## Facts

- Walter F. Tellier was a securities dealer engaged in underwriting stock offerings and buying securities for resale to customers.
- In 1956, Tellier was prosecuted under a 36-count indictment alleging securities fraud, mail fraud, and conspiracy tied to his securities business activities.
- Tellier was convicted on all counts, fined $18,000, sentenced to prison, and his conviction was affirmed on appeal.
- Tellier paid $22,964.20 in legal fees in 1956 to defend the criminal case and claimed the amount as a business-expense deduction on his federal income tax return.
- The Commissioner disallowed the deduction; the Tax Court sustained the disallowance.
- The Second Circuit (en banc) reversed, holding the fees deductible as ordinary and necessary business expenses under IRC § 162(a).

## Issues

1. Whether legal expenses incurred in an unsuccessful criminal defense are deductible as “ordinary and necessary” business expenses under IRC § 162(a) when the prosecution originates in the taxpayer’s trade or business.
2. Whether a generalized “public policy” objection permits denial of a deduction that otherwise satisfies § 162(a).

## Decision

- The Supreme Court affirmed the Second Circuit and held the legal fees deductible under § 162(a).
- The Court treated the fees as expenses of carrying on Tellier’s securities business because the criminal charges arose from his business activities.
- The Court rejected the Commissioner’s public-policy objection, holding that deductions otherwise permitted by § 162(a) are disallowed only in narrow circumstances.
- The Court emphasized that federal income tax is imposed on net income and is not an additional punishment for wrongdoing.
- The Court concluded that deducting costs to exercise the constitutional right to counsel does not offend public policy.

## Legal Principles

- Whether an expense is “business” or “personal” under § 162(a) turns on the origin and character of the claim giving rise to the expense, not the expense’s potential consequences to the taxpayer.
- Expenses that otherwise fall within § 162(a) may be denied on public-policy grounds only when allowing the deduction would severely and immediately frustrate sharply defined national or state policies proscribing particular conduct, typically evidenced by governmental declarations such as statutes or regulations.
- The term “necessary” in § 162(a) requires only that the expense be appropriate and helpful to the taxpayer’s business.
- Legal fees incurred to defend criminal charges that originate in the taxpayer’s business are deductible under § 162(a), even when the defense is unsuccessful, absent a specific and clearly articulated policy that would be directly undermined by the deduction.

## Conclusion

The Court held that business-origin criminal defense fees qualify as deductible ordinary and necessary business expenses under IRC § 162(a), and that a deduction may be denied on public-policy grounds only when it would severely and immediately frustrate a sharply defined governmental policy—conditions not met by deducting costs incurred to retain counsel in a criminal prosecution arising from business conduct.


Commissioner v. Tellier, 383 U.S. 687 (1966)