No deduction for paying corporate parent's expense: A subsidiary fails to show that it received the primary benefit from its payment to an adviser incident to a merger.

Author:Reichert, Charles J.
Position:2019 Tax Court memorandum decision in Piano Holding LLC v. Commissioner

The Tax Court held that a corporate taxpayer could not deduct its payment of an expense of another entity. According to the court, the taxpayer's payment did not primarily benefit its own business, and the payment was not an ordinary and necessary expense of the taxpayer.

Facts: In 2010, Piano Molding Co. (Piano), an Illinois-based manufacturer of plastic storage cases and containers for outdoor sporting goods, retained Robert W. Baird & Co. as its financial adviser for purposes of a sale of the company. In 2012, Baird suggested to the Ontario Teachers' Pension Plan Board (OTPP), a large, not-for-profit institutional investor, that it should buy Piano. The OTPP decided to acquire Piano through a merger transaction and organized Piano Holding LLC (Holding) and Piano Acquisition LLC as its wholly owned subsidiaries to effect the merger.

The merger of Piano and OTPP was closed in 2012. OTPP also agreed (in a separate agreement) to pay Baird $1.5 million for suggesting Piano to OTPP; however, Piano paid Baird that amount.

On their 2012 consolidated federal income tax return, Holding and Piano deducted $1.05 million of the $1.5 million fee and capitalized the remaining amount. The IRS disallowed the deduction, claiming that Piano had not incurred or paid the amount for ordinary and necessary business purposes and issued Holding a deficiency notice of $90,385 plus an accuracy-related penalty of $18,077. Holding petitioned the Tax Court for relief.

Issues: Sec. 162(a) allows a deduction for expenses directly connected to a taxpayer's business that are ordinary (common for that business in the industry in which it operates) and necessary (helpful and appropriate for that business). Generally, a taxpayer cannot deduct the payment of another's expenses. However, in Lohrke, 48 T.C. 679 (1967), the Tax Court allowed a deduction for payments of another's obligation when (1) the primary motive for the payment is to benefit the taxpayer's own business by protecting or promoting it, and any benefit received by the other party is incidental; and (2) the payment is of an ordinary and necessary expense of the taxpayer's business.

To show that a payment primarily benefits a taxpayer's own business, the taxpayer must show a direct connection between the payment's purpose and the taxpayer's business. This can be accomplished by showing that failure to make the payment would have direct and proximate adverse consequences on the taxpayer's business. The IRS argued...

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