Deductibility of Son-in-Law’s Tuition Expense

In the recent Tax Court Opinion of Sherwin Community Painters, Inc. v. Comm’r, a corporation was denied a Section 162 business deduction for amounts paid for the boyfriend of the sole shareholder’s daughter to take a course in coding.[1] Gray Edmondson discussed the importance of being in a trade or business years ago, one of which is the ability to deduct “ordinary and necessary” business expenses under Section 162.[2] While the corporation in question was in a trade or business, the taxpayers neglected to consider that Section 262 disallows deductions for personal, living, or family expenses. In addition to denying the deduction, the IRS also argued that the disallowed business expenses should have been treated as a constructive dividend to the sole-shareholder, but the Court disagreed on that point.


Sherwin Community Painters, Inc. (“Sherwin”) is a commercial painting contractor for commercial warehouses, residential complexes, and multipurpose highrise buildings. Swanette Triem Ward was the sole shareholder of Sherwin and both she and her husband worked for the business. In addition to several other Section 162 deductions, Sherwin claimed a business expense deduction on its 2016 return for the costs of a coding course at Northwestern University for Lucas Kocemba.

The Wards met Mr. Kocemba in 2016 when he was dating their daughter. Mr. Kocemba expressed an interest in the coding course, and the Wards offered to pay the tuition if he was admitted. Before taking the course, he worked in the construction industry and had no previous coding experience. After completing the course in 2017, Mr. Kocemba spent a considerable amount of time using the skills he learned to update Sherwin’s website over the course of several months. Sherwin did not pay him for this work, nor did it pay him for additional computer-related work he has done for the company since. Mr. Kocemba and the Wards’ daughter eventually got married.

The Wards argued that the cost of the tuition should be deductible under Section 162 since Sherwin received website development services once he completed the course.


The Court began its discussion with a summary of what constitutes an ordinary and necessary expenses in carrying on a trade or business as follows:

The term “ordinary” means that the expense is normal, usual, or customary in the taxpayer’s trade or business.[3] The term “necessary” means the expense is appropriate or helpful in carrying on the trade or business.[4] The expenses must proximately relate to the taxpayer’s trade or business.[5] The determination of whether an expense satisfies the requirements for deduction is a question of fact.[6] 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.[7] A taxpayer is not entitled to deduct personal, living, or family expenses.[8]

The key sentence here is the last one, as it recites those expenses which are explicitly non-deductible under Section 262. The Court stated that while Mr. Kocemba ended up providing services to Sherwin that would have probably cost Sherwin more than it paid in tuition fees, the tuition was still a personal expense and therefore nondeductible under Section 262. To justify its holding, the Court noted that there was no agreement (formal or informal) between the Wards or Sherwin and Mr. Kocemba for the performance of any services in exchange for the tuition payments and that Mr. Kocemba was not an employee of Sherwin. The company paid the tuition without an expectation of a return and thus did not have a business purpose for the payment.

The Court then considered the IRS’s position that the Wards received a constructive dividend equal to the amount of the disallowed deductions (there were additional business deductions which the Wards conceded were nondeductible). Citing Truesdell V. Comm’r[9], the Court stated that “A constructive dividend arises when a corporation confers an economic benefit on a shareholder without an expectation of repayment where the corporation has current or accumulated earnings and profits,” and that “such dividends are includible in the shareholder’s gross income under section 61(a)(7).”

The IRS had recharacterized a shareholder loan made during 2016 of $38,199 as a constructive dividend to Mrs. Ward in the notice of deficiency issued to the Wards. However, the records established that the reported loan was made by Mrs. Ward to Sherwin, not from Sherwin to Mrs. Ward. The Court found that there was no relationship between the disallowed expenses and the amount of the purported constructive dividends determined in the notice of deficiency. The Court held that there was no indication that the Wards received an economic benefit from the disallowed expenses and that the company’s failure to substantiate the business purpose of the disallowed deductions did not result in a constructive dividend based on the circumstances.


Taxpayers are often confused about what they can claim as business expenses. The inability to deduct personal, living, or family expenses under Section 262 is an important limitation that taxpayers tend to forget. This can lead to the belief that if there is any sort of actual or theoretical benefit to the business, taxpayers should be able to deduct the expense, even if the expenditure is clearly motived by personal benefits. Doing so can result in the timely and costly process of contending with the IRS as well as interest and penalties in the event the taxpayer loses.

In this case, the taxpayers lost with regard to the Section 162 deduction because the expenses were disallowed by Section 262 and were subject to accuracy-related penalties for the disallowed deductions. As we continue to note in our articles, the importance of documenting cannot be overstated. However, the issue in this case doesn’t appear to be one of documentation, as apparently there was never an agreement to document. Perhaps if the parties had at least an oral agreement that Mr. Kocemba would revise the company website upon completion of the course, the outcome might have been different.

While they lost on the issue of the Section 162 deduction, the taxpayers won on the constructive dividend issue. Where the IRS is successful on denying Section 162 deductions in a closely held business, there is often a link between such expenses and a benefit to the shareholders. See Josh Sage’s recent articles on the Fab Holdings case and the Blossom case, where the IRS was successful in denying deductions such as management expenses, performance bonuses, and repair expenses as well as recharacterizing certain expenditures including salaries, professional expenses, benefit programs, and directors’ fees as constructive dividends.[10]

Unlike the denied deductions in Fab Holdings and Blossom, the deductions here were for the benefit of Mr. Kocemba, who was not a shareholder of Sherwin. Certainly one could see the argument that a benefit to a family member (or future family member) of a shareholder should be treated similarly as a benefit to the shareholder, but fortunately for the taxpayers, the Court did not. Perhaps the Court relied on the fact that Mr. Kocemba was merely dating the Ward’s daughter at the time the expense was incurred, or perhaps the IRS’s argument was predicated on the existence of a loan to Mrs. Ward, which did not exist. Regardless, the taxpayers were fortunate they prevailed where other taxpayers have recently lost.

[1] Sherwin Community Painters, Inc. v. Comm’r, TC Memo 2022-19.

[2] Gray Edmondson, “The Importance of Being a Trade or Business” (September 12, 2018),

[3] Deputy v. du Pont, 308 U.S. 488, 495 [23 AFTR 808] (1940).

[4] Heineman v. Comm’r, 82 T.C. 538, 543 (1984).

[5] Larrabee v. Comm’r, 33 T.C. 838, 843 (1960); Treas. Reg. § 1.162-1(a).

[6] Comm’r v. Heininger, 320 U.S. 467, 475 [31 AFTR 783] (1943).

[7]  IRC § 6001.

[8]  IRC § 262.

[9] Truesdell v. Comm’r, 89 T.C. 1280, 1295 (1987).

[10] Josh Sage, “Fab Holdings – It is called the Tax Plan” (January 11, 2022), and Josh Sage, “Blossom Day Care Centers – The Income Tax Side” (August 3, 2021),


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