Cavanaugh v. Commissioner
United States Tax Court
T.C. Memo. 2012-324 (2012)
Facts
In 2002 Colony Anne (Claire) Robinson died of a drug overdose while on vacation with her boyfriend, James Cavanaugh (plaintiff), and two of Cavanaugh’s employees. Cavanaugh was the CEO and sole shareholder of Jani-King International, Inc. (Jani-King), a janitorial-services franchisor. Claire’s mother, Linda, sued Cavanaugh and Jani-King for the wrongful death of her daughter. Linda claimed Cavanaugh had given Claire the drugs that killed her. Linda brought Jani-King into the suit by alleging that its employees, including Cavanaugh, were acting within the scope of their employment when Claire died. Jani-King’s board of directors decided to settle the case to avoid the company’s reputation being ruined during litigation. Jani-King paid a settlement of $2.3 million to Linda and incurred $180,000 in legal fees. Jani-King deducted the settlement and legal fees from its income taxes, classifying the expenditures as ordinary and necessary business expenses. The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the deductions. The Commissioner reasoned that the vacation Claire, Cavanaugh, and the Jani-King employees took was not business related. Therefore, the settlement and legal fees from the lawsuit that arose after Claire’s death could not be business expenses. Cavanaugh appealed.
Rule of Law
Issue
Holding and Reasoning (Holmes, J.)
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