Thank You For Submiting Feedback!
Congress intends income tax laws to tax earnings and profits less expenses and losses, carrying out a broad basic policy of taxing net, not gross, income. Deductibility under I.R.C. § 23 (a)(1)(A) (1939), is limited to expenses that are both ordinary and necessary to carrying on a taxpayer's business. A finding of "necessity" cannot be made, however, if allowance of a deduction would frustrate sharply defined national or state policies proscribing particular types of conduct, evidenced by some governmental declaration thereof. An income tax regulation reflecting an administrative distinction between legitimate business expenses and those arising from that family of contracts to which the law has given no sanction is valid. Also, where a taxpayer has violated a federal or a state statute and incurred a fine or penalty he has not been permitted a tax deduction for its payment.
In 1951 petitioner Tank Truck Rentals paid several hundred fines imposed on it and its drivers for violations of state maximum weight laws. This case involves the deductibility of those payments as "ordinary and necessary" business expenses under § 23 (a)(1)(A) of the Internal Revenue Code of 1939. Prior to 1950 the Commissioner had permitted such deductions, but a change of policy that year caused petitioner's expenditures to be disallowed. The Tax Court, reasoning that allowance of the deduction would frustrate sharply defined state policy expressed in the maximum weight laws, upheld the Commissioner. 26 T. C. 427. The Court of Appeals affirmed on the same ground.
Was the denial of the deduction of the fines proper?
The Supreme Court affirmed the decision of the appeals court. In allowing deductions for income tax purposes, Congress did not intend to encourage a business enterprise to violate declared state policy. Allowing the deduction of the fines at bar would encourage continued violations of state law by increasing the odds favoring noncompliance and such would destroy the effectiveness of state maximum weight laws.