In the case of Sherwin Community Painters, Inc. v. Commissioner, TC Memo 2022-19 a corporation was denied a deduction for amounts paid for the boyfriend of the owners’ daughter to take a course in coding.

The company in question was a commercial painting contractor whose stock was owned by Mr. and Mrs. Ward. The amounts in question were paid for a coding course at Northwestern University.

The Wards met Mr. Kocemba in 2016 when he was dating their daughter. Mr. Kocemba expressed an interest in the course, and the Wards offered to pay the tuition if he was admitted.[1]

Although Mr. Kocemba had no coding experience before taking this course, he had worked in the construction industry. The corporation attempted to claim paying his tuition was a deductible business expense as Mr. Kocemba updated the organization’s website once he completed the course:

After completing the course in 2017, Mr. Kocemba used the skills that he had learned to update Sherwin's website over the course of several months and spent a considerable amount of time working on the website. Sherwin did not pay him for his work. Mr. Kocemba later married the Wards' daughter. He has performed additional computer-related work for Sherwin without compensation.[2]

The Tax Court outlined the basic requirements for a deduction under IRC §162 for expenses related to a trade or business:

Section 162(a) generally allows a deduction for the ordinary and necessary expenses paid during the taxable year in carrying on a trade [*3] or business. The term “ordinary” means that the expense is normal, usual, or customary in the taxpayer’s trade or business. Deputy v. du Pont, 308 U.S. 488, 495 (1940). The term “necessary” means the expense is appropriate or helpful in carrying on the trade or business. Heineman v. Commissioner, 82 T.C. 538, 543 (1984). The expenses must proximately relate to the taxpayer’s trade or business. Larrabee v. Commissioner, 33 T.C. 838, 843 (1960); Treas. Reg. § 1.162-1(a). The determination of whether an expense satisfies the requirements for deduction is a question of fact. Commissioner v. Heininger, 320 U.S. 467, 475 (1943). A taxpayer is required to substantiate the expenses underlying a deduction by keeping and producing adequate records that enable the Commissioner to determine the correct tax liability, including the amounts paid; and to demonstrate that the deduction is allowable pursuant to some statutory provision. § 6001. A taxpayer is not entitled to deduct personal, living, or family expenses. § 262.[3]

The bar on being able to claim personal, living or family expenses is a limitation on the ability to deduct business expenses that is often not well understood by taxpayers.  Rather, they often believe that if they can show any sort of actual or theoretical benefit to the business, the expense should be deductible even if the personal benefits clearly are what motivated the expenditure.

In this case the Court found that IRC §262 barred this deduction.  While the taxpayers argued that Mr. Kocember received the tuition in exchange for the web services he later provided, the Court found that other factors indicated this was a personal expense that was being paid through the corporation:

While Mr. Kocemba has provided services to Sherwin free of charge that would have likely cost Sherwin more than the amount of the tuition, we nevertheless find that petitioners have not established that Sherwin is entitled to deduct the tuition. Mr. Kocemba was not an employee of Sherwin. The Wards did not have an agreement with Mr. Kocemba that he would perform any services in exchange for the tuition payment. Sherwin paid the tuition without any expectation of a return and thus did not have a business purpose for the payment. The tuition was a personal expense, and Sherwin is not entitled to deduct it.[4]

This finding is not surprising. The only real link the company had to Mr. Kocemba was that he was dating the daughter of the owners. While he may have felt a moral obligation to provide the web site services to his benefactors’ company, he was under no legal obligation to do so.

[1] Sherwin Community Painters, Inc. v. Commissioner, TC Memo 2022-19, March 9, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/company-allowed-some-deductions%3b-owner-didn%e2%80%99t-receive-dividends/7d8b6 (retrieved March 13, 2022)

[2] Sherwin Community Painters, Inc. v. Commissioner, TC Memo 2022-19, March 9, 2022

[3] Sherwin Community Painters, Inc. v. Commissioner, TC Memo 2022-19, March 9, 2022

[4] Sherwin Community Painters, Inc. v. Commissioner, TC Memo 2022-19, March 9, 2022