Gilliam v. Commissioner
1986 Tax Ct. Memo LEXIS 525, 51 T.C.M. 515, 1986 T.C. Memo. 81 (1986)
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Rule of Law:
An expense is not "ordinary" and therefore not deductible as a business expense under IRC § 162 if the transaction or event giving rise to the expense is not a common, usual, or customary occurrence in the taxpayer's specific type of business, even if it occurs during business-related travel.
Facts:
- Sam Gilliam, a noted artist and art teacher, was invited to lecture and teach at the Memphis Academy of Arts.
- On February 23, 1975, Gilliam flew to Memphis to fulfill this business obligation.
- Gilliam, who had a history of mental health issues and was under significant work-related stress, took a newly prescribed anti-anxiety drug, Dalmane, for the first time shortly after boarding the flight.
- Approximately 90 minutes into the flight, Gilliam began to act in an irrational manner, claiming the plane was going to crash and attempting to open exit doors.
- During this episode, Gilliam assaulted another passenger, Seiji Nakamura, with a telephone receiver and threatened members of the flight crew.
Procedural Posture:
- Upon arriving in Memphis, Sam Gilliam was arrested by federal officials.
- Gilliam was indicted on one count of certain crimes aboard an aircraft in flight and two counts of interference with flight crew members.
- Gilliam was tried in the United States District Court for the Western District of Tennessee, where the court granted his motion for a judgment of acquittal by reason of temporary insanity.
- The Gilliams deducted the legal fees and a civil claim settlement related to the incident on their 1975 and 1976 federal income tax returns.
- The Commissioner of Internal Revenue disallowed these deductions.
- The Gilliams, as petitioners, challenged the Commissioner's determination by filing a petition in the United States Tax Court.
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Issue:
Do legal fees for a criminal defense and settlement costs for a civil claim, arising from a violent altercation caused by a taxpayer's temporary insanity during a business trip, qualify as "ordinary and necessary" business expenses deductible under IRC § 162?
Opinions:
Majority - Chabot, J.
No. The legal fees and settlement costs do not qualify as "ordinary and necessary" business expenses under IRC § 162. An expense is "ordinary" if it is normal, usual, or customary in the taxpayer's specific trade or business. While it is ordinary for an artist to travel for business, the court found it is not ordinary for artists to be involved in violent altercations during such travel. The court distinguished this case from Dancer v. Commissioner, where costs from a business-trip car accident were held to be ordinary because accidents are an inseparable and common risk of driving. In contrast, Gilliam's actions were not a normal incident of air travel for his profession. The court also distinguished the case from Commissioner v. Tellier, where the underlying acts giving rise to legal fees were directly part of the conduct of the business itself, whereas Gilliam's assault was merely incidental to his business travel. Therefore, the expenses originated from a personal, not business, event and are not deductible.
Analysis:
This case clarifies the "ordinary" expense requirement under IRC § 162, emphasizing that a mere connection to a business trip is insufficient for deductibility. The decision establishes that the nature of the incident giving rise to the expense, not just its timing, is determinative. By distinguishing between the common risk of a car accident (Dancer) and the bizarre, personal nature of a psychotic episode, the court narrowed the scope of deductible expenses related to travel incidents. This precedent reinforces that the origin of a claim must be a normal risk of the business activity itself to be considered an ordinary business expense.
