Corporate Tax

Week 1:

Q1: In Deputy v. Du Pont, 308 US 488 (1940) what did the Supreme Court decide shareholder’s payment of the corporation’s business expense could be characterized as? and why?

The Internal Revenue Service classifies expenses into four different categories:

1. Business expenses;

2. The expenses included in the determination of cost of goods sold;

3. Capital expenses;

4. Personal expenses.

Section 162(a) of the Internal Revenue Code defines business expenses as the ordinary and necessary expenses of carrying on a trade or business. Generally business expenses are tax deductible. However, the IRS does not provide a compendium of general business expenses, leaving it to the taxpayer to divine such from its definable criteria, ordinary and necessary. In fact, the terms ordinary and necessary were not defined in the original statute establishing the Internal Revenue Code, leaving it to the tax courts to establish their meanings through case law.

In Deputy v. DuPont, 308 U.S. 488, 495 (1940), the Supreme Court defined ordinary as “normal, usual, or customary”, reaffirming Welch V. Helvering by explaining, that though an expense happen but once in the taxpayer's lifetime, if the transaction giving rise to it is of "common or frequent occurrence in the type of business involved", it is ordinary. It concludes that "the kind of transaction out of which the obligation arose and its normalcy in the particular business...are crucial and controlling" in determining whether the expense is ordinary and, hence, deductible by the taxpayer. A few years later, Commissioner v. Heininger, 320 U.S. 467 (1943) defines the term "normal" as used in the prior two court opinions quoted above in their definition of ordinary, as an expense arising "from an action that is ordinarily to be expected of one in the taxpayer's position".

Accountants CPA Hartford. The Meaning of Ordinary and Necessary Expenses:

No Ordinary Matter But Absolutely Necessary!. Available at:...