Historic Tax Case | Welch v. Helvering

• Published date: 23 September 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Tax Authorities
• Law Firm: Freeman Law
• Author: Freeman Law

Welch v. Helvering, 290 U.S. 111 | November 6, 1933 | Justice Cardozo | Docket No. 33

Short Summary:

In 1922, Thomas H. Welch (Petitioner) was the secretary of the E. L. Welch Company, which was engaged in the grain business. The Welch Company went bankrupt and was discharged from its debts. Subsequently, Petitioner obtained a new job with a company engaged in the grain business. To re-establish relations with customers he had served while working with the Welch Company, and to solidify his good will, Petitioner decided to pay the debts of the Welch Company, to the extent he was able, over five years.

Petitioner deducted the payments he made to the Welch Company creditors, characterizing them as ordinary and necessary business expenses, during the corresponding tax years. The Commissioner of Internal Revenue (Commissioner) ruled that the payments made by Petitioner were not deductive from income as ordinary and necessary expenses, but were rather more akin to capital expenditures. The Board of Tax Appeals sustained the ruling of the Commissioner and the Court of Appeals for the Eighth Circuit affirmed. The Petitioner petitioned for a writ of certiorari.

Key Issue:

Whether payments by a taxpayer to the creditors of his now-bankrupt former employer, made in an effort to better his own standing and credit, are allowable deductions under IRC ' 162(a)¹ in the computation of his own net income?

Primary Holding:

No, Petitioner could not deduct payments made to the creditors of his now-bankrupt former employer as ordinary and necessary expenses paid or incurred in carrying on any trade or business. Payments of this sort, the Court concluded, are 'a high degree extraordinary.'

Key Points of Law:

• IRC ' 162(a) provides that 'there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.' [emphasis added]
• Ordinary, in the context of IRC ' 162(a), means something that is usual or customary
  • Contrarily, ordinary, in the context of IRC ' 162(a), does not require that something be habitual or regularly occurring; a single occurrence can be ordinary.
• Necessary, in the context of IRC ' 162(a), means something is appropriate or helpful.
• In reviewing whether a deduction is proper under IRC ' 162(a), the Commissioner's determination is prima facie...