     Case: 18-20585   Document: 00515208391    Page: 1   Date Filed: 11/21/2019




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                                United States Court of Appeals
                                                                         Fifth Circuit

                                                                       FILED
                                No. 18-20585                    November 21, 2019
                                                                  Lyle W. Cayce
BAKER HUGHES, INCORPORATED,                                            Clerk


                                          Plaintiff–Appellant
v.

UNITED STATES OF AMERICA

                                          Defendant–Appellee




                Appeal from the United States District Court
                     for the Southern District of Texas


Before SOUTHWICK, WILLETT, and OLDHAM, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
      In this dispute over an income tax deduction, the taxpayer appeals the
decision of the district court that a $52 million payment from its predecessor
in interest to the predecessor’s subsidiary was not a bad debt under 26 U.S.C.
§ 166 or an ordinary and necessary business expense under 26 U.S.C. § 162.
Therefore, no income tax deduction was allowed for the payment. We AFFIRM.


              FACTUAL AND PROCEDURAL BACKGROUND
      During the relevant time period, BJ Services Company, which the
parties have referred to as “BJ Parent” and so shall we, conducted fracking
services in Russia. It operated through a Russian subsidiary, ZAO Samotlor
Fracmaster Services, which also has an agreed shortform, “BJ Russia.” The
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plaintiff Baker Hughes is the successor in interest to BJ Parent. In 2006, BJ
Russia entered into a three-year contract with OJSC TNK-Management
(“TNK-BP”), a joint venture between Russian National Oil company TNK and
British Petroleum, to provide fracking services in Siberia. TNK-BP could
terminate this contract if BJ Russia became bankrupt, if a liquidator was
appointed for BJ Russia, or if BJ Russia defaulted on its contractual
obligations. During the three-year term of the contract, BJ Russia did not
default, and TNK-BP never claimed it had.
      As a condition of BJ Russia’s bidding on this contract, TNK-BP required
BJ Parent to provide a guarantee that BJ Parent would perform or ensure the
performance of the fracking services that TNK-BP asked BJ Russia to provide.
The final version of this guarantee in part provided:
      1. We [BJ Parent] guarantee that [BJ Russia] shall duly perform
      all its obligations contained in the Contract.
      2. If [BJ Russia] shall in any respect fail to perform its obligations
      under the Contract or shall commit any breach thereof, we
      undertake, on simple demand by [TNK-BP], to perform or to take
      whatever steps may be necessary to achieve performance of said
      obligations under the Contract and shall indemnify and keep
      indemnified against any loss, damages, claims, costs and expenses
      which may be incurred by [TNK-BP] by reason of any such failure
      or breach on the part of [BJ Russia].
      BJ Russia sustained unanticipated losses on the contract in 2006 and
2007. BJ Russia decided to exit the Russian market. Nevertheless, it was
critical that BJ Russia not breach its contract. In September 2008, BJ Russia
informed TNK-BP of its intention not to renew the contract; it would exit the
Russian market after BJ Russia fulfilled its contractual obligations.
      By letter dated October 21, 2008, the Russian Ministry of Finance
informed BJ Russia that it was not in compliance with Articles 90 and 99 of
the Civil Code of the Russian Federation. Those provisions require a joint
stock company, such as BJ Russia, to maintain net assets in an amount at least
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equal to the company’s chartered capital. A company may reduce its chartered
capital to match the level of its net assets, but Russian Law establishes a
minimum level for chartered capital.       The Ministry explained that if a
company’s net assets are less than the minimum level for chartered capital at
the end of the financial year, then the company is subject to liquidation by the
Russian taxing authority. In the letter, the Ministry provided calculations
showing that BJ Russia’s net assets were less than the chartered capital
minimum for both 2006 and 2007. Based on these calculations, the Ministry
determined that the Russian “tax authority ha[d] the right to claim the
liquidation of the company through the court.” (underlining in original). The
Ministry required BJ Russia to provide by November 14, 2008, information
regarding actions taken to “improve [its] financial performance and increase
the net assets in 2008.”
      BJ Russia responded to the Ministry in a letter dated November 13,
2008. In this letter BJ Russia stated that it “was taking steps to improve the
financial and economic activities of the company and to increase the net assets
in 2008” but did not specify what these steps were. The issue in this case is
how to classify, for tax purposes, BJ Parent’s actions in response to the
Ministry’s letter.
      BJ Parent made wire transfers totaling $52 million to BJ Russia. The
transfer caused BJ Russia’s net assets to be greater than its chartered capital,
and the transfer ended the risk of liquidation. This transfer of funds was made
as “Free Financial Aid” (“FFA”) under a provision of the Tax Code of the
Russian Federation. The finance manager of BJ Parent’s non–United States
affiliates described FFA as “just giv[ing] money . . . with no repayment
obligation, ever.”   Under the Russian Tax Code, assets received by an
organization from its majority shareholder without consideration are exempt
from a profit tax. According to an email exchange between the BJ Parent
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finance manager and BJ Parent tax counsel, BJ Parent considered a transfer
of funds via FFA as the most “tax efficient” way to provide BJ Russia with the
capital needed to satisfy the net-asset requirements of Russian law. Had BJ
Parent failed to prevent BJ Russia’s liquidation, BJ Parent estimates that its
losses would have been at least $160 million.
      To be eligible for the tax exemption under Russian law, the FFA had to
be given on behalf of BJ Russia’s majority shareholder. BJ Russia and its
majority shareholder, also a subsidiary of BJ Parent, entered into an
“Agreement on Provision of Free Financial Aid” on November 26, 2008,
whereby BJ Parent would transfer funds in the form of FFA to BJ Russia on
behalf of the majority shareholder.          The agreement stated that “[t]he
Shareholder confirms hereby that its financial assistance is free and that it
does not expect [BJ Russia] to return the funds to the Shareholder.” The
parties agree that BJ Russia had no obligation to repay BJ Parent for the
provision of the FFA. The FFA was characterized in a BJ Russia shareholder
meeting as a “free capital contribution” from BJ Parent to BJ Russia. BJ
Russia used at least part of the $52 million BJ Parent wired to BJ Russia to
partially repay a loan from another BJ Parent subsidiary. As a result of the
FFA, BJ Russia’s net assets increased, resolving the undercapitalization
problem identified in the Ministry letter.
      BJ Parent claimed the $52 million FFA provided to BJ Russia as a “bad
debt expense” on its United States income tax return for fiscal year 2008. The
Internal Revenue Service (“IRS”) disallowed the deduction. The IRS stated
that BJ Parent failed to support that this transaction should be considered a
“bad debt or guaranteed debt” as allowed by Section 166 of the Internal
Revenue Code. Taxpayer BJ Parent also had not shown that payment should
be deductible as an ordinary and necessary business expense under Section


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162 or entitled to a deduction under any other section of the Internal Revenue
Code. Instead, the IRS considered the payment to be a capital contribution.
      Baker Hughes, as the successor in interest to BJ Parent, filed this suit
in the United States District Court for the Southern District of Texas. It
sought a refund for 2008 in the amount of $17,654,000, plus interest. Baker
Hughes alleged that BJ Parent was entitled to a bad-debt deduction under 26
U.S.C. § 166 for the payment it made to BJ Russia. The district court later
permitted Baker Hughes to assert an additional claim that the FFA was a
deductible ordinary and necessary business expense under 26 U.S.C. § 162.
      As to both claims, the district court granted summary judgment to the
Government. Baker Hughes timely appealed.


                                DISCUSSION
      We review a district court’s “grant of summary judgment de novo,
applying the same standards as the district court.” Ibarra v. UPS, 695 F.3d
354, 355 (5th Cir. 2012). Summary judgment is appropriate if the movant
demonstrates “there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). When
cross-motions for summary judgment have been ruled upon, “we review each
party’s motion independently, viewing the evidence and inferences in the light
most favorable to the nonmoving party.” Green v. Life Ins. Co. of N. Am., 754
F.3d 324, 329 (5th Cir. 2014). Baker Hughes bears “the burden of proving
entitlement to a claimed deduction.” BC Ranch II, L.P. v. Comm’r, 867 F.3d
547, 551 (5th Cir. 2017). Here, few facts are in dispute. The controlling issues
are ones of law.




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I.    Section 166: Bad-debt deduction
      Section 166 of the Internal Revenue Code states that “[t]here shall be
allowed as a deduction any debt which becomes worthless within the taxable
year.” 26 U.S.C. § 166(a)(1). A taxpayer may claim a bad-debt deduction only
for a bona fide debt, which is defined as a “debt which arises from a debtor-
creditor relationship based upon a valid and enforceable obligation to pay a
fixed or determinable sum of money.” Treas. Reg. § 1.166-1(c). “A gift or
contribution to capital shall not be considered a debt for purposes of section
166.” Id. For taxpayers who have entered into an agreement to act as a
guarantor of a debt obligation, “a payment of principal . . . in discharge of part
or all of the taxpayer’s obligation as a guarantor . . . is treated as a business
debt becoming worthless in the taxable year in which the payment is made,”
Treas. Reg. § 1.166-9(a), and the payment is thus deductible under Section 166.
If the payment constitutes a contribution to capital, it is not treated as a
worthless debt, and it thus is not deductible under Section 166. See Treas. Reg.
§ 1.166-9(c).
      The district court reasoned that the $52 million in payments from BJ
Parent to BJ Russia did not itself create an indebtedness and was not a
deductible bad debt under Section 166. The FFA agreement was explicit that
there would be no repayment, and indeed Russian law required that no
obligation to repay be created by an FFA.
      On appeal the parties agree that BJ Russia had no obligation to repay
the $52 million to BJ Parent. Nonetheless, Baker Hughes argues that the
payment to BJ Russia fulfilled BJ Parent’s guarantee obligation and was
entitled to a bad-debt deduction pursuant to Treasury Regulation § 1.166-9.
The district court agreed that a guarantee payment may qualify as a bad-debt
deduction when there is “an enforceable legal duty upon the taxpayer to make
the payment.” Treas. Reg. § 1.166-9(d)(2). Voluntary payments, though, do
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not qualify because “[a] gift or contribution to capital shall not be considered a
debt for purposes of section 166.” Treas. Reg. § 1.166-1(c).
       According to Baker Hughes, it does not matter that there is no
underlying repayment obligation. To support its position, it cites to Tax Court
decisions 1 and to authority outside the Fifth Circuit for the proposition that a
guarantor’s losses are deductible under Section 166 even in the absence of a
legal right to repayment.          For example, the Sixth Circuit held that a
guarantor’s payments to creditor-lessors represented payments to cover the
debt of the debtor-lessee and were thus deductible as bad debts pursuant to
Section 166; that was true even though the guarantor had no legal right to
repayment. United States v. Vaughan (In re Vaughan), 719 F.2d 196, 198–99
(6th Cir. 1983). Baker Hughes also cites a Third Circuit decision where the
court recognized that the taxpayer had gained no right of subrogation through
its guarantee, but its payments to creditors on behalf of the debtor should
nonetheless be considered “bad debts within section 166.” Stratmore v. United
States, 420 F.2d 461, 464 (3d Cir. 1970). In addition, Baker Hughes quotes one
Tax Court opinion for the proposition that “even without the existence of a
technical right of subrogation, a guarantor’s loss is in the nature of a bad debt
loss, and, thus, is subject to the bad debt regime of section 166.” Black Gold
Energy Corp. v. Comm’r, 99 T.C. 482, 486–87 (1992) (summarizing holdings of
Vaughan and Stratmore).
      We agree with the Government’s response to these arguments. The sort
of guarantee contemplated by Section 1.166-9(a) is for a taxpayer’s payments
that are “in discharge of part or all of the taxpayer’s obligation as a guarantor.”



      1   The Tax Court is an Article I court. Estate of Smith v. Comm’r, 429 F.3d 533, 537
(5th Cir. 2005). Tax Court opinions and memorandum opinions are persuasive authority.
See, e.g., Chemtech Royalty Assocs., L.P. v. United States, 823 F.3d 282, 290–92 (5th Cir.
2016) (considering both a Tax Court opinion and a memorandum opinion as persuasive).
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That means a guarantor can claim a bad-debt deduction only if the creditor
could have claimed such a deduction were it not for the guarantor’s payment
of the underlying debt. Baker Hughes’ authorities all involved a bona fide debt.
In Vaughan, the taxpayer-guarantor made payments directly to the creditors
to discharge his obligation as guarantor. There was a bona fide debt from the
debtor-lessee to the creditor-lessor which allowed for the taxpayer’s bad-debt
deduction. See Vaughan, 719 F.2d at 198–99. In Stratmore, the taxpayer’s
payments were in discharge of its obligation as guarantor of corporate notes,
which constituted the bona fide debt. See Stratmore, 420 F.2d at 461.
      No authority shown to us holds that a bad-debt deduction applies to a
guarantor’s payment on a guarantee that does not create a debtor-creditor
relationship with the party whose original obligation is extinguished. “Only a
bona fide debt qualifies for purposes of section 166. A bona fide debt is a debt
which arises from a debtor-creditor relationship.” Treas. Reg. § 1.166-1(c).
One of Baker Hughes’ cited opinions reiterates that “the guarantor’s loss arises
by virtue of the worthlessness of the debtor’s obligation to the guarantor.”
Black Gold, 99 T.C. at 486–87. In other words, it is the debtor’s obligation to
the guarantor that creates the “bad debt” necessary for the deduction.
      The Supreme Court has analyzed the sorts of guarantor payments that
are deductible as bad debts. See Putnam v. Comm’r, 352 U.S. 82 (1956). There,
the taxpayer made a payment to a creditor in discharge of the taxpayer’s
obligation as guarantor of corporate notes of a debtor. Id. at 83. The Court
reasoned that a performed guarantee to pay a debtor’s loan was a bad-debt
deduction because upon paying the guarantee, the guarantor “step[ped] into
the creditor’s shoes.” Id. at 85. When the guarantor was then unable to
“recover from the debtor” the guaranteed and paid amount, the performed
guarantee was functionally “a loss from the worthlessness of a debt.” Id. The


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taxpayer’s ability to claim the bad-debt deduction as a guarantor was the result
of the existence of an underlying debt.
      The FFA itself imposed no obligation on BJ Russia to BJ Parent, and BJ
Parent’s obligations as guarantor imposed no obligation on BJ Russia. Indeed,
there was no debt at all, good or bad. BJ Russia never failed to perform its
contractual obligations with TNK-BP, and TNK-BP never called on BJ Parent
to carry out its obligations as guarantor. As a result, there was no bad debt to
support Baker Hughes’ claim for a bad-debt deduction.
      The Putnam Court distinguished between voluntary payments made
while knowing there would be no repayment and payments that are made in
compliance with a taxpayer’s obligations as a contractual guarantor. Id. at 88.
The former is considered a gratuity and not a deductible bad debt, while the
latter is a loss that arises because the debtor is unable to repay the guarantor
– making it a deductible bad debt. Id. This is consistent with Section 166’s
implementing regulations: “A gift or contribution to capital shall not be
considered a debt for purposes of section 166.” Treas. Reg. § 1.166-1(c).
      We consider the FFA to have been a contribution to capital, as it was
described by BJ Parent itself. We find relevant two sections of the regulations
on Section 166.      One states that a “contribution to capital shall not be
considered a debt for purposes of section 166.” Treas. Reg. § 1.166-1(c). In
addition: “No treatment as a worthless debt is allowed with respect to a
payment made by the taxpayer in discharge of part or all of the taxpayer’s
obligation as a guarantor . . . if, on the basis of the facts and circumstances at
the time the obligation was entered into, the payment constitutes a
contribution to capital by a shareholder.” Treas. Reg. § 1.166-9(c).
      The FFA was used to resolve the capitalization problem identified in the
letter from the Russian Ministry.             It therefore “closely resembles an


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investment or contribution to capital,” Comm’r v. Fink, 483 U.S. 89, 96–97
(1987), which is not deductible under Section 166.
      The district court also concluded that the payment to BJ Russia did not
discharge BJ Parent’s obligation to perform as a guarantor as required by the
regulations to qualify as the bad-debt deduction of a guarantor. See Baker
Hughes, Inc. v. United States, 313 F. Supp. 3d 804, 810–11 (S.D. Tex. 2018).
The district court considered that TNK-BP never looked to BJ Parent to carry
out its guarantor obligations; none of the obligations under the guarantee
agreement were discharged by the FFA; and the requirements of the guarantee
remained unchanged after the FFA was transferred to BJ Russia. Id.
      Baker Hughes contends this analysis was error because the letter from
the Ministry was “effectively a demand” on BJ Parent’s performance
guarantee, and because “the receipt of the letter triggered the payment.”
Baker Hughes’ position is that the Russian Federation controlled TNK-BP, and
the Ministry letter was issued by an arm of the Russian Federation soon after
BJ Russia informed TNK-BP that the contract would not be renewed.
Consequently, Baker Hughes argues the letter must be construed as a demand
on BJ Parent’s performance guarantee. The Government disputes that the
Ministry letter was such a demand. It relies in part on the fact that the letter,
addressed to BJ Russia, makes no mention of BJ Parent, the performance
guarantee, TNK-BP, or the contract between BJ Russia and TNK-BP.
      Regardless of whether the letter was a demand, we conclude that BJ
Parent discharged no guarantor obligation through its provision of the FFA.
Notwithstanding TNK-BP’s possible influence over the Ministry, BJ Parent’s
providing the money necessary to reduce the risk of BJ Russia’s liquidation
was a transfer of funds made to a subsidiary so that the subsidiary could satisfy
Russian capitalization requirements. The district court correctly concluded
that it was not a “payment of principal or interest . . . by the taxpayer in
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discharge of part or all of the taxpayer’s obligation as a guarantor.” Treas. Reg.
§ 1.166-9(a). Therefore, it was not a deductible bad debt.
      Baker Hughes argues that even if the Ministry letter was not a demand,
BJ Parent was not required to wait until BJ Russia failed in its contractual
obligations and BJ Parent was called on to perform on its guarantee agreement
to claim a bad-debt deduction under Section 166. In support, Baker Hughes
relies on a Tax Court case dealing with whether a taxpayer’s advance
payments, to the extent they were not reimbursed, were deductible as either
bad debts or ordinary and necessary business expenses. See Myers v. Comm’r,
42 T.C. 195, 205 (1964). There, the taxpayers had entered into a construction
contract with a developer whereby the taxpayers would construct homes,
providing all necessary labor, materials, tools, and equipment; and the
developer would pay the taxpayer for the cost of all such labor, materials, and
services furnished or rendered. Id. at 205–06. In a guarantee agreement with
the lender to finance the construction, the taxpayers and the developer had
guaranteed the construction of the homes free and clear of all mechanic’s,
labor, and materialmen’s liens. Id. at 207. In time it became clear that the
home sales would not recoup costs, and the taxpayers made advance payments
to the developer so that the requirements of the guarantee agreement would
be met. Id. at 207–08.
      Here, the district court distinguished Myers on the basis that the Myers
court found the advances had created “a debtor-creditor relationship” between
the developer and the taxpayer under the construction contract. Id. at 205,
206. The Myers court found that the payments were deductible as a bad debt
because the taxpayers were required to make the advances to the developer
under the terms of the guarantee agreement. Id. at 207–08, 210. Upon the
taxpayers’ making the advances, an obligation to repay arose that the


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developer could not satisfy, allowing the taxpayers to claim the payments as a
bad-debt deduction under Section 166. Id. at 210–11.
        In contrast, no debtor-creditor relationship ever existed between BJ
Parent and BJ Russia as to the $52 million. The FFA agreement stated that
BJ Parent “confirms hereby that its financial assistance is free and that it does
not expect [BJ Russia] to return the funds.” Indeed, the parties agree that BJ
Russia had no obligation to repay BJ Parent for the provision of the FFA.
Because the district court’s distinction regarding the existence of an
underlying debt goes to the heart of why there is no bad-debt deduction here,
we agree with the district court that Baker Hughes’ reliance on Myers fails.
        BJ Parent’s $52 million payment to BJ Russia created no debt owed to
BJ Parent, and the payment discharged no guarantor obligation of BJ Parent’s.
The payment is thus not deductible as a bad debt under Section 166.


II.     Section 162: Ordinary and necessary business expense deduction
        Section 162 of the Internal Revenue Code states that “[t]here shall be
allowed as a deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business.” 26
U.S.C. § 162(a). To qualify as a deduction under Section 162, an item must be
(1) paid during the taxable year (2) for carrying on trade or business, and it
must be (3) an expense that is both (4) ordinary and (5) necessary. See Comm’r
v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352 (1971).          Generally, the
requirement that a payment be “ordinary” and “necessary” is not met when
one taxpayer pays to satisfy the obligation of another taxpayer. See Lohrke v.
Comm’r, 48 T.C. 679 (1967).        Further, voluntary payments made by a
stockholder to a corporation to benefit the financial position of the corporation
cannot be claimed as a deductible business expense or loss. See Schleppy v.
Comm’r, 601 F.2d 196, 197 (5th Cir. 1979).          A shareholder’s voluntary
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contribution to capital of the corporation has no immediate tax consequences.
See Fink, 483 U.S. at 94. Under regulations in effect at the time of the claimed
deduction here, such contributions are considered capital investments and are
not deductible. See Treas. Reg. § 1.263(a)-2(f) (2008).
      The district court held that the FFA was not an “expense” of BJ Parent
but instead was a non-deductible contribution to capital of BJ Russia, as
contemplated by Fink and Treasury Regulation § 1.263(a)-2(f). The district
court reasoned that BJ Parent provided the FFA so that BJ Russia could
recapitalize its balance sheet to avoid the risk of suffering the consequences
outlined in the Ministry letter.
      Baker Hughes argues that Fink and Schleppy do not apply. In Fink, the
taxpayers were individuals who “voluntarily surrendered some of their shares”
to their corporation in an attempt to attract new investors to the company. 483
U.S. at 91. The Supreme Court compared “the voluntary surrender of shares”
to “a shareholder’s voluntary forgiveness of debt.” Id. at 96. Even though the
company’s net assets did not change by the donation of shares, the Court saw
the transaction as “closely resembl[ing] an investment or contribution to
capital.” Id. at 96–97. Consequently, no deduction was allowed. Id. at 99–
100. In Schleppy, the taxpayers surrendered shares to their corporation to
facilitate a transaction with a creditor. 601 F.2d at 196–97. Although the
surrender did not increase the net assets in the corporation, we recognized the
move was “to bolster the corporation’s financial health,” and the taxpayers
were “left . . . in substantially the same position that they . . . held” before the
surrender. Id. at 197–98. We concluded that with “a surrender of a very small
part of [their majority ownership] stockholdings” to “improve [the company’s]
financial position,” the transactions were best understood as non-deductible
capital contributions. Id. at 199.


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      It is true, as Baker Hughes states, that the Fink taxpayers hoped to
recover the value of the surrendered shares through increased dividends or
appreciation in the value of their remaining shares and that the Schleppy
taxpayers surrendered their holdings to improve the financial position of the
corporation for future operations. Because BJ Parent provided the FFA to BJ
Russia without expectation of recovery, Baker Hughes argues, the payment
should not be categorized as a capital contribution. This argument focuses on
the fact that BJ Russia eventually ended its operations in Russia. Regardless
of that, the $52 million payment was made for the purpose of increasing BJ
Russia’s net assets. Fink did not turn on whether the taxpayers hoped to
recover the value of their shares.    The transfer was treated as a capital
contribution because it was similar to the forgiveness of debt owed by the
corporation. Fink 483 U.S. at 96–97. The FFA payment was used to reduce
one of BJ Russia’s debts, recapitalizing its balance sheet through reducing its
liabilities and increasing its net equity. This same result would have occurred
had BJ Russia kept the funds and not paid down the debt, and like the transfer
in Fink, it “closely resembles an investment or contribution to capital.” Id. at
96–97. The decision in Schleppy also did not turn on the taxpayers’ hope that
their actions would improve future business operations.         Like here, the
Schleppy taxpayers’ transfer of shares was made to bolster the financial
position of the corporation and was thus best understood as a capital
contribution. 601 F.2d at 199.
      In making its Section 162 argument, Baker Hughes relies mostly on an
exception to the general rule that a payment by one taxpayer for the obligation
of another taxpayer is not deductible as an ordinary and necessary business
expense under Section 162. It relies on a Tax Court case for the proposition
that such a payment is deductible if the following apply: (1) the taxpayer’s
purpose is to protect or promote the taxpayer’s own business interests, and
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(2) the rest of the Section 162 requirements are met vis-à-vis the taxpayer. See
Lohrke, 48 T.C. at 684–85, 688.
      The district court here held that the Lohrke exception did not apply
because the FFA was not tied to any actual expense of BJ Russia. Baker
Hughes does not effectively respond to the district court’s reasoning that the
cases in which the Lohrke exception was invoked included an underlying
expense. In Lohrke, the taxpayer made a payment directly to a third-party
entity who had sent an invoice to the taxpayer’s corporation because the latter
had insufficient cash to make the payment. Id. at 683. Baker Hughes’ cases
in support of its Lohrke-exception argument similarly involved an actual
expense paid by the taxpayer. See Coulter Elecs., Inc. v. Comm’r, 59 T.C.M.
(CCH) 350 (1990) (allowing parent company to deduct reimbursements made
to wholly owned subsidiary to cover warranty expenses); Gould v. Comm’r, 64
T.C. 132, 134 (1975) (invoking Lohrke exception where taxpayer made payment
directly to creditor in response to invoice from creditor sent to debtor
corporation). The existence of some paid expense is no surprise, considering
an “expense” is required for there to be an ordinary and necessary business
expense deduction. See 26 U.S.C. § 162(a); Lincoln, 403 U.S. at 351. This
requirement did not fall away under Lohrke. See 48 T.C. at 688.
      Here, the FFA was not an expense of BJ Parent, and it was not provided
to pay any expense of BJ Russia. Even if BJ Parent’s long-term strategy
included recapitalizing its Russian subsidiary to meet Russian capitalization
requirements, this does not itself make the funds deductible. There must be
an “expense” to support an ordinary and necessary business expense deduction
under Section 162, and here there was no such expense.
      Baker Hughes also highlights an IRS Technical Advice Memorandum
(“TAM”), which Baker Hughes argues supports its position that the FFA
should be a deductible business expense under Section 162. The district court
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   Case: 18-20585     Document: 00515208391     Page: 16   Date Filed: 11/21/2019



                                 No. 18-20585
found that the TAM was distinguishable because the taxpayer there made
payments to a subsidiary to end its business operations and not to facilitate its
continued operations. In contrast, submitting the FFA to BJ Russia satisfied
Russian regulations and allowed the continuation of business operations. See
I.R.S. TAM 9522003, 1995 WL 327461 (June 2, 1995). Baker Hughes disputes
this distinction, claiming that the payment from BJ Parent to BJ Russia was
solely for the purpose of winding up BJ Russia’s business operations, much like
the taxpayer’s payments to its subsidiary in the TAM.
      We preface our analysis by saying the TAM is not precedential. See 26
U.S.C. § 6110(k)(3); Bombardier Aerospace Corp. v. United States, 831 F.3d 268
(5th Cir. 2016). The TAM is also distinguishable on the basis that the IRS
recognized that a taxpayer generally may not claim a Section 162 deduction
for payments of the obligation of some other taxpayer, but the TAM mentioned
and did not reject the Lohrke exception. Under the facts as described in the
TAM, the taxpayer made payments to the subsidiary so that the subsidiary
could fully satisfy claims of depositors and creditors; this was legally required
for its dissolution. TAM at 6. This is consistent with cases involving the
Lohrke exception, which still involve an underlying expense to support a
business expense deduction under Section 162. Indeed, the IRS stated that the
exception “permits taxpayers to claim a deduction for a payment made to
extinguish another taxpayer’s liability where the payment was . . . an ordinary
and necessary business expense.” TAM at 9.
      The IRS was correct to disallow any deduction based on the FFA.
      AFFIRMED.




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