Memorandum Findings of Fact and Opinion
IRWIN, Judge:
Respondent determined deficiencies of $67,141 and $14,226 in petitioners' Federal income taxes for their 1973 and 1974 taxable years, respectively. After concessions by petitioners and respondent,
Findings of Fact
Some of the facts have been stipulated and are found accordingly. The stipulation of facts, the supplemental stipulation of facts, and the second supplemental stipulation of facts and the exhibits attached to the stipulations are incorporated herein by this reference.
Petitioner Harold L. Jenkins timely filed his unmarried head of household Federal income tax return for his taxable year ending December 31, 1973, with the Director of the Internal Revenue Service Center in Austin, Texas. Petitioners Harold L. and Temple M. Jenkins timely filed a joint Federal income tax return for their taxable year ending December 31, 1974, also with the Director of the Internal Revenue Service Center in Austin, Texas. At the time the petition in this proceeding was filed, the petitioners resided in Sumner County, Tennessee.
Petitioner is a country music entertainer who for more than 25 years has been more commonly known and referred to by his stage name "Conway Twitty." We will hereinafter refer to him by this name. Since 1964, Conway Twitty has used a logo in connection with his work as an entertainer and in connection with his stage name. The insignia consists of an image of a small yellow bird (i.e., the Twitty Bird) strumming a guitar.
During the early period of his career in the mid-1950s, Conway Twitty performed music that would be referred to in music vernacular as "rock and roll" or "pop." While living in Oklahoma in 1965, Conway decided to change his style of music to "country music." At the time of his crossover to country music, his popularity was concentrated primarily in Texas, Oklahoma, and Arkansas. However, Conway was not a complete unknown in the country music field in 1965 as his hit recording of "It's Only Make Believe" had been a Number 1 song on the "pop charts" and the "country music charts" in 1958.
By 1968, Conway Twitty was firmly rooted in the country music entertainment field. For the 10-year period from January 1968 through December 1977, every title release by Conway Twitty became a Number 1 hit. By mid-1970, considering all popularity charts together, Conway Twitty had earned 43 Number 1 positions for his recordings.
In 1968, Conway Twitty and several of his friends decided to form a restaurant business. In late 1968, Twitty Burger, Inc. (hereinafter referred to as "Twitty Burger"), an Oklahoma corporation, was formed to operate and sell franchises for the operation of Twitty Burger Fast Food Restaurants. A number of Twitty's friends, acquaintances, and business associates were solicited to invest in Twitty Burger. In late 1968 and early 1969, approximately 75 of petitioner's friends and business associates invested money in Twitty Burger by directly remitting a check to Twitty Burger or by sending a check to petitioner on behalf of Twitty Burger, or by sending checks or other money instruments to others in petitioner's employ.
Initially, it was Twitty Burger's intention to make a public offering of its stock once the securities registration requirements were met and an exemption obtained from the Securities and Exchange Commission. At the time the public offering was to be made, the investors would receive the appropriate number of shares of capital stock based upon the amount of their investment in Twitty Burger. In late 1968, when funds began coming in from various individuals, petitioner hired Hugh Carden, a long-time friend, to be general manager of the Twitty Burger enterprise. At that point no restaurant had been opened.
Subsequent to the time the funds were remitted by the investors, it was determined that it might be some time before all the registration requirements for a public offering of Twitty Burger stock could be met. Therefore, it was decided that debentures should be issued to the investors as interim evidence of their investment in Twitty Burger. During 1970, debentures of Twitty Burger were issued to the following investors evidencing their investment in Twitty Burger as follows:
Debenture Face
Name No. Amount
Anthony Chiodi ........ 12 $9,222.00
Bob Neal .............. 18 2,809.00
Don Davis ............. 26 2,650.00
Harlan Howard ......... 27 2,650.00
Bob Neal .............. 30 560.00
Harlan Core ........... 32 1,000.00
Frank Smart ........... 34 2,809.00
Robert F. Smart ....... 35 3,371.00
Scott Smart ........... 36 2,809.00
Michael Bennett ....... 49 2,787.50
Dale Ferguson ......... 56 550.00
Robert Hurley ......... 60 1,110.00
G. W. Shuck ........... 68 223.00
Billy C. Trousdale .... 71 3,345.00
John Weatherford ...... 73 557.50
Les Chapman and/or
Louise Chapman ........ 78 1,111.00
Earl Merrick .......... 79 2,816.25
Earl T. Merrick ....... 80 2,816.25
Catherine Merrick ..... 81 5,632.50
E. H. Wilemon and/or
Christine Wilemon ... 47 2,198.00
Roger Cleghorne ....... 54 560.00
M.L. Clifton .......... 58 106.00
Graham Kendall ........ 61 1,110.00
Bobby Pugh and/or
Cherry Pugh ......... 43 225.00
Sonny Neal ............ 29 500.00
Shirley Legate ........ 28 106.00
Gary Lake ............. 8 2,809.00
Virginia Jones ........ 6 2,809.00
Roger Mills and/or
Ethel A. Mills ........ 5 159.00
The above amounts include the principal and, in some cases, interest on the investments.
Conway Twitty became aware of possible violations of the securities laws by Twitty Burger in 1970. Several attorneys, the last of which was Cleta John Rogers, were hired by Twitty Burger to attempt to get the Twitty Burger capital stock registered. By October of that year, Mr. Rogers had determined that it was not possible to register the capital stock of Twitty Burger. After that time, no further attempts at fulfilling the requirements for registration were made and the application for registration was withdrawn from the Securities and Exchange Commission.
After Twitty Burger ceased operating its restaurants in 1971, petitioner and those in his employ commenced a program of terminating the leases of the restaurant premises and paying the general creditors. The restaurants were in poor financial condition at this time. Thereafter petitioner had no intention of reopening the Twitty Burger restaurants or attempting to sell the corporation.
The last Twitty Burger restaurant was closed in May 1971, except for one franchise that had been sold to a group of doctors who, as of the date of trial, continue to operate a restaurant in Hemphill, Texas. Subsequently, Conway Twitty decided that the investors should be paid the amount of money that they had invested in Twitty Burger. Although petitioner had not participated in the day-to-day operation of Twitty Burger and had not reviewed many of the documents received by his lawyers and business associates regarding the investments in Twitty Burger and those documents received from the Securities and Exchange Commission, he did participate in the determination that Twitty Burger should be closed down. As Twitty Burger had no assets with which to pay the debentures, Conway Twitty decided that he would repaid the investors from his future earnings. After Twitty Burger ceased operations, Conway Twitty repaid the investors in Twitty Burger the amount of their investment and, in some instances, an additional amount representing interest thereon. During 1973 and 1974, he repaid the following investors by checks drawn on his personal accounts in the amounts listed:
1973
Check
Name Number Amount
G. W. Shuck ...................... 1215 $ 252.49
Harlan Howard .................... 1216 3,187.75
Don Davis ........................ 1217 3,187.95
Bob Neal ......................... 1329 3,156.19
Bob Neal ......................... 1330 1,191.02
Merle Haggard .................... 1817 30,000.00
Steve Lake ....................... 1823 $10,000.00
Tom Cole ......................... 1961 600.00
Les Chapman ...................... 1977 620.00
Les Chapman ...................... 1994 620.00
Robert & Lola Hurley ............. 1998 1,500.00
Jimmy Loden, a/k/a
Sonny James .................... 2055 10,000.00
Larry Mohr ....................... 2086 300.00
Frank Smart ...................... 2222 2,500.00
Robert F. Smart .................. 2224 3,000.00
Scott Smart ...................... 2226 2,500.00
John Weatherford ................. 2236 659.79
Earl T. Merrick .................. 2326 2,500.00
Earl Merrick ..................... 2327 2,500.00
Catherine Merrick ................ 2328 5,000.00
Fern Bennett ..................... 2411 2,500.00
Billy C. Trousdale ............... 2512 2,110.63
Anthony Chiodi ................... 2615 2,700.00
Harlan Core ...................... 2775 1,306.64
Dale Ferguson .................... 1884 1,000.00
__________
Total .............................. $92,892.46
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1974
Graham Kendall ................... 2873 $ 1,000.00
Roger Cleghorn ................... 2874 500.00
E. H. Wilemon .................... 3065 2,000.00
M. L. Clifton .................... 3209 100.00
__________
Total ............................... $ 3,600.00
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On his 1973 and 1974 Federal income tax returns petitioner deducted these total amounts, $92,892.46 and $3,600, respectively, as bad debts or alternatively, as ordinary and necessary business expenses under section 162.
Opinion
The sole issue presented for our decision is whether payments made by petitioner to investors in a failed corporation known as Twitty Burger, Inc., are deductible as ordinary and necessary business expenses of petitioner's business as a country music performer.
The general rule is that a shareholder
Section 162(a) provides in pertinent part:
As is clear from the statutory language, to be deductible under section 162, a business expense must be both "ordinary" and "necessary." In Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111 (1933), the Supreme Court discussed the meaning of those terms. The taxpayer in Welch was the secretary of the E.L. Welch Company, a corporation engaged in the grain business which was eventually adjudged an involuntary bankrupt. Thereafter, the taxpayer became associated with another grain company. In order to reestablish his relations with former customers of the bankrupt company in developing his new business, Mr. Welch decided to pay the debts of the Welch Company himself. The Commissioner disallowed the claimed deduction of these amounts as business expenses on the basis that such payments were not ordinary and necessary expenses but were rather in the nature of capital expenditures allocable to his new business.
The Supreme Court stated that while the payments to the corporation's creditors were "necessary" for the development of the petitioner's business, at least in the sense that they were appropriate and helpful, it remained to be decided whether such payments were "ordinary." In sustaining the Commissioner's disallowance of the deduction, Justice Cardozo speaking for the Court stated:
Welch v. Helvering, supra at 114. See also Deputy v. Dupont [40-1 USTC ¶ 9161], 308 U.S. 488 (1940).
An exception to the general rule that one person
In Lohrke, the taxpayer was allowed a deduction for a payment made on behalf of a corporation in which he had a substantial interest. The corporation had made a shipment of defective fiber produced by a patented process owned by the taxpayer personally and from which he derived significant income. The petitioner believed that if he did not personally reimburse the customers' losses his personal business reputation would be harmed in that the corporation's involvement in the transaction might become known to the entire synthetic fiber industry. The petitioner's surname constituted a portion of the corporation's name and the taxpayer had never attempted to separate his activities as an inventor from his activities as president of the corporation to any member of the industry.
We noted in Lohrke, supra at 685, that in a number of cases the courts have 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
Lohrke, supra, at 688. Rushing v. Commissioner [Dec. 31,545], 58 T.C. 996, 1003 (1972).
Applying this test to the facts in Lohrke, we found that the taxpayer was of the opinion that his failure to assume the corporate obligation would have adversely affected his licensing because of the harm that would have resulted to his own reputation. Because we believed that the petitioner's primary motive was the protection of his personal licensing business and that the payment was proximately related to that business, the deduction was allowed as an ordinary and necessary business expense.
Similarly in Gould v. Commissioner [Dec. 33,167], 64 T.C. 132 (1975), we allowed the taxpayer a deduction for payments made to debtors of his wholly-owned corporation because we found that the payments were made to preserve his employment at another corporation. We specifically found that petitioner did not make the payments to revitalize the corporation or to enhance the value of his investment. See Koree v. Commissioner [Dec. 26,305], 40 T.C. 961 (1963). The corporation was defunct and had ceased conducting any activities except those related to terminating its operations.
We turn now to the case at bar. The question presented is whether one person (Conway Twitty) may deduct the expenses of another person (Twitty Burger). In order to determine whether the disallowed expenditures are deductible by petitioner under section 162 we must (1) ascertain the purpose or motive of the taxpayer in making the payments and (2) determine whether there is a sufficient connection between the expenditures and the taxpayer's trade or business. Lohrke v. Commissioner, supra. Petitioner bears the burden of proving that respondent's determination was in error. Rule 142(a), Tax Court Rules of Practice and Procedure.
The relevant facts are as follows: Petitioner Conway Twitty is 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. During 1968 and 1969, approximately 75 of petitioner's friends and business associates invested money in Twitty Burger. Subsequently it was determined that it would be some time before the requirements of the Security and Exchange Commission could be met and a public offering of stock made. It was determined, therefore, that debentures should be issued to those persons who had invested money in the undertaking as interim evidence of their investments.
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. Shortly thereafter it was decided that Twitty Burger should be shut down. Except for one independently-owned franchise operating in Texas, the last Twitty Burger restaurant was closed in May 1971. Subsequently, Conway Twitty decided that the investors should be repaid the amount of 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, 1973 and 1974, Conway Twitty made payments to the investors of $92,892.46 and $3,600, respectively.
Respondent argues that the payments Conway Twitty made to the investors in Twitty Burger are 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. Respondent argues that the payments in question here were made by Conway
Petitioner argues that the rule of Welch v. Helvering, supra, is not applicable to the case at bar because petitioner made the payments in question to protect his reputation and earning capacity in his ongoing business of being a country music entertainer whereas in Welch the Supreme Court held that the payments made there were capital expenditures of the taxpayer's new business. Petitioner maintains that under the test as formulated by this Court in Lohrke, the expenditures in issue here are deductible under section 162 if the payments were made primarily with a business motive and if there is a sufficient connection between the payments and the taxpayer's trade or business. Lohrke v. Commissioner, supra at 688.
The question presented for our resolution is purely one of fact. While previously decided cases dealing with this issue are somewhat helpful there is, quite understandably, no case directly on point with the facts before us. As the Supreme Court recognized in Welch v. Helvering, supra at 116,
There is no suggestion in the record that any of the payments were made in order to protect petitioner's investment in Twitty Burger or to revitalize the corporation. See Gould v. Commissioner, supra. It is petitioner's contention that Conway Twitty repaid the investors in Twitty Burger from his personal funds and in order to protect his personal business reputation. While it is 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.
After a thorough consideration of the record we are convinced that petitioner Conway Twitty repaid the investors in Twitty Burger with the primary motive of protecting his personal business reputation. There was the obvious similarity of the name of the corporation and petitioner's stage name. See Lohrke v. Commissioner, supra; L. Heller & Son, Inc. v. Commissioner [Dec. 17,053], 12 T.C. 1109 (1949). There is 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.
Petitioner testified as follows concerning his motivations for repaying the Twitty Burger investors:
Petitioner presented the expert testimony of William Ivey, the Director of Country Music Foundation in Nashville, Tennessee. In his report which was introduced into evidence in lieu of direct testimony he stated as follows:
We conclude that there was a promixate relationship between the payments made to the holders of Twitty Burger debentures and petitioner's trade or business as a country music entertainer so as to render those payments an ordinary and necessary expense of that business. Although, as respondent argues, the chances of a successful lawsuit against Conway Twitty by any of the investors or the Securities and Exchange Commission was remote we agree with petitioner that the possibility of extensive adverse publicity concerning petitioner's involvement with the defunct corporation and the consequent loss of the investors' funds was very real. We do not believe it is necessary for us to find that adverse publicity emanating from Conway Twitty's failure to repay the investors in Twitty Burger would have ruined his career as a country music singer. Rather, we need only find that a proximate relationship existed between the payments and petitioner's business. We find that such relationship exists. It is not necessary that the taxpayer's trade or business be of the same type as that engaged in by the person on whose behalf the payments are made. See for example Scruggs-Vandervoort-Barney, Inc. v. Commissioner [Dec. 15,380], 7 T.C. 779 (1946), where petitioner operated a retail department store and was allowed a deduction for payments made to creditors of a failed bank which had been owned by petitioner's predecessor.
In making these payments petitioner was furthering his business as a country music artist and protecting his business reputation for integrity. The mere fact that they were voluntary does not deprive them of their character as ordinary and necessary business expenses. Milbank v.
Decision will be entered under Rule 155.
FootNotes
With respect to the year 1974, the petitioners agree that the adjustments to income set forth in the notice of deficiency as adjustments (b) through (h) in the respective amounts of $21,570, $3,809, $578, $400, $1,151, minus (-) $643 and $5,173, are correct. The petitioners also concede that $5 of that portion of the claimed business bad debt in the amount of $10 relating to payments to general creditors of Twitty Burger, Inc., is not deductible as a business bad debt, but instead is deductible as a nonbusiness bad debt. Respondent concedes that the remaining $5 is deductible as an ordinary and necessary business expense.
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