Comm'r of Internal Revenue

Tax Court of the United States.Apr 30, 1956
26 T.C. 201 (U.S.T.C. 1956)
26 T.C. 201T.C.

Docket No. 51111.



Charles N. Schenck, III, Esq., for the petitioners. John J. O'Toole, Esq., for the respondent.

Charles N. Schenck, III, Esq., for the petitioners. John J. O'Toole, Esq., for the respondent.

Petitioner's expenditures for counsel fees to prosecute a libel action solely for the protection of his income as a public entertainer, held, deductible as ordinary and necessary business expense.

Petitioners contest deficiencies of $3,441.68 and $311.44 in income taxes determined for the calendar years 1947 and 1949, respectively. No part of a 1948 deficiency is in dispute. Respondent disallowed a deduction in 1949 of legal expenses, which had in part resulted in a loss carryback to 1947. The only issue presented is the deductibility of legal expenses paid by petitioners to prosecute a libel action.


Some of the facts have been stipulated and are hereby found.

Petitioners, who are husband and wife, filed their return for the period here involved with the collector of internal revenue for the third district of New York.

Paul Draper, hereafter called petitioner, is a professional dancer who, prior to 1949, derived substantial income from fees received for dancing engagements in hotels and night clubs and for concert appearances under the management of a nationwide concert agency. He began his career about 1933. Commencing in 1940 and continuing for about 8 years he gave concerts wi h Larry Adler. When not on these recital tours, petitioner performed in night clubs, hotels, and theaters.

In the fall of 1948, he and Adler were engaged by the Greenwich Community Concerts Association to give a concert on January 21, 1949, in Greenwich, Connecticut. Following the announcement of this concert and commencing in December 1948, Mrs. Hester McCullough, a resident of Greenwich, made statements in the public press to the effect that petitioner was pro-Communist, that his professional entertainments were un-American, and that he was prone to interrupt his performances to make ‘party-line’ speeches. These charges were repeated by Mrs. McCullough and obtained wide circulation in the public press throughout the nation. Petitioner was advised by both his concert agent and lawyers with whom he discussed the situation that unless he took legal action his business would be harmed. In January 1949, he filed a libel action against Mrs. McCullough. The case was tried in April and May of 1950 before a jury in the United States District Court for Connecticut. The jury failed to agree and petitioner, due to a lack of funds, did not retry the case.

After the libel action had been initiated, Mrs. McCullough made several further publications during 1949 adverse in nature to petitioner, the contents of which were alleged in his substituted complaint and admitted in her answer in the libel action. Illustrative of the statements made by Mrs. McCullough, and their purpose to have an adverse effect upon petitioner's professional bookings, are the following:

These two men, while fine artists, have been openly denounced in the press as being pro-communist in sympathy and as such, I do not believe should appear in any community project in Greenwich. * * *

It is my firm belief that Greenwich can lead the way by refusing to patronize anything un-American.

She stated that she will carry her fight for support to the Daughters of the American Revolution, the Pen Women, the Knights of Columbus, the Catholic Daughters of America, the American Legion and as many other organizations as she can reach. the only way to stop the spread of communist propaganda through the medium of entertainment is ‘to his these boys in their box office,’ * * *

Starting with 1949, following Mrs. McCullough's publications at the end of 1948 and concurrent with her publications in 1949, petitioner's new bookings. concert and theatrical, almost vanished although he lowered his fee scale in an effort to find work. His contract with the concert agent, with whom he had worked some 8 years, was not renewed in January 1949, and two contracts for the 1949 season to dance for a month each at hotels in New York and Chicago at a fee of some $2,000 a week were canceled.

During 1942 through 1952 petitioner's gross income from his business of dancing was as follows:

+----------------+ ¦1942¦$50,521.54 ¦ +----+-----------¦ ¦1943¦44,851.56 ¦ +----+-----------¦ ¦1944¦45,160.62 ¦ +----+-----------¦ ¦1945¦86,062.50 ¦ +----+-----------¦ ¦1946¦51,099.30 ¦ +----+-----------¦ ¦1947¦81,252.17 ¦ +----+-----------¦ ¦1948¦$64,639.21 ¦ +----+-----------¦ ¦1949¦26,100.43 ¦ +----+-----------¦ ¦1950¦6,721.25 ¦ +----+-----------¦ ¦1951¦None ¦ +----+-----------¦ ¦1952¦None ¦ +----------------+

The performances from which petitioner's 1949 income was derived were contracted for in 1948. After deducting business expenses from his 1950 gross income petitioner showed a net loss. In 1950 petitioner left this country because he was unable to make a living. He returned late in the fall of 1953 and has since been attempting a comeback as a dancer in the United States.

In the fall of 1949, the law firm which had originally represented petitioner in his libel action against Mrs. McCullough withdrew, and he retained another firm to whom he paid in 1949, a fee of $12,200, here in issue, for the sole purpose of prosecuting this action. The latter firm then filed a substituted complaint, incorporating the publications by Mrs. McCullough subsequent to the original complaint, and claiming as elements of damage petitioner's loss of bookings in 1949, the cancellation of his contracts, and in general the loss of professional income as the result of the publications. The District Judge in his charge to the jury in the libel action recognized these elements of damage as valid under the law of libel, if the plaintiff prevailed on the merits of the case.

The legal fee paid by petitioner in 1949 constituted an ordinary and necessary expense incurred by him in carrying on his trade or business.


OPPER, Judge:

The sole issue as the case is presented is whether petitioner's expenditure for counsel fees as plaintiff in a libel action was personal and nondeductible or business and deductible. Where the primary purpose of litigation is to vindicate the personal reputation and character of a taxpayer, the proceeds have been held not to be taxable, C. A. Hawkins, 6 B.T.A. 1023, and the expenses of litigation not deductible. Robert Edward Kleinschmidt, 12 T.C. 921. Whether punitive damages even in a personal action would now be taxable we need not consider. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426. Where, however, the cause for engaging counsel and the benefit sought is primarily the protection of petitioner's the expense is an ordinary and necessary business expense and hence a deductible item. Waldo Salt, 18 T.C. 182; Commissioner v. Heininger, 320 U.S. 467; Kornhauser v. United States, 276 U.S. 145. So stated, the issue becomes primarily one of fact. Commissioner v. Heininger, supra.

We conclude on this record that petitioner's concern was solely with his continued business success as a public performer. He sought to reestablish his reputation on the advice of his concert manager and attorneys whom he consulted. They and he were of the opinion that no other means was at hand by which to counteract the effect of the statements about him, the publication of which was apparently responsible for his loss of income. Petitioner testified that he was not motivated by personal reasons and there was no suggestion that his statements in this respect were false. On the entire record we have accordingly found as a fact that the attorneys' fees in question were ordinary and necessary business expenses of petitioner's occupation of giving dance recitals for the general public.

Decision will be entered under Rule 50.