WELCH V. HELVERING, 290 US 111 (TAX)

Issue: Whether payments by taxpayer, who is in business as a commission agent, are allowable deductions in the computation of his income if made to the creditors of a bankrupt corporation in a endeavor to strengthen his own standing and credit.

We may assume that the payments to creditors of the Welch Company were necessary for the development of the petitioner's business as least in the sense that they were appropriate and helpful. But the problem is not solved when the payments are characterized as necessary. Many necessary payments are charges upon capital. There is a need to determine whether they are both necessary and ordinary.

Now what is ordinary is nonetheless a variable affected by time and place. Men do at times pay the debts of others without legal obligation or the lighter obligation imposed by the usages of trade or by neighborly amendities, but they do not do so ordinarily, not even though the result might be to heighten their reputation for generosity and opulence. Indeed, if language is to be read in its natural and common meaning, we should have to say that payment in such circumstances, instead of being ordinary is in a high degree extraordinary. There is nothing ordinary in the stimulus evoking it, and none in the response.

Reputation and learning are akin to capital assets, like the goodwill of an old partnership. For many, they are the only tools with which to hew a path way to success. The money spent in acquiring them is well and wisely spent. It is not ordinary expense of the operation of a business.