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Welch v. Helvering

U.S.
Nov 6, 1933
290 U.S. 111 (1933)

Summary

holding that the Commissioner's determinations are presumed to be correct, and the taxpayer bears the burden of proving them wrong

Summary of this case from Cullifer v. Comm'r

Opinion

No. 33

11-6-1933

WELCH v. HELVERING, Commissioner of Internal Revenue

Messrs. Edward S. Stringer, Thomas D. O'Brien, and Alexander E. Horn, all of St. Paul, Minn., for petitioner. The Attorney General and Mr. H. Brian Holland, of Philadelphia, Pa., for respondent.


WELCH v. HELVERING, Commissioner of Internal Revenue.

Argued Oct. 19, 1933.

Decided Nov. 6, 1933.

Messrs. Edward S. Stringer, Thomas D. O'Brien, and Alexander E. Horn, all of St. Paul, Minn., for petitioner.

The Attorney General and Mr. H. Brian Holland, of Philadelphia, Pa., for respondent.

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 re-establish 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 1925, 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 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.' Revenue Act of 1924, c. 234, 43 Stat. 253, 269, § 214, 26 U.S.C. § 955, 26 USCA § 955(a)(1); Revenue Act of 1926, c. 27, 44 Stat. 9, 26, § 214, 26 U.S.C. App. § 955, 26 USCA § 955(a)(1); Revenue Act of 1928, c. 852, 45 Stat. 791, 799, § 23(a), 26 USCA § 2023(a); cf. Treasury Regulations 65, Arts. 101, 292, under the Revenue Act of 1924, and similar regulations under the acts of 1926 and 1928.

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, 4 Wheat. 316, 4 L.Ed. 579. 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 none the less a variable affected by time and place and circumstance. Ordinary 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 experience 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, 72 L.Ed. 505. 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 neighborly amendities, but they do not do so ordinarily, not even though the result might be to heighten their reputation for generosity and opulence. Indeed, if language is to be read in its natural and common meaning (Old Colony R. Co. v. Commissioner, 284 U.S. 552, 560, 52 S.Ct. 211, 76 L.Ed. 484; Woolford Realty Co. v. Rose, 286 U.S. 319, 327, 52 S.Ct. 568, 76 L.Ed. 1128), 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 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. Wickwire v. Reinecke, 275 U.S. 101, 48 S.Ct. 43, 72 L.Ed. 184; Jones v. Commissioner (C.C.A.) 38 F. (2d) 550, 552. 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 this 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 (C.C.A.) 52 F.(2d) 923. For many, they are the only tools with which to hew a path- way 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 border-line conclusions. Typical illustrations are cited in the margin.

Ordinary expenses: Commissioner v. People's Pittsburgh Trust Co. (C.C.A.) 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 (C.C.A.) 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, 68 A.L.R. 736, donations to a hospital by a corporation whose employees with their dependents made up two-thirds of the population of the city; Harris & Co. v. Lucas (C.C.A.) 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, 74 L.Ed. 733, where additional compensation, reasonable in amount, was allowed to the officers of a corporation for services previously rendered. Not ordinary expenses: Hubinger v. Commissioner (C.C.A.) 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 (C.C.A.) 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; One Hundred Five West Fifty-Fifth Street v. Commissioner (C.C.A.) 42 F.(2d) 849, and Blackwell Oil & Gas Co. v. Commissioner (C.C.A.) 60 F.(2d) 257, gratuitous payments to stockholders in settlement of disputes between them, or to assume the expense of a lawsuit in which they had been made defendants; White v. Commissioner (C.C.A.) 61 F.(2d) 726, payments in settlement of a lawsuit against a member of a partnership, the effect being to enable him to devote his undivided efforts to the partnership business and also to protect its credit.

The decree should be

Affirmed.


Summaries of

Welch v. Helvering

U.S.
Nov 6, 1933
290 U.S. 111 (1933)

holding that the Commissioner's determinations are presumed to be correct, and the taxpayer bears the burden of proving them wrong

Summary of this case from Cullifer v. Comm'r

holding that the Commissioner's determinations in a notice of deficiency are presumed correct and the taxpayer bears the burden of proving them incorrect

Summary of this case from Branson v. Comm'r of Internal Revenue

upholding disallowance of deduction for taxpayer's payment of debts of a bankrupt corporation because the expenses were incurred only to enhance the taxpayer's "own standing and credit"

Summary of this case from Holt v. U.S.

In Welch Mr. Justice Cardozo emphasized the difference between the "ordinary" and the "necessary" and the need for satisfying both in order to achieve the deduction.

Summary of this case from Commissioner v. Lincoln Savings Loan Assn

stating that Commissioner's determination that expenses were not deductible is a “ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong”

Summary of this case from Reddam v. Comm'r

noting that the Commissioner's "ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong"

Summary of this case from Kanter v. C.I.R

In Welch, which was a case involving deductions, the Court held that the Commissioner's "ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong. Wickwire v. Reinecke, 275 U.S. 101 [ 48 S.Ct. 43, 72 L.Ed. 184]; Jones v. Commissioner, [7th Cir. 1930], 38 F.2d 550, 552."

Summary of this case from AMEY MONGE, INC. v. C.I.R

establishing that burden of proof in Tax Court is on the taxpayer

Summary of this case from Sauers v. Commissioner

In Welch the taxpayer, a former secretary of a bankrupt grain business, later became a commission agent for another grain company.

Summary of this case from M.L. Eakes Co., Inc. v. C. I. R

In Welch, a former officer of a bankrupt corporation paid several debts incurred by the corporation and then sought to deduct the expense as a cost necessary to protect his reputation.

Summary of this case from NCNB Corp. v. United States

In Welch, the former officer of a bankrupt corporation paid off many of the discharged debts of the defunct corporation in order to solidify his own credit and standing in his current profession.

Summary of this case from NCNB Corp. v. United States

In Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933), the Supreme Court ruled that the terms "ordinary and necessary" as used in the statute are not to be given a narrow, restricted, dictionary-type meaning, but are to be applied in each case in the context of the taxpayer's business and the circumstances occasioning the expenditure.

Summary of this case from Kennecott Copper Corporation v. United States

In Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933), the taxpayer made payments to the creditors of a bankrupt corporation in an endeavor to strengthen his own standing and credit.

Summary of this case from Dodd v. Commissioner

In Welch v. Helvering, supra 290 U.S. at page 115, 54 S.Ct. at page 9, there is a dictum that the cost of acquiring learing is a personal expense.

Summary of this case from Coughlin v. Commissioner of Internal Revenue

In Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212, Justice Cardozo discussed the meaning of "ordinary and necessary expenses," pointing out that although payments might be necessary in the development of a taxpayer's business, they could at the same time be charges upon capital rather than ordinary operating expenses.

Summary of this case from Commissioner of Int. Rev. v. Surface Combus

In Welch v. Helvering, 290 U.S. 111, 54 S. Ct. 8, 9, 78 L. Ed. 212, it appeared that the taxpayer had been an active officer of a corporation which had been adjudged a bankrupt.

Summary of this case from Sam P. Wallingford Grain Corp. v. Commissioner

In Welsh v. Helvering, 290 U.S. 111, 54 S. Ct. 8, 9, 78 L. Ed. 212 (decided November 6, 1933), in referring to the terms "the ordinary and necessary expenses," the Supreme Court said: "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."

Summary of this case from Blackmer v. Commissioner of Internal Revenue

discussing the ordinariness of counsel fees in defending a lawsuit

Summary of this case from O'Cheskey v. U.S.

resting the burden of proof in tax disputes on the taxpayer

Summary of this case from Boca Airport, Inc. v. United States

In Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933) the Supreme Court, speaking through Justice Cardozo, eschewed the rigid per se approach, here urged upon us by the Service, in analyzing the meaning of the language "ordinary and necessary", and reasoned instead that "[t]he standard set up by the statute is not a rule of law; it is rather a way of life [and that] [l]ife in all its fullness must supply the answer to the riddle".

Summary of this case from Texas Instruments, Inc. v. United States

In Welch v. Helvering, supra, 290 U.S. 111, at pp. 115-116, 54 S.Ct. at pp. 9-10, 78 L.Ed. 212, Mr. Justice Cardozo put it this way. `Reputation and learning are akin to capital assets, like the good will of an old partnership.

Summary of this case from Fugate v. United States

In Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 9, 78 L.Ed. 212, Justice Cardozo stated the considerations involved in determining whether an expense is "ordinary" and "necessary". He there stated that if the taxpayer considered the expenditure a necessary one, the court "should be slow to override his judgment."

Summary of this case from Wigmore Realty Co. v. United States

In Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 9, 78 L.Ed. 212, which did not pass upon the precise question with which we are concerned, but which did interpret the meaning of section 23(a) for the purpose of arriving at a decision whether certain payments were proper deductions, Mr. Justice Cardozo stated: "The standard set up by the statute is not a rule of law; it is rather a way of life.

Summary of this case from De Blois v. Welch

providing for burden shifting under prescribed conditions

Summary of this case from Rahman v. Comm'r

In Welch v. Helvering, 290 U.S. 111, 113-15, 54 S.Ct. 8, 8-9, 78 L.Ed. 212 (1933), Justice Cardozo contemplated that a once-in-a-lifetime expense of the taxpayer could be an ordinary expense depending on the facts and circumstances surrounding the taxpayer's business.

Summary of this case from In re Placid Oil Co.
Case details for

Welch v. Helvering

Case Details

Full title:WELCH v . HELVERING, COMMISSIONER OF INTERNAL REVENUE

Court:U.S.

Date published: Nov 6, 1933

Citations

290 U.S. 111 (1933)
54 S. Ct. 8
78 L. Ed. 212

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