Harold L. Jenkins, better known as the legendary country music singer, Conway Twitty, was able to accomplish something few before and after him have accomplshed, or even attempted for that matter. That is, pay back those who lost money as a result of an enterprise he sponsored. In a surprise turn of events, Twitty was also able to deduct these repayments from his federal taxes as ordinary and necessary expenses of his business.
In Jenkins v. Commissioner, T.C. Memo 1983-667 (U.S. Tax Court Memos 1983), the U.S. Tax Court held that payments made by Twitty (Jenkins) to investors for his failed restaurant business were deductible under § 162 of the Tax Code as ordinary and necessary business expenses of Twitty’s business as a country music performer. In 1968, Twitty and 75 of his friends and business associates formed Twitty Burger, Inc. to operate Twitty Burger Fast Food Restaurants. Within just a few years by the end of 1970, Twitty Burger started to lose money and almost every Twitty Burger restaurant was closed by 1971.
Despite having no cash or assets to pay the business loans, Conway promised to repay investors for their losses with his future earnings. On his 1973 and 1974 Federal income tax returns, Conway deducted $92,892.46 and $3,600, respectively, as ordinary and necessary business expenses under I.R.C. § 162.
Lohrke v. Commissioner, 48 T.C. 679 (1967), established a two-part test to determine whether a payment is deductible as ordinary and necessary. The court applied the Lohrke test to Twitty’s case as follows. The Tax Court was required to determine:
- the purpose or motive of the taxpayer in making the payments; and
- whether there was a sufficient connection between the expenditures and the taxpayer’s trade or business.
After determining Conway’s motive, which was to protect his personal business reputation, the Court found a proximate relationship between repayments to the investors and Conway’s trade or business as a country music entertainer. Thus, Conway’s payments to the Twitty Burger investors were held to be ordinary and necessary business expenses of a country music performer. Testimony in the case centered on how the success of country music performers is primarily correlated to their image. This testimony proved crucial in determining the final result.
The Tax Court closed its opinion with the following: “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.
As for the dissent, they participated in the fun as well:
Harold Jenkins and Conway Twitty They are both the same
But one was born The other achieved fame.
The man is talented And has many a friend
They opened a restaurant His name he did lend.
They are two different things Making burgers and song
The business went sour It didn’t take long.
He repaid his friends Why did he act
Was it business or friendship Which is fact?
Business the court held It’s deductible they feel
We disagree with the answer But, let’s not appeal.
If you are an individual or business in the New York or Tri-State area and have any question about taxes, especially in planning ahead for the next filing season, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
