## Facts

- Sam Gilliam, Jr., a professional artist and art instructor, traveled from Washington, D.C. to Memphis, Tennessee to lecture and teach for a week at the Memphis Academy of Arts.
- Gilliam had a history of mental and emotional disturbances and remained under psychiatric care at the time of the trip.
- On the morning of the flight, Gilliam contacted his physician for anxiety medication; a tranquilizer was prescribed with instructions to take one pill immediately and another later that day.
- During the flight, Gilliam behaved irrationally, repeatedly attempted to open the aircraft door, and struck and injured another passenger; Gilliam later did not remember the incident.
- Federal criminal charges were brought arising from the incident, including interference with flight crew members and assault; Gilliam was found not guilty by reason of insanity.
- The injured passenger filed a civil action; Gilliam settled the claim.
- The Gilliams paid roughly $25,000 in legal expenses connected to the criminal defense and the civil settlement and deducted amounts paid in 1975 and 1976 as business expenses under I.R.C. § 162(a).
- The Commissioner disallowed the deductions and determined income tax deficiencies for 1975 and 1976; the Gilliams petitioned the Tax Court.

## Issues

1. Whether legal fees incurred in Gilliam’s criminal defense and amounts paid to settle a related civil damages claim were deductible under I.R.C. § 162(a) as ordinary and necessary expenses incurred in carrying on Gilliam’s trade or business.
2. Whether the business purpose of Gilliam’s travel established a sufficient business nexus under the “origin of the claim” analysis, or whether the expenses were nondeductible personal expenses.

## Decision

- The Tax Court sustained the Commissioner’s disallowance of the deductions.
- The court held the expenses were personal and did not proximately result from carrying on Gilliam’s trade or business as an artist and teacher.
- The court upheld the deficiencies to the extent attributable to the disallowed deductions for 1975 and 1976.

## Legal Principles

- Deductibility of litigation-related costs under I.R.C. § 162(a) turns on the origin and character of the claim giving rise to the expense, not merely the setting in which the events occurred.
- Expenses are deductible under § 162(a) only if they proximately arise from the taxpayer’s trade or business and are ordinary and necessary in that business.
- Being engaged in business travel does not, by itself, convert expenses arising from independent personal conduct into trade-or-business expenses.
- Criminal-defense fees and related civil-settlement payments are not deductible when the underlying proceedings originate in personal circumstances (here, irrational and violent conduct tied to personal mental condition and medication reaction) rather than business activity.

## Conclusion

The Tax Court held that costs of defending criminal charges and settling a civil claim stemming from an in-flight assault, though occurring during a trip undertaken for a business engagement, originated in personal behavior and therefore were not ordinary and necessary expenses of carrying on the taxpayer’s art and teaching business under I.R.C. § 162(a).


Gilliam v. Commissioner, T.C. Memo. 1986-81, 51 T.C.M. (CCH) 515 (1986)