Computing Taxable Income Do not write over a page, not longer than 2/3 of the page. S Welch v. Helvering Supreme Court of the United States, 1933. 290 U.S.

Computing Taxable Income Do not write over a page, not longer than 2/3 of the page. S
Welch v.
Helvering
Supreme Court of the United States, 1933.
290 U.S. 111, 54 S.Ct. 8.
2
issue
. MR. JUSTICE CARDOZO delivered the opinion of the Court.
The question to be determined is whether payments by a taxpayer,
who is in business as a commission agent, are allowable deductions in
the computation of his income if made to the creditors of a bankrupt
corporation in an endeavor to strengthen his own standing and credit.
In 1922 petitioner was the secretary of the E.L. Welch Company, a
Minnesota corporation, engaged in the grain business. The company was
adjudged an involuntary bankrupt, and had a discharge from its debts.
Thereafter the petitioner made a contract with the Kellogg Company to
purchase grain for it on a commission. In order to reestablish his
relations with customers whom he had known when acting for the Welch
Company and to solidify his credit and standing, he decided to pay the
debts of the Welch business so far as he was able. In fulfillment of that
resolve, he made payments of substantial amounts during five successive
years. In 1924, the commissions were $18,028.20; the payments
$3,975.97; in 1923, the commissions $31,377.07; the payments
$11,968.20; in 1926, the commissions $20,925.25; the payments
$12,815.72; in 1927, the commissions $22,119.61; the payments
$7,379.72; and in 1928, the commissions $26,177.56, the payments
$11,068.25. The Commissioner ruled that these payments were not
deductible from income as ordinary and necessary expenses, but were
rather in the nature of capital expenditures, an outlay for the
list of
Commissions
+ & payment
312
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relle
DEDUCTIONS IN COMPUTING TAXABLE INCOME
development of reputation and good will. The Board of Tax Appeals
sustained the action of the Commissioner (25 B.T.A. 117), and the Court
of Appeals for the Eighth Circuit affirmed. 63 F.2d 976. The case is here
on certiorari.
“In computing net income there shall be allowed as deductions ***
all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business.” [The Court cites
revenue acts and regulations applicable to the different taxable years
Ed.]
We may assume that the payments to creditors of the Welch
Company were necessary for the development of the petitioner’s
business, at least in the sense that they were appropriate and helpful.
McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316. He certainly thought
they were, and we should be slow to override his judgment. But the
problem is not solved when the payments are characterized as necessary.
Many necessary payments are charges upon capital. There is need to
determine whether they are both necessary and ordinary. Now, what is
ordinary, though there must always be a strain of constancy within it, is
one the less a variable affected by time and place and circumstance.
prdinary in this context does not mean that the payments must be
habitual or normal in the sense that the same taxpayer will have to make
them often. A lawsuit affecting the safety of a business may happen once
in a lifetime. The counsel fees may be so heavy that repetition is unlikely.
None the less, the expense is an ordinary one because we know from
Nexperience that payments for such a purpose, whether the amount is
‘large or small, are the common and accepted means of defense against
attack. Cf. Kornhauser v. United States, 276 U.S. 145, 48 S.Ct. 219. The
situation is unique in the life of the individual affected, but not in the life
of the group, the community, of which he is a part. At such times there
are norms of conduct that help to stabilize our judgment, and make it
certain and objective. The instance is not erratic, but is brought within a
known type.
The line of demarcation is now visible between the case that is here
and the one supposed for illustration. We try to classify this act as
ordinary or the opposite, and the norms of conduct fail us. No longer can
we have recourse to any fund of business experience, to any known
business practice. Men do at times pay the debts of others without legal
obligation or the lighter obligation imposed by the usages of trade or by
40 neighborly amenities, but they do not do so ordinarily, not even though
the result might be to heighten their reputation for generosity and
meaning we should have to say that payment in such
circumstances, instead of being ordinary is in a high degree
extraordinary. There is nothing ordinary in the stimulus evoking it, and
none in the response. Here, indeed, as so often in other branches of the
law, the decisive distinctions are those of degree and not of kind. One
Bue
***
CAPTER 14
313
***
BUSINESS DEDUCTIONS
struggles in vain for any verbal formula that will supply a ready
touchstone. The standard set up by the statute is not a rule of law: it is
rather a way of life. Life in all its fullness must supply the answer to the
riddle.
The Commissioner of Internal Revenue resorted to that standard in
assessing the petitioner’s income, and found that the payments in
controversy came closer to capital outlays than to ordinary and necessary
expenses in the operation of a business. His ruling has the support of a
presumption of correctness, and the petitioner has the burden of proving
it to be wrong. *. Unless we can say from facts within our knowledge
that these are ordinary and necessary expenses according to the ways of
conduct and the forms of speech prevailing in the business world, the tax
must be confirmed. But nothing told us by this record or within the
sphere of our judicial notice permits us to give that extension to what is
ordinary and necessary. Indeed, to do so would open the door to many
bizarre analogies. One man has a family name that is clouded by thefts
committed by an ancestor. To add to his own standing he repays the
stolen money, wiping off, it may be, his income for the year. The
payments figure in his tax return as ordinary expenses. Another man
conceives the notion that he will be able to practice his vocation with
greater ease and profit if he has an opportunity to enrich his culture.
Forthwith the price of his education becomes an expense of the business,
reducing the income subject to taxation. There is little difference between
these expenses and those in controversy here. Reputation and learning
are akin to capital assets, like the good will of an old partnership. Cf.
Colony Coal & Coke Corp. v. Commissioner, 52 F.2d 923. For many, they
are the only tools with which to hew a pathway to success. The money
spent in acquiring them is well and wisely spent. It is not an ordinary
expense of the operation of a business.
Many cases in the federal courts deal with phases of the problem
presented in the case at bar. To attempt to harmonize them would be a
futile task. They involve the appreciation of particular situations, at
times with borderline conclusions. Typical illustrations are cited in the
margin.1
1
Ordinary expenses: Commissioner v. People’s-Pittsburgh Trust Co., 60 F.2d 187,
expenses incurred in the defense of a criminal charge growing out of the business of the
taxpayer; American Rolling Mill Co. v. Commissioner, 41 F.2d 314, contributions to a civic
improvement fund by a corporation employing half of the wage earning population of the city,
the payments being made, not for charity, but to add to the skill and productivity of the workmen
(cf. the decisions collated in 30 Columbia Law Review 1211, 1212, and the distinctions there
drawn); Corning Glass Works v. Lucas, 59 App.D.C. 168; 37 F.2d 798, donations to a hospital
by a corporation whose employees with their dependents made up two thirds of the population
of the city; Harris v. Lucas, 48 F.2d 187, payments of debts discharged in bankruptcy, but
subject to be revived by force of a new promise. Cf. Lucas v. Ox Fibre Brush Co., 281 U.S. 115,
50 S.Ct. 273, where additional compensation, reasonable in amount, was allowed to the officers
of a corporation for services previously rendered.
Not ordinary expenses: Hubinger v. Commissioner, 36 F.2d 724, payments by the taxpayer
for the repair of fire damage, such payments being distinguished from those for wear and tear;
Lloyd v. Commissioner, 55 F.2d 842, counsel fees
incurred by the taxpayer, the president of a
corporation, in prosecuting a slander suit to protect his reputation and that of his business; 105
4
DEDUCTIONS IN COMPUTING TAXABLE INCOME
PART 4
The decree should be
Affirmed.

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