Brief Fact Summary. Respondent was in the business of underwriting public stock offerings. He was charged and convicted of multiple counts of securities fraud and mail fraud. He expended $22,964 in his criminal defense and deducted these on his tax return.
Synopsis of Rule of Law. The federal income tax is a tax on net income and not a sanction against wrongdoing.
Issue. Whether the expenses incurred by Respondent in the defense of the criminal prosecution are deductible as ordinary and necessary business expenses.
Held. Justice Stewart issued the opinion for the Supreme Court of the United States affirming the Court of Appeals and holding that the criminal defense expenses are deductible.
Discussion. The Supreme Court rejected the public policy argument by the Commissioner that the deduction should not be allowed because he was facing criminal charges. Rather, the Court noted that it is a constitutional right to be entitled to a criminal defense. Further, the Court found that Respondent was facing the charges as a result of his business and these expenses qualified as ordinary and necessary.