Trade or Business Expenses

See IRC § 162(a).

For a deduction based on a business expense, the cost must be:

  • Ordinary and necessary
  • An expense
  • Incurred during the taxable year
  • Carrying on
  • A trade or business activity

Welch v. Helvering

290 U.S. 111 (1933).

Facts

Welch was a business in the grain industry and ultimately went bankrupt. When the company got it’s feet under itself again, the owner paid a considerable amount of the business’s debts over the course of 5 years. He then sought to deduct these as business expenses.

Analysis

Although the commissioner argues the costs are capital expenditures, the characterization does not alter the result. If this is a business expense, this is not ordinary. As such, no deduction can be merited.

A business expense is ordinary if there is a sense of constancy. Although there is no need to have consistent payments, a payment to be unexpected would be extraordinary. For instance, one company may never have lawsuits, but if they are sued, paying legal fees would be an expected result. Here, paying the debts of the business would not be expected of the owner but instead would be the expectation of the business.

Additional Notes

This case is one example of how ordinary and necessary are defined. Necessary includes actions that are appropriate and helpful. Ordinary takes into consideration time, place, and circumstances that are commonly considered normal business activities. Here, the payment was made out of a moral obligation as a goal to increase business investments later.

Jenkins v. Commissioner

T.C. Memo. 1983–667.

Facts

Jenkins was a country performer who went by the name of Conway Twitty. As a country performer, he had much success and eventually a restaurant chain opened up in his name called Twitty Burgers. Although Jenkins was not the owner or operator of the business, he was somewhat involved by being an investor and being the face of the chain. Eventually, the business failed. To protect his image, Jenkins personally refunded all the investors. He then sought to label the cost as a business expense to his artistic career.

Analysis

This does count as a deductable business expense. His entire career is made up of his personality and how it is viewed. If people have a negative connotation of his personality based on lawsuits or failings of Twitty Burger, Jenkins also would have taken a hit. He made the cost not to advantage or save Twitty Burger, but instead to save his artistic career. This was enough to qualify as an ordinary business expense.

Additional Notes

There was a two part test utilized here: (1) ask what the motive of the cost was, (2) whether there was a significant connection between the cost and business.

Estate of Rockefeller v. Commissioner

762 F.2d 264 (2d Cir. 1985).

Facts

Rockefeller spent about 550,000 to help fund the nomination and appointment of himself as Vice President after President Nixon resigned. He sought to deduct some of these costs as business expenses associated with being in public service.

Analysis

Business expenses are deductable if they are “carrying on” an ongoing business practice. This does not mean “starting or beginning” a new business practice. Thus, this case is about determining whether the appointment as VP was carrying on the field of being an executive.

Rockefeller had served as New York governor for around 15 years before he resigned and chaired two committees designed to further public service. Later, he was nominated and appointed as VP. Being a VP is inheritenly different than being a chair on two committees. Also, being a VP is significantly different than being a governor. Although being a governor and VP are both executive functions, their differences are significant enough where it would not be a continuation of the same business.

Additional Notes

Basically, to determine whether an individual is “carrying on” a business, the court will consider the (1) continuity of the job, (2) tasks and whether they are substantially similar, (3) qualifications between the two jobs, (4) personal interests the person may have.

Will Laursen

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