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against the insurance company that had fired him. The taxpayer
recovered $51,499 in actual damages and $250,000 in punitive
damages. The Commissioner conceded that the legal costs were a
business expense deductible on Schedule C, Profit or Loss From
Business, in computing adjusted gross income to the extent
attributable to the taxpayer’s recovery of the actual damages.
However, the Commissioner determined that the punitive damages
were “other income”, and that the remaining legal costs were a
nonbusiness itemized deduction under section 212(1) for the
production of income because they were attributable to the
taxpayer’s recovery of the punitive damages.
We held for the taxpayer, reasoning that the punitive
damages were ancillary to the actual damages under South Carolina
law, and that the attorney’s fees attributable to the punitive
damages recovery were sufficiently related; that is,
“attributable to” the taxpayer’s sole proprietor insurance
business to be deductible by him under section 162(a):
As a matter of fact, petitioner’s lawsuit against
Academy arose entirely from his insurance business.
Each cause of action petitioner alleged in the lawsuit
was spawned entirely from the fact that, after Academy
fired him, it failed to honor the terms of their
working agreement by not paying him the commissions to
which he was entitled under their agreement. * * * [Id.
at 329-330.]
As a result, we held that all the taxpayer’s legal costs were
“attributable to” his trade or business and were deductible on
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