Tax Court ruling – Can you deduct a subsidiary’s expenses?
Abstract: In a 2009 decision, the U.S. Tax Court held that a company couldn’t deduct expenses it had paid on a subsidiary’s behalf, because they weren’t ordinary and necessary to its own trade or business. This opinion provides a guide for distinguishing between deductible expenses and capital contributions. The court suggested that the outcome might have been different if the taxpayer had operated other businesses whose reputations or credit ratings would have suffered as a result of its failure to cover its subsidiary’s obligations. Indeed, a sidebar to this article illustrates such a case, in which a deduction was allowed.