LOCATION: United States Department of Justice
DOCKET NO.: 351
DECIDED BY: Warren Court (1965-1967)
LOWER COURT: United States Court of Appeals for the Second Circuit
CITATION: 383 US 687 (1966)
ARGUED: Jan 27, 1966
DECIDED: Mar 24, 1966
Facts of the case
Media for Commissioner v. Tellier
Audio Transcription for Oral Argument - January 27, 1966 in Commissioner v. Tellier
Number 351, Commissioner of Internal Revenue, Petitioner versus Walter F. Tellier, et ux.
Jack S. Levin:
Mr. Chief Justice, may it please the Court.
This income tax case presents the question whether a taxpayer who has been convicted of a criminal offense arising out of his business activities may take a deduction on his income tax return for the expenses incurred in defending against the criminal prosecution which resulted in conviction.
Respondent was in the business of underwriting and selling securities.
He was indicted in a Federal District Court on 36 counts charging that he had knowingly and intentionally made false and fraudulent representations which induced the public to invest hundreds of thousands of dollars in an insolvent enterprise.
The indictment charged violations of three federal statutes, the fraud provision of the Securities Act of 1933, the mail fraud statute and the federal conspiracy statute.
After a full trial to a jury, respondent was convicted on all 36 counts.
The judge sentenced him to four-and-a-half years imprisonment on each count, the sentence is to run concurrently, and a total fine of $18,000.
In connection with his defense of this criminal prosecution, petitioner -- respondent paid his attorney approximately $23,000.
This case concerns the question whether he can deduct that approximately $23,000 from his other income.
The Tax Court following an administrative and judicial rule of approximately 40-year standing disallowed the deduction.
The Second Circuit en banc overruled a number of that court's prior decisions and held that the $23,000 incurred in connection with the criminal prosecution was in fact deductible.
The governing statute in this case is Section 162 of the Internal Revenue Code of 1954 which is the general provision allowing a deduction for ordinary and necessary expenses incurred in carrying on a trade or business.
The position of the Commissioner of Internal Revenue which has enjoyed at least 40 years of consistent judicial acceptance both in the trial courts and the Court of Appeals is that expenses incurred in defending against a criminal prosecution which results in the taxpayer's conviction are not deductible.
This position is bottomed upon the public policy expressed in the statute which the taxpayer is convicted of violating.
The Commissioner in the courts had, at various times, expressed this theory in a couple of different ways.
At times, they have said that the expenses are not ordinary and necessary and other times they have stated that the expenses are nondeductible because they violate the public policy expressed by the state legislature or by Congress in enacting the criminal statute.
In essence, regardless of the way of phrasing it, the Commissioner believes that the theory of nondeductibility is premised upon the public policy ground.
That is that Congress or the state legislature in prohibiting criminal acts could not have been intending that a taxpayer receive a deduction for his expenses of resisting a suit which results in his conviction.
In this case, the Solicitor General in the brief has expressed some doubts as to whether the public policy doctrine, which as I will point out in a moment this Court has accepted in other contexts in tax cases, extends to the disallowance of attorney's fees.
However, the Commissioner of Internal Revenue declined to abandon this position which had long standing support in the cases both trial and appellate, and therefore, the Solicitor General has applied for certiorari which was granted.
During the course of this argument, I will attempt to set forth the reasoning which underlies both the position of the Commissioner and the Solicitor General.
However, before doing that, I would like to deal with two preliminary statutory questions which I think will put the public policy question in proper perspective.
First, Section 262 of the Internal Revenue Code specifically states that no deduction shall be allowed for personal expenses.
While it can be argued that the expenses of attempting to avoid a criminal conviction and possible imprisonment are personal in nature, the Commissioner does not believe that this case can be disposed of on that ground.
In a number of cases involving the deductibility of attorney's fees incurred in defending civil lawsuits, this Court has recognized that whether the expenses of resisting a lawsuit are to be regarded as personal or business in nature depends on the type of activities out of which the claim arose, rather than upon the consequences losing a suit would have on the taxpayer.
For example, if the taxpayer engaged in the business of delivering packages is involved in an accident and defend the tort suit arising out of that accident, his expenses of resisting the damage claim would be deductible, because the origin of the suit would be his business activities.
Whereas if the same taxpayer was on the way to a cocktail party was engaged in an automobile accident, his expenses of resisting a lawsuit would be personal in nature.
Suppose you're on the way to a business, to a friend of yours to plainly discuss the business and he had an automobile accident?