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Welch v. Helvering | 290 U.S. 111 (1933)
Welch versus Helvering gave the United States Supreme Court an opportunity to act like a Greek oracle by answering three tax questions. The first question asked what is a personal versus a business expense. The second examined what is an ordinary versus a bizarre expense. Finally, the third inquired about when is an expense ordinary and deductible now versus capital and recoverable later. Despite pontificating about life in all its fullness, the Supreme Court only clearly answered the when of these questions, not the what.
Thomas Welch was a businessman for a Minnesota grain company. When that company suffered bankruptcy, Welch set out to secure new contracts and income. Welch’s bankers advised him to repay the old debts even though he had no legal obligation to do so. Welch deducted those debt payments as ordinary and necessary business expenses, arguing that he needed to repair his business reputation and his relationships with customers.
The Internal Revenue Service Commissioner disallowed the deduction of the debt payments because they weren’t ordinary and necessary business expenses and instead were capital expenses to be recovered over a longer period of time. The board of tax appeals agreed with the commissioner. The United States Court of Appeals for the Eighth Circuit also affirmed.
The United States Supreme Court then granted cert.
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