## Facts

- Thomas Welch, a commission agent in the grain business, had been secretary of E. L. Welch Company, which was adjudged an involuntary bankrupt and discharged from its debts.
- After the bankruptcy, Welch began working as a commission agent for another company in purchasing grain.
- To restore his reputation and credit with former customers, Welch voluntarily paid debts of the bankrupt corporation, despite having no legal obligation to do so.
- Welch made substantial payments over multiple tax years and claimed deductions for those payments on his individual returns as “ordinary and necessary” business expenses.
- The Commissioner of Internal Revenue disallowed the deductions, treating the payments as capital outlays for reputation and goodwill; the Board of Tax Appeals and the Eighth Circuit affirmed.

## Issues

1. Whether voluntary payments made to satisfy a discharged corporation’s debts to improve the taxpayer’s own credit and standing are “ordinary and necessary” expenses incurred “in carrying on” a trade or business and therefore deductible.
2. Whether the Commissioner’s determination that the payments were not deductible was entitled to a presumption of correctness not overcome by the taxpayer.

## Decision

- The Supreme Court affirmed the judgment disallowing the deductions.
- The Court accepted that an expense may be “necessary” if it is appropriate and helpful to the business, but held the payments were not “ordinary.”
- Paying another’s discharged debts without legal obligation, even for business reasons, was not a common or customary business practice and therefore failed the “ordinary” requirement.
- The Commissioner’s classification was presumptively correct, and the taxpayer did not carry the burden of showing the determination was wrong.

## Legal Principles

- “Necessary” business expenses include those appropriate and helpful to the conduct or development of a business, not only those indispensable to operations.
- “Ordinary” requires that the type of expense be normal or customary in the relevant business community, not merely sensible or advantageous to the taxpayer.
- Voluntary payment of another entity’s debts to create or restore business reputation and goodwill is generally more akin to a capital outlay than a current operating expense.
- The Commissioner’s deficiency determinations are presumptively correct; the taxpayer bears the burden of proving entitlement to a deduction.

## Conclusion

The Court held that voluntary repayment of a bankrupt corporation’s discharged debts to rebuild the taxpayer’s business credit was not an “ordinary” expense of carrying on the taxpayer’s trade or business and therefore was not deductible, and the Commissioner’s disallowance was properly sustained.


Welch v. Helvering, 290 U.S. 111 (1933)