George W. Guill - Page 1

                                   112 T.C. No. 22                                     

                               UNITED STATES TAX COURT                                 

                         GEORGE W. GUILL, Petitioner v.                                
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                       

               Docket No. 16796-97.            Filed June 18, 1999.                    

                    P, an independent contractor, commenced a lawsuit                  
               against D, alleging that D was liable to P for breach                   
               of contract and conversion arising out of P's work for                  
               D.  As to the conversion claim, the jury awarded P                      
               actual and punitive damages, together with interest and                 
               costs.  P received the award in 1992, and, from this                    
               amount, P paid his attorneys their fees and the court                   
               costs (collectively, legal costs).  P deducted the                      
               legal costs on his 1992 Schedule C, Profit or Loss From                 
               Business, reporting that the costs arose out of his                     
               sole-proprietor business, and he reported the actual                    
               damages on that schedule as income from the business.                   
               P did not include the punitive damages in his 1992                      
               gross income.  R determined that the legal costs were                   
               deductible as a nonbusiness itemized deduction on                       
               Schedule A, Itemized Deductions, and that the punitive                  
               damages were reportable as nonbusiness income.  R                       
               concedes that the legal costs are a business expense to                 
               the extent they are attributable to P's recovery of the                 

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