Welch v. Helvering

Brief Fact Summary. Petitioner worked for a company that went bankrupt. After receiving a job with another company he decided to pay off debts of the bankrupt company to extent that he was able in order to repair his credit and standing.

Synopsis of Rule of Law. In computing net income one may deduct ordinary and necessary expenses incurring in carrying on any trade or business.

Facts. Petitioner was the secretary of the E.L. Welch Company which was involved in the grain business. The went bankrupt and was discharged from its debts. Petitioner entered into a contract with the Kellogg Company to purchase grain for it on commission. Petitioner decided to pay the debts of the Welch Company in order to repair his credit and standing from the bankruptcy of the Welch Company. The Commissioner ruled that these payments of the debts were not deductible from income as ordinary and necessary business expenses. The Board of Tax Appeals sustained and the Court of Appeals affirmed.

Issue. Are the expenses deductible as ordinary and necessary business expenses?

Held. Justice Cardozo issued the opinion for the Supreme Court of the United States in affirming the lower court and holding that the expenses are not deductible as ordinary and necessary business expenses.

Discussion. The Supreme Court found no evidence that these expenditures were ordinary or necessary in the world of business or in operating a business. Rather the Court found this to be an extraordinary circumstance and not commonly found or expected in any business.