Jenkins v. Commissioner - Docket No. 3354-79., 1983 Tax Ct. Memo LEXIS 121 (T.C. Nov. 3, 1983)

Rule:

In Lohrke v. Commissioner, 48 T.C. 679 (1967), the courts in several cases allowed deductions for expenditures made by a taxpayer to protect or promote his own business even though the transaction originated with another person and that the resulting expenditures would have been deductible by that other person if payment had been made by him. After a fairly exhaustive review of many of the cases dealing with this issue the Court stated as follows: The tests as established by all of these cases are that we must first ascertain the purpose or motive which cause the taxpayer to pay the obligations of the other person. Once we have identified that motive, we must then judge whether it is an ordinary and necessary expense of the individual's trade or business; that is, is it an appropriate expenditure for the furtherance or promotion of that trade or business? If so, the expense is deductible by the individual paying it.

Facts:

Petitioner Harold L. Jenkins, aka Conway Twitty, was a well-known country music entertainer. Most of his income is derived from his performances, songwriting, and record royalties. In 1968, Conway and several of his friends decided to form a chain of fast-food restaurants and incorporated Twitty Burger under the laws of Oklahoma. Petitioner's friends and business associates invested money in Twitty Burger. By late 1970, Twitty Burger was experiencing financial difficulties and it was determined by Twitty Burger's attorney that further attempts to obtain registration of the corporate stock would be futile. The last Twitty Burger restaurant was closed in May 1971. Subsequently, Conway Twitty decided that the investors should be repaid the amount of their investments in the failed corporation. As Twitty Burger had no assets with which to satisfy the debentures, Conway Twitty decided he would repay the investors from his future earnings. During the years in issue, Conway Twitty made payments to the investors. Respondents argued that the payments Conway Twitty made to the investors in Twitty Burger were not deductible by him as ordinary and necessary business expenses under section 162 because there was no business purpose for the payments and, additionally, there was no relationship between his involvement in Twitty Burger and his business of being a country music entertainer. 

Issue:

Were the payments deductible as ordinary and necessary business expenses of petitioner's business as a country music performer?

Answer:

Yes.

Conclusion:

Section 162(a) provides in pertinent part: In General.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

In Lohrke v. Commissioner, 48 T.C. 679 (1967), the courts in several cases allowed deductions for expenditures made by a taxpayer to protect or promote his own business even though the transaction originated with another person and that the resulting expenditures would have been deductible by that other person if payment had been made by him. After a fairly exhaustive review of many of the cases dealing with this issue the Court stated as follows: The tests as established by all of these cases are that we must first ascertain the purpose or motive which cause the taxpayer to pay the obligations of the other person. Once we have identified that motive, we must then judge whether it is an ordinary and necessary expense of the individual's trade or business; that is, is it an appropriate expenditure for the furtherance or promotion of that trade or business? If so, the expense is deductible by the individual paying it. The question presented was whether Conway Twitty may deduct the expenses of Twitty Burger. While it was clear from the facts that Conway was under no legal obligation to make such payments, (at least in the sense that the corporate debentures were not personally guaranteed by him), the law is clear that the absence of such an obligation is not in itself a bar to the deduction of such expenditures under section 162. In addition, the fact that the petitioner also felt a moral obligation to the people who had entrusted him with their funds did not preclude the deductibility of the payments so long as the satisfaction of the moral obligation was not the primary motivation for the expenditures. After a thorough consideration of the record, the court was convinced that petitioner Conway Twitty repaid the investors in Twitty Burger with the primary motive of protecting his personal business repuation. There was the obvious similarity of the name of the corporation and petitioner's stage name. There was no doubt that the corporation's name was chosen with the idea of capitalizing on Conway Twitty's fame as a country music performer. Additionally, many of the investors were connected with the country music industry. While there was no doubt that part of petitioner's motivation for making the payments involved his personal sense of morality, we do not believe that this ethical consideration was paramount.