                           T.C. Memo. 2002-6



                        UNITED STATES TAX COURT



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



     Docket No. 7315-00.                       Filed January 8, 2002.


     James Allen Brown, for petitioners.

     H. Elizabeth Downs, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:    For taxable years 1995 and 1996,

respondent determined deficiencies of $47,775 and $53,144,

respectively, in petitioners’ Federal income taxes.      The sole

issue for decision is whether petitioners are entitled to deduct

as real property taxes, or as business expenses, amounts paid by

petitioner husband (petitioner) with respect to properties owned
                                - 2 -

by two partnerships in which petitioners’ wholly owned S

corporation was a partner.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                        FINDINGS OF FACT

     Petitioners are married.   When they petitioned this Court,

they resided in Greenwood, Arkansas.

     During 1995 and 1996, petitioners jointly owned 100 percent

of the stock of Griffin California Enterprises, Inc. (Griffin

California), an S corporation as defined by section 1361(a)(1).

In turn, Griffin California owned 60 percent of each of two

partnerships (the partnerships):   Orange Tree Commerce Center

Partnership (Orange Tree) and Solano Commercial Investors, a

California Partnership, d.b.a. Texas Jacks (Texas Jacks).

     During 1995 and 1996, each of the partnerships owned

commercial real property in Vacaville, California.   Orange Tree

owned Orange Tree Plaza, a small shopping mall.   Texas Jacks

owned a western dance hall.   Petitioners personally owned no

interest in these real properties, other than indirectly through

their ownership of Griffin California.

     On or about April 18, 1991, Orange Tree borrowed $6,251,000

from Napa Valley Bank (the Orange Tree loan) for the purpose of
                               - 3 -

constructing Orange Tree Plaza.   The note was secured by the

Orange Tree Plaza property and personally guaranteed by

petitioner.

     On or about November 19, 1993, Texas Jacks borrowed

$1,427,000 from First Northern Bank of Dixon (the Texas Jacks

loan).   The note was secured by the Texas Jacks dance hall and

personally guaranteed by petitioner.

     Sometime before 1995, the City of Vacaville, California,

sued Orange Tree and other defendants, not including petitioners,

to foreclose liens due to Orange Tree’s failure to pay

assessments against the Orange Tree Plaza.

     During 1995 and 1996, petitioner personally paid delinquent

real property taxes that had accrued with respect to the

partnerships’ Vacaville properties.    These payments (the tax

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

Schedules E, Supplemental Income and Loss (Schedules E), attached

to their 1995 and 1996 joint Federal income tax returns,

petitioners claimed the tax payments as deductible expenses.1




     1
       On the Schedules E, Supplemental Income and Loss
(Schedules E), attached to petitioners’ 1995 and 1996 joint
Federal income tax returns, the taxes paid with respect to the
Vacaville properties were included in amounts claimed as paid
with respect to rental property located in Fairfield, Cal.
Petitioners have stipulated that the taxes were not in fact paid
with respect to the Fairfield, Cal., property or any other
property listed on the Schedules E for 1995 and 1996.
                               - 4 -

     On the Schedule E attached to their 1995 return, petitioners

reported income or loss from 21 S corporations, including Griffin

California.2   On the Schedule C, Profit or Loss from Business

(Schedule C), attached to their 1995 return, petitioners reported

$931 net profit from Creekside Manor of Fairfield (Creekside

Manor).   On Schedules C attached to their 1996 return,

petitioners reported a $1,422 net loss from Creekside Manor and

$31,382 net profit from Citation Skymaster Shelton Korbel Homes

(Citation Skymaster).   On the Schedules C, petitioners identified

the principal business of both Creekside Manor and Citation

Skymaster (the Schedule C activities) as “construction”.

     Respondent’s examination of petitioners’ 1995 and 1996

Federal income tax returns commenced October 6, 1999.     In the

notice of deficiency, respondent disallowed petitioners’ claimed

deductions for the tax payments but treated the tax payments as

capital contributions by petitioners to Griffin California and as

deductible expenses of the partnerships, resulting in a flow

through of 60 percent of the deductions to Griffin California.

                              OPINION

Deduction for Taxes Paid Under Section 164

     Section 164 allows a deduction for certain taxes, including

State and local property taxes.   In general, taxes are deductible



     2
       The Schedule E attached to petitioners’ 1996 return does
not contain similar detail, but rather lists four S corporations
by name (not including Griffin California Enterprises, Inc.), and
then references “ALL OTHERS” without further specifics.
                               - 5 -

under section 164 only by the person upon whom they are imposed.

Sec. 1.164-1(a), Income Tax Regs.; see Walsh-McGuire Co. v.

Commissioner, 97 F.2d 983, 985 (6th Cir. 1938), affg. an order of

this Court.

     Petitioners do not contend that the real property taxes in

question were imposed upon them, that they owned the real

property against which the taxes were assessed, or that they

owned any equitable or beneficial interest in the real property

that might entitle them to a deduction under section 164.   Cf.

Hord v. Commissioner, 95 F.2d 179 (6th Cir. 1938), revg. 33

B.T.A. 342 (1935); Estate of Movius v. Commissioner, 22 T.C. 391

(1954); Horsford v. Commissioner, 2 T.C. 826 (1943).

Petitioners’ ownership of Griffin California does not support a

conclusion that the property taxes were imposed on them.    Such a

conclusion would require inappropriately disregarding Griffin

California as a separate corporate entity, see Planters’ Cotton

Oil Co. v. Hopkins, 286 U.S. 332 (1932), and disregarding, as

well, the fact that Griffin California owned only 60 percent of

the partnerships.   Accordingly, petitioners are not entitled to

deduct the tax payments under section 164(a).

Ordinary and Necessary Business Expenses

     Although nondeductible under section 164(a), the tax

payments may still be deductible under section 162 to the extent

that they represent ordinary and necessary expenses of
                                - 6 -

petitioners’ business.   See Stoddard v. Commissioner, T.C. Memo.

1982-720.

     As a general rule, a taxpayer may not deduct a payment made

on another’s behalf unless the payment represents an ordinary and

necessary expense of the taxpayer’s own business, as distinct

from the business of another person or of some other entity in

which the taxpayer may have an ownership interest.   See Gould v.

Commissioner, 64 T.C. 132, 134-135 (1975); Rink v. Commissioner,

51 T.C. 746, 751 (1969); Lohrke v. Commissioner, 48 T.C. 679,

(1967); see also Gantner v. Commissioner, 905 F.2d 241, 244 (8th

Cir. 1990) (“A shareholder is not entitled to a deduction from

his individual income for payment of corporate expenses.”), affg.

92 T.C. 192 (1989).   The cases that have allowed deductions under

this rule generally have involved the taxpayer’s payment of

financial obligations of another party in financial distress and

have required the taxpayer to show “direct and proximate” adverse

consequences to the taxpayer’s own business from failure to pay

the other party’s obligation.   See Hood v. Commissioner, 115 T.C.

172, 180-181 (2000), and cases cited therein.

     Petitioners contend that the tax payments are deductible

under section 162 because petitioner paid the delinquent real

property taxes to prevent foreclosure on the Orange Tree and

Texas Jacks loans (the partnership loans), which he had
                               - 7 -

personally guaranteed and which were secured by the partnerships’

real properties against which the property taxes were assessed.

     Under Rule 142(a), the burden of proof is upon petitioners,

except as otherwise provided by statute.   In certain

circumstances, if the taxpayer “introduces credible evidence with

respect to any factual issue relevant to ascertaining” the proper

tax liability, section 7491 places the burden of proof on

respondent with respect to such issue.   Sec. 7491(a); Rule

142(a)(2).

     Section 7491 is effective with respect to court proceedings

arising in connection with examinations commencing after July 22,

1998.   See Internal Revenue Service Restructuring & Reform Act of

1998, Pub. L. 105-206, sec. 3001(c)(2), 112 Stat. 726.   The

examination in the instant case began after July 22, 1998.

Petitioners contend that the burden of proof is therefore on

respondent.   Respondent disagrees, contending that petitioners

have failed to introduce credible evidence, as required by

section 7491(a), regarding “the core factual issue” as to whether

petitioners were engaged in a trade or business “distinct from

their investment in S corporations or the activities conducted by

those S corporations, to which the payment of the taxes at issue
                                - 8 -

was attributable as an ordinary and necessary expense, or as

payment to protect such business.”3

     Section 7491 does not define what constitutes credible

evidence.   The pertinent legislative history states: “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 if no contrary evidence were submitted

(without regard to the judicial presumption of IRS correctness).”

H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-

995; see Higbee v. Commissioner, 116 T.C. 438, 442 (2001).

     The only evidence regarding the nature of petitioners’

business activities consists of petitioner’s summary and

uncorroborated testimony.    He testified, with little elaboration,

that he has been a building contractor and land developer for

about 30 years, during which time he has developed about one

project a year.   On cross-examination, he testified that his

construction and real-estate development businesses are not

separate businesses, but are “all tied together.   They’re all–-

any business I have is–-if I–-if they are–-oftentimes I

incorporate, because of the liability aspect.   They are

Subchapter S if they are.”




     3
       Respondent does not contend that petitioners fail to
satisfy other requirements of sec. 7491(a)(2).
                               - 9 -

     Petitioner testified that petitioners owned 100 percent of

all but one of the 21 S corporations listed on the Schedule E

attached to their 1995 tax return and that all these S

corporations were involved in real-estate development or

management activities.   Petitioner offered no testimony, and the

record otherwise contains no evidence, regarding Creekside Manor,

listed as a construction business on the Schedules C attached to

petitioners’ 1995 and 1996 returns, or Citation Skymaster, listed

as a construction business on the Schedule C attached to

petitioners’ 1996 return.

     The sparse evidence introduced by petitioners would not be

“sufficient upon which to base a decision on the issue”, H. Conf.

Rept. 105-599, supra at 240, 1998-3 C.B. at 994, as to whether

petitioners were individually engaged in a trade or business,

within the meaning of section 162, with respect to which the tax

payments would represent ordinary and necessary expenses.4   In

the first instance, assuming for sake of argument that

petitioners devoted significant time and energy to the many S

corporations that they owned, such activity would not necessarily

constitute a trade or business of petitioners.   See Whipple v.

United States, 373 U.S. 193 (1963); Bell v. Commissioner, 200

F.3d 545, 547 (8th Cir. 2000), affg. T.C. Memo. 1998-136.    The


     4
       Even if the burden of proof were placed on respondent, we
would decide the issue in his favor based on the preponderance of
the evidence.
                               - 10 -

evidence introduced by petitioners does not suggest that they

were engaged in a regular course of promoting their S

corporations for profit on their sale, so as to lend support to

an argument that they were engaged in a trade or business with

respect to their S corporations, other than as mere investors.

See Whipple v. United States, supra; Bell v. Commissioner, supra.

There is no evidence that petitioners were employees of the

partnerships or of Griffin California, such that their employment

therewith might constitute a business that might be jeopardized

by their failure to make the tax payments.   See Bell v.

Commissioner, supra at 548; cf. Gould v. Commissioner, 64 T.C.

132 (1975).

     Assuming, for sake of argument, that petitioners acquired

and continued to own properties in their individual capacities,

as suggested by the Schedules C attached to their 1995 and 1996

returns, there is no credible evidence that the tax payments were

made with respect to such activities.   To the contrary,

petitioners’ accountant testified that the tax payments were

reported on Schedule E because they were attributable to

petitioners’ S corporations.

     Further assuming, for sake of argument, that petitioners

were engaged in one or more trades or businesses in their

individual capacities, there is no credible evidence that the tax

payments represented ordinary and necessary expenses of any such
                                - 11 -

trades or businesses.     Petitioners contend that the makers of the

partnership loans looked to petitioner to satisfy the delinquent

tax assessments on the partnerships’ Vacaville properties and

that if petitioner had not made the tax payments, he would have

been “subject to risk if a judgment was brought against him which

could be executed against his other property holdings.”5    Apart

from petitioner’s uncorroborated testimony, however, the record

is devoid of evidence to support this contention.     Petitioners

have failed to introduce credible evidence to establish that

petitioner’s failure to make the tax payments would have caused

direct and proximate adverse consequences to any businesses

conducted in petitioners’ individual capacities.     See Hood v.

Commissioner, 115 T.C. at 180-181; Cloud v. Commissioner, T.C.

Memo. 1976-27.     Indeed, there is no evidence to show that the

partnerships themselves, which presumably were primarily liable

for paying the property taxes and for repaying the loans, lacked

resources to satisfy such liabilities.

         Petitioner testified that he made the tax payments “in

order to preserve my integrity and my standing with the bank, and


     5
       It is unclear from the record why a judgment could be
executed against petitioner if the taxes went unpaid. If we are
to assume that it would be on account of his guaranty of the
mortgage notes, it is unclear that petitioner entered into the
guaranty for a business purpose so as to entitle him to a
business expense deduction pursuant to sec. 162. Moreover,
petitioner has not shown that his subrogation rights against his
corporation or partnerships were worthless within the meaning of
sec. 166.
                              - 12 -

my good name, my goodwill.”   There is no evidence to indicate,

however, to what extent petitioner’s failure to make the tax

payments would have resulted in any damage to his reputation or

creditworthiness.   Petitioners have introduced no credible

evidence to show that petitioner made the tax payments to protect

the reputation of any business operation conducted in

petitioners’ individual capacities.    On the basis of petitioner’s

testimony, we are unable to conclude that the tax payments would

have represented ordinary expenses to advance any business

carried on in petitioners’ individual capacities, as opposed to

capital outlays to establish or purchase goodwill or business

standing, see Welch v. Helvering, 290 U.S. 111 (1933); Koree v.

Commissioner, 40 T.C. 961, 965-966 (1963), or contributions to

the capital of Griffin California (consistent with respondent’s

characterization in the notice of deficiency), see Gantner v.

Commissioner, 905 F.2d at 244.

     Petitioners have 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.   Consequently, we sustain

respondent’s determination.

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent.
