Commissioner v. Tellier Page 2

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Media for Commissioner v. Tellier

Audio Transcription for Oral Argument - January 27, 1966 in Commissioner v. Tellier

Jack S. Levin:

I think that undoubtedly there is -- there is room here as in most other tax questions for argument as to whether the activities were in fact personal or business in nature in closed cases.

There is no such question in this case where the taxpayer's activities which led to this criminal indictment and conviction were attempts to sell security which in fact he did so approximately $700,000 or $800,000 worth and received commission to total $540,000.

So his activities which gave rise to this lawsuit were clearly business in nature.

The question -- undoubtedly, there are cases where there could be some doubt as to whether the activities were sufficiently business in nature so that your expense in resisting lawsuit would be business rather than personal.

Abe Fortas:

I see.

This is business in nature if it's nondeductible.

Jack S. Levin:

Yes, and we take that position not on the ground that the expense is personal in nature.

The Commissioner concedes that in this case the expenses of resisting a lawsuit are business in nature.

The second ground, the second statutory question is the meaning of the words 'ordinary' and 'necessary', because in order for a business expenditure to be deductible, it must be ordinary and necessary.

That's the statutory language.

Now, this Court has interpreted the words ordinary and necessary, as have the lower courts quite liberally in order to effectuate their purpose and has interpreted them to include in general any expenditures which the taxpayer reasonably expects to further his profit-making purpose, his profit-making business purpose.

There are, however, two questions which arise in relation to this ordinary and necessary phraseology.

The first is that in a 1940 opinion of this Court, the Deputy versus Du Pont, which the Commissioner has at time cited and which the lower courts have also cited.

This Court used language to the following effect.

And he said that in order for an expenditure to be ordinary, it must be of common or frequent occurrence in the type of business involved.

Now, if that test is correct and if that is the law, then we believe that the expenses here in question would have to be disallowed, because as I just stated in answer to Mr. Justice Fortas' question, the expenses of resisting a lawsuit must be viewed in light of the activities which gave rise to the lawsuit.

And here, the expenses of the lawsuit were occasioned by the taxpayer's criminal fraud in his securities business.

And since criminal fraud is certainly not common or frequent in the securities business of this nation, it becomes necessary to decide whether frequency is actually an essential ingredient of the phrase 'ordinary and necessary'.

As spelled out in more detail in our brief, we do not believe that it is.

For if expenses were to be disallowed whenever the activities of the type engaged in by the taxpayer were not common or frequent in his business or industry, we think this rationale would apply in cases not involving criminal violations at all but would tend to discourage business initiative and innovation.

A result that certainly is not suggested or compelled by either the statutory language, the purpose or the legislative history of the relevant code provisions.

Abe Fortas:

Does the record show whether the respondent was engaged in a general securities business or was this an isolated transaction?

Jack S. Levin:

The record is rather scanty, Your Honor, but we have cited in our brief in a footnote, the Second Circuit's opinion affirming his criminal conviction.

And in that case, the facts are set forth at much greater length, but also the facts in the record are also ample to demonstrate.

The taxpayer was regularly engaged in the securities business.

He employed 25 to 30 salesmen who were, I believe from the record, mainly on his premises making telephone calls and attempting to induce costumers to purchase securities.

Abe Fortas:

And there was only part of his securities business that was involved here, is that right?

Jack S. Levin:

That's correct.

The indictment related only to one securities issue, to one company for separate issuances of debentures for that company.

Taxpayer dealt mainly in securities which sold for under $1 and which were issued principally by companies which had no earnings record, had never engaged in business before, new enterprises.