Tax Research
A and C is a famous country-and-western singer. As an investment, A and Cstarted a chain of barbecue restaurants called ACs Terrific Ribs. AC’s friends and associates invested $600,000 in this venture. The restaurant chain failed, and the investors lost all their money. Because of his visibility and status in the entertainment community, Flake felt that he personally had to make good on the losses suffered by the investors, to protect his singing and business reputation. Consequently, he personally paid $600,000 to reimburse the investors for their losses.
Use the following resources to prepare a tax research memorandum and client letter:
I.R.C. § 162
Harold Jenkins, 47 TCM 238 (1983)
Lohrke v. Comm., 48 T.C. 679
In Harold Jenkins, 47 TCM 238 (1983), the Tax Court ruled that payments made to investors to reimburse them for their losses are deductible under §162 as ordinary and necessary business expenses of petitioner's business as a country music performer. The Court concluded on the basis of Lohrke v. Comm., 48 T.C. 679, that the negative impact of a potential lawsuit from the investors on the petitioner's career would justify the reimbursements as an expense of maintaining the integrity and reputation of that career.