Griffin’s testimony
convinced us that his relevant business activities were conducted
entirely through S corporations. In light of the Court of
Appeals’ conclusion that Mr. Griffin’s testimony was sufficient
to support the claimed deductions, the preponderance of the
evidence, thus evaluated, is no longer in respondent’s favor.
