Jenkins v. Commissioner
Encyclopedia
In Jenkins v. Commissioner, T.C. Memo 1983-667 (U.S. Tax Court Memos 1983), the U.S. Tax Court held that the payments Conway Twitty
, a legendary country singer, made to investors in a defunct restaurant business known as “Twitty Burger, Inc.” were deductible under § 162 as ordinary and necessary business expenses of petitioner's business as a country music performer.
, Harold L. Jenkins, was a well-known country music
singer who was commonly known by his stage name of “Conway Twitty”. Conway had been a musical performer since the 1950s, but it was not until the late 1960s that Conway became well-established in the country music industry. By mid-1970, Conway Twitty had 43 Number 1 hit record
s.
In 1968, Twitty Burger, Inc. was formed by Conway, along with approximately 75 friends and business associates who invested money in Twitty Burger for the operation of Twitty Burger Fast Food Restaurants. Late in 1970, Twitty Burger began to encounter financial difficulties and nearly every Twitty Burger restaurant was closed by 1971. Although he had no assets with which to pay the debentures, Conway decided to repay the investors the amount of their investment
s with future earnings. On his 1973 and 1974 Federal income tax
returns, Conway deducted these total amounts, $92,892.46 and $3,600, respectively, as ordinary and necessary business expense
s under § 162.
known as Twitty Burger, Inc., deductible as ordinary and necessary business expense
s of Conway’s business as a country music
performer?
s of his business as a country music
performer. Lohrke v. Commissioner, 48 T.C. 679 (1967), a landmark Tax Court case, established a two-part test to determine whether a payment is deductible as ordinary and necessary.
The court applied the Lohrke test to the instant case as follows. To determine whether the payments were deductible under § 162, the United States Tax Court
was required to
After a lengthy explanation of how vital personal reputation is to a member of the country music industry, the Court found that Conway’s motive in repaying the investors was to protect his personal business reputation. Interestingly, direct quotes from Conway himself, and from a number of country music historians, were presented in this case to explain how the success of country musicians is extremely dependent on their images. After determining Conway’s motive, the Court went on to find a proximate relationship between payments made to the investors and Conway’s trade or business as a country music entertainer. Having determined the motive and the connection between the expenditures and the trade or business, Conway’s payments to the Twitty Burger investors were held to be ordinary and necessary business expenses of a country music
performer.
Apparently, members of the Court may have been country music aficionados as well. The Court closed with the following footnote:
"Ode to Conway Twitty"
Twitty Burger went belly up
But Conway remained true
He repaid his investors, one and all
It was the moral thing to do.
His fans would not have liked it
It could have hurt his fame
Had any investors sued him
Like Merle Haggard or Sonny James.
When it was time to file taxes
Conway thought what he would do
Was deduct those payments as a business expense
Under section one-sixty-two.
In order to allow these deductions
Goes the argument of the Commissioner
The payments must be ordinary and necessary
To a business of the petitioner.
Had Conway not repaid the investors
His career would have been under cloud,
Under the unique facts of this case
Held: The deductions are allowed.
Conway Twitty
Conway Twitty , born Harold Lloyd Jenkins, was an American country music artist. He also had success in early rock and roll, R&B, and pop music. He held the record for the most number one singles of any act with 55 No. 1 Billboard country hits until George Strait broke the record in 2006...
, a legendary country singer, made to investors in a defunct restaurant business known as “Twitty Burger, Inc.” were deductible under § 162 as ordinary and necessary business expenses of petitioner's business as a country music performer.
Facts
The petitionerPetitioner
A petitioner is a person who pleads with governmental institution for a legal remedy or a redress of grievances, through use of a petition.-In the courts:The petitioner may seek a legal remedy if the state or another private person has acted unlawfully...
, Harold L. Jenkins, was a well-known country music
Country music
Country music is a popular American musical style that began in the rural Southern United States in the 1920s. It takes its roots from Western cowboy and folk music...
singer who was commonly known by his stage name of “Conway Twitty”. Conway had been a musical performer since the 1950s, but it was not until the late 1960s that Conway became well-established in the country music industry. By mid-1970, Conway Twitty had 43 Number 1 hit record
Hit record
A hit record is a sound recording, usually in the form of a single or album, that sells a large number of copies or otherwise becomes broadly popular or well-known, through airplay, club play, inclusion in a film or stage play soundtrack, causing it to have "hit" one of the popular chart listings...
s.
In 1968, Twitty Burger, Inc. was formed by Conway, along with approximately 75 friends and business associates who invested money in Twitty Burger for the operation of Twitty Burger Fast Food Restaurants. Late in 1970, Twitty Burger began to encounter financial difficulties and nearly every Twitty Burger restaurant was closed by 1971. Although he had no assets with which to pay the debentures, Conway decided to repay the investors the amount of their investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
s with future earnings. On his 1973 and 1974 Federal income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
returns, Conway deducted these total amounts, $92,892.46 and $3,600, respectively, as ordinary and necessary business expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
s under § 162.
Issue
Were the payments made by Conway Twitty to investors in the failed corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
known as Twitty Burger, Inc., deductible as ordinary and necessary business expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
s of Conway’s business as a country music
Country music
Country music is a popular American musical style that began in the rural Southern United States in the 1920s. It takes its roots from Western cowboy and folk music...
performer?
Holding
The Court held that the payments to the investor by Conway Twitty were deductible as ordinary and necessary business expenseExpense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
s of his business as a country music
Country music
Country music is a popular American musical style that began in the rural Southern United States in the 1920s. It takes its roots from Western cowboy and folk music...
performer. Lohrke v. Commissioner, 48 T.C. 679 (1967), a landmark Tax Court case, established a two-part test to determine whether a payment is deductible as ordinary and necessary.
The court applied the Lohrke test to the instant case as follows. To determine whether the payments were deductible under § 162, the United States Tax Court
United States Tax Court
The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...
was required to
- ascertain the purpose or motive of the taxpayer in making the payments and
- determine whether there was a sufficient connection between the expenditures and the taxpayer's trade or business.
After a lengthy explanation of how vital personal reputation is to a member of the country music industry, the Court found that Conway’s motive in repaying the investors was to protect his personal business reputation. Interestingly, direct quotes from Conway himself, and from a number of country music historians, were presented in this case to explain how the success of country musicians is extremely dependent on their images. After determining Conway’s motive, the Court went on to find a proximate relationship between payments made to the investors and Conway’s trade or business as a country music entertainer. Having determined the motive and the connection between the expenditures and the trade or business, Conway’s payments to the Twitty Burger investors were held to be ordinary and necessary business expenses of a country music
Country music
Country music is a popular American musical style that began in the rural Southern United States in the 1920s. It takes its roots from Western cowboy and folk music...
performer.
Real World Interest
Aside from providing an analysis to use in determining whether certain payments constitute ordinary and necessary business expenses under § 162, this case provides a fascinating, if brief, history of the country music industry and the unique relationship between country musicians and country music fans.Apparently, members of the Court may have been country music aficionados as well. The Court closed with the following footnote:
"Ode to Conway Twitty"
Twitty Burger went belly up
But Conway remained true
He repaid his investors, one and all
It was the moral thing to do.
His fans would not have liked it
It could have hurt his fame
Had any investors sued him
Like Merle Haggard or Sonny James.
When it was time to file taxes
Conway thought what he would do
Was deduct those payments as a business expense
Under section one-sixty-two.
In order to allow these deductions
Goes the argument of the Commissioner
The payments must be ordinary and necessary
To a business of the petitioner.
Had Conway not repaid the investors
His career would have been under cloud,
Under the unique facts of this case
Held: The deductions are allowed.