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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