No.

33
U.S.

Welch v. Helvering
290 U.S. 111 (1933) • 54 S. Ct. 8 • 78 L. Ed. 212
Decided Nov 6, 1933

MR. JUSTICE CARDOZO delivered the opinion action of the Commissioner ( 25 B.T.A. 117), and
of the Court. the Court of Appeals for the Eighth Circuit
affirmed. 63 F.2d 976. The case is here on
The question to be determined is whether
certiorari.
payments by a taxpayer, who is in business as a
commission agent, are allowable deductions in the "In computing net income there shall be allowed
computation of his income if made to the creditors as deductions . . . all the ordinary and necessary
of a bankrupt corporation in an endeavor to expenses paid or incurred during the taxable year
strengthen his own standing and credit. in carrying on any trade or business." Revenue Act
of 1924, c. 234, 43 Stat. 253, 269, § 214; 26
In 1922 petitioner was the secretary of the E.L.
U.S.C. § 955; Revenue Act of 1926, c. 27, 44 Stat.
Welch Company, a Minnesota corporation,
9, 26, § 214; 26 U.S.C. App. § 955; Revenue Act
engaged in the grain business. The company was
of 1928, c. 852, 45 Stat. 791, 799, § 23; cf.
adjudged an involuntary bankrupt, and had a
Treasury Regulations 65, Arts. 101, 292, under the
discharge from its debts. Thereafter the petitioner
Revenue Act of 1924, and similar regulations
made a contract with the Kellogg Company to
under the Acts of 1926 and 1928.
purchase grain for it on a commission. In order to
reestablish his relations with customers whom he We may assume that the payments to creditors of
had known when acting for the Welch Company the Welch Company were necessary for the
and to solidify his credit and standing, he decided development of the petitioner's business, at least in
to pay the debts of the Welch business so far as he the sense that they were appropriate and helpful.
was able. In fulfilment of that resolve, he made McCulloch v. Maryland, 4 Wheat. 316. He
payments of substantial amounts during five certainly thought they were, and we should be
113 successive years. In 1924, the commissions *113 slow to override his judgment. But the problem is
were $18,028.20; the payments $3,975.97; in not solved when the payments are characterized as
1923, the commissions $31,377.07; the payments necessary. Many necessary payments are charges
$11,968.20; in 1926, the commissions $20,925.25, upon capital. There is need to determine whether
the payments $12,815.72; in 1927, the they are both necessary and ordinary. Now, what is
commissions $22,119.61, the payments $7,379.72; ordinary, though there must always be a strain of
and in 1928, the commissions $26,177.56, the constancy within it, is none the less a variable
payments $11,068.25. The Commissioner ruled 114 affected by time and place *114 and circumstance.
that these payments were not deductible from Ordinary in this context does not mean that the
income as ordinary and necessary expenses, but payments must be habitual or normal in the sense
were rather in the nature of capital expenditures, that the same taxpayer will have to make them
an outlay for the development of reputation and often. A lawsuit affecting the safety of a business
good will. The Board of Tax Appeals sustained the may happen once in a lifetime. The counsel fees

1
 Welch v. Helvering 290 U.S. 111 (1933)

may be so heavy that repetition is unlikely. None necessary expenses in the operation of a business.
the less, the expense is an ordinary one because His ruling has the support of a presumption of
we know from experience that payments for such correctness, and the petitioner has the burden of
a purpose, whether the amount is large or small, proving it to be wrong. Wickwire v. Reinecke, 275
are the common and accepted means of defense U.S. 101; Jones v. Commissioner, 38 F.2d 550,
against attack. Cf. Kornhauser v. United States, 552. Unless we can say from facts within our
276 U.S. 145. The situation is unique in the life of knowledge that these are ordinary and necessary
the individual affected, but not in the life of the expenses according to the ways of conduct and the
group, the community, of which he is a part. At forms of speech prevailing in the business world,
such times there are norms of conduct that help to the tax must be confirmed. But nothing told us by
stabilize our judgment, and make it certain and this record or within the sphere of our judicial
objective. The instance is not erratic, but is notice permits us to give that extension to what is
brought within a known type. ordinary and necessary. Indeed, to do so would
open the door to many bizarre analogies. One man
The line of demarcation is now visible between
has a family name that is clouded by thefts
the case that is here and the one supposed for
committed by an ancestor. To add to his own
illustration. We try to classify this act as ordinary
standing he repays the stolen money, wiping off, it
or the opposite, and the norms of conduct fail us.
may be, his income for the year. The payments
No longer can we have recourse to any fund of
figure in his tax return as ordinary expenses.
business experience, to any known business
Another man conceives the notion that he will be
practice. Men do at times pay the debts of others
able to practice his vocation with greater ease and
without legal obligation or the lighter obligation
profit if he has an opportunity to enrich his
imposed by the usages of trade or by neighborly
culture. Forthwith the price of his education
amenities, but they do not do so ordinarily, not
becomes an expense of the business, reducing the
even though the result might be to heighten their
income subject to taxation. There is little
reputation for generosity and opulence. Indeed, if
difference between these expenses and those in
language is to be read in its natural and common
controversy here. Reputation and learning are akin
meaning ( Old Colony R. Co. v. Commissioner,
to capital assets, like the good will of an old
284 U.S. 552, 560; Woolford Realty Co. v. Rose,
partnership. Cf. Colony Coal Coke Corp. v.
286 U.S. 319, 327), we should have to say that
Commissioner, 52 F.2d 923. For many, they are
payment in such circumstances, instead of being
116 the only tools with which to hew a pathway *116
ordinary is in a high degree extraordinary. There is
to success. The money spent in acquiring them is
nothing ordinary in the stimulus evoking it, and
well and wisely spent. It is not an ordinary
none in the response. Here, indeed, as so often in
expense of the operation of a business.
other branches of the law, the decisive distinctions
115 are those of degree and not of kind. *115 One Many cases in the federal courts deal with phases
struggles in vain for any verbal formula that will of the problem presented in the case at bar. To
supply a ready touchstone. The standard set up by attempt to harmonize them would be a futile task.
the statute is not a rule of law; it is rather a way of They involve the appreciation of particular
life. Life in all its fullness must supply the answer situations, at times with borderline conclusions.
to the riddle. Typical illustrations are cited in the margin._

The Commissioner of Internal Revenue resorted to _ Ordinary expenses: Commissioner v.

that standard in assessing the petitioner's income, People's-Pittsburgh Trust Co., 60 F.2d 187,
and found that the payments in controversy came expenses incurred in the defense of a

closer to capital outlays than to ordinary and criminal charge growing out of the

2
 Welch v. Helvering 290 U.S. 111 (1933)

business of the taxpayer; American Rolling 117 *117

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 (ef. 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, 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 West 55th Street v.
Commissioner, 42 F.2d 849, and Blackwell
Oil Gas Co. v. Commissioner, 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, 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.

3
Welch v. Helvering 290 U.S. 111 (1933)