Welch v. Helvering

Holding

Payments made to creditors of a discharged bankruptcy debtor with whom the taxpayer was associated were capital expenditures rather than ordinary business expenses.

Facts

Welch personally paid debts of his discharged former employer to restore his own reputation in the trade. He sought to deduct the payments as ordinary business expenses.

Reasoning

Justice Cardozo's opinion articulated that 'ordinary and necessary' is a 'matter of degree' and asked whether the expenditure looked more like a capital outlay for an asset (goodwill). The result was not a clean rule but a multi-factor inquiry that has guided subsequent business-expense cases.