Question

Willie Waylon is a famous country-and-western singer. As an investment, Willie started a chain of barbecue restaurants called Willie’s Wonderful Ribs. Willie’s friends and associates invested $500,000 in this venture. The restaurant chain failed, and the investors lost all their money. Because of his visibility and status in the entertainment community, Willie felt that he personally had to make good on the losses suffered by the investors to protect his singing and business reputation. Consequently, he personally paid $500,000 to reimburse the investors for their losses.

What are Willie’s tax consequences (if any) from the reimbursement?

(From textbook Federal Tax Research 11th Edition)

Answer 1

The rule is that any remittances made to the investors as a repayment for damages can be deducted under the provisions of section 162. The deduction will be in the form of essential and normal corporate expenditure of the petitioner’s work as a music artist.

In this case Willie has paid back $500,000 in the form of reimbursement to the investors. Thus, as per the provisions of the law, this amount can be deducted by Willie as ordinary and compulsory business expense relating to the business of a music performer.

The amount being reimbursed will be considered as a gift and hence will be taxed based on the current taxation rate.