Rev. Rul. 71-36

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 1901, C.B. III-1, 120 (1924). The question presented is whether a taxpayer may deduct as business expenses in the years paid sums advanced by him to pay the business expenses of a corporation of which he is the majority stockholder.

The taxpayer purchased a majority of the stock of a corporation and devoted the major portion of his time to its affairs. The corporation was not successful and from time to time the taxpayer advanced sums of money to it so that the corporation could pay the salaries of its employees. The taxpayer accepted demand notes of the corporation to cover his advances.

Section 162(a) of the Internal Revenue Code of 1954 provides, in part, that there shall be allowed as a deduction all the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Section 1.162-1 of the Income Tax Regulations provides, in part, that ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business are deductible from gross income as business expenses.

Although the taxpayer in the instant case devoted most of his time to the affairs of the corporation, and the sums advanced by him were expenses incurred in carrying on the business of the corporation, the business to which these expenses pertained was not the taxpayer's business, but that of the corporation.

Accordingly, the advances made by the taxpayer are not deductible in the years paid as ordinary and necessary business expenses under section 162 of the Code.

I.T. 1901 is hereby superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.