Plano Holding LLC v. Commissioner, 2019 T.C. Memo. 140

In 2012 Ontario Teachers’ Pension Plan (OTPP) sought to acquire Plano Molding Co.; OTPP organized Plano Holding LLC (Holding) to effect the purchase for ~$240 million, which closed Dec. 21, 2012.
Baird had earlier suggested Plano to OTPP and attempted to arrange introductions; OTPP thereafter agreed (by letter) to pay Baird $1.5 million contingent on a successful acquisition.
Plano paid the $1.5 million to Baird at closing; Plano contemporaneously paid Harris Williams (its exclusive financial advisor) separate transaction fees that reduced the purchase price.
Holding (the consolidated filer) deducted 70% ($1.05M) of the Baird payment on the 2012 consolidated return under §162; the IRS disallowed the deduction, assessed a $90,385 deficiency and a $18,077 accuracy-related penalty under §6662(a).
The parties stipulated Baird provided no financial-advisory services to Plano in 2012; Baird’s role ended months before the closing and its agreement with OTPP stated services were for OTPP’s benefit.
The Tax Court applied the Lohrke two-prong test (primary benefit to payor; expense ordinary and necessary to payor’s business) and sustained the deficiency and penalty.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Deductibility under §162 of payment Plano made to Baird (payment on another's behalf)	Holding: Payment facilitated the acquisition and thus benefited Plano’s business; deductible as ordinary and necessary.	Commissioner: Payment primarily benefited OTPP (the investor) and was not an ordinary/necessary expense of Plano.	Held: Disallowed — Plano failed Lohrke prongs; no direct nexus or ordinary/necessary connection to Plano’s manufacturing business.
Applicability of Lohrke exception (paying another’s expense)	Holding: Even if payment was to another, Lohrke should apply because payment aided Plano’s acquisition and expansion.	Commissioner: Lohrke requires strong showing when payor is corporation and payee is controlling shareholder/investor; here benefit to Plano was incidental.	Held: Lohrke inapplicable — primary benefit accrued to OTPP; payment not ordinary/necessary for Plano.
Accuracy-related penalty under §6662(a)	Holding: Substantial authority and/or reasonable reliance (CPA) supported return position; penalty unwarranted.	Commissioner: No substantial authority; facts distinguish cited authorities; corporation bears burden.	Held: Penalty sustained — taxpayer failed to show substantial authority or reasonable cause/good faith reliance.

Commissioner v. Heininger, 320 U.S. 467 (1943) (deductibility under §162 is factual inquiry)
Deputy v. du Pont, 308 U.S. 488 (1940) (expense is "ordinary" if customary in the trade)
Commissioner v. Tellier, 383 U.S. 687 (1966) (expense is "necessary" if appropriate and helpful to business)
Welch v. Helvering, 290 U.S. 111 (1933) (taxpayer bears burden to prove error in Commissioner’s determination)
Lohrke v. Commissioner, 48 T.C. 679 (1967) (narrow exception allowing deduction when paying another’s expense primarily to benefit payor and expense is ordinary and necessary)
Square D Co. v. Commissioner, 121 T.C. 168 (2003) (allowing deduction where costs were incurred on behalf of taxpayer and paid by taxpayer; distinguished on facts)
Waring Prods. Corp. v. Commissioner, 27 T.C. 921 (1957) (legal obligation not always required for §162 deductibility)