Kopp’s Company, Inc. v. United States

Kopp’s Company, Inc. (the company) (plaintiff) was a lumber and building-supply company owned by Earl and Jean Kopp. The Kopps had a son, Wayne, who was in the military. While on leave from the military, Wayne, who had a checkered driving history, had permission to use a car owned by the company. Wayne got in a car accident that left the other driver, Warren Danner, a quadriplegic. The company had car insurance, but Wayne did not. Wayne also had no assets, and Earl had limited assets outside of the company. Danner filed a lawsuit against the company and all three Kopps, alleging damages of over $4 million. As a result, the company suffered financially. The company’s lawyer warned that it would probably be found guilty of negligent entrustment of the car to Wayne due to his driving record. The company settled the case with Danner, offering to pay $50,000 and incurring over $3,000 in legal fees. The company deducted the settlement and legal fees from its income taxes for the year, classifying the expenditures as business expenses. The Internal Revenue Service (the IRS) (defendant) disallowed the deduction and assessed a deficiency. The Kopps paid the deficiency and sued the IRS for a refund. The district court held that the expenditures were not business expenses because the company was not the origin of the claim. Rather, Wayne’s actions were the origin of the claim, and the company was only involved as a consequence of those actions. The company appealed.