Introduction
Expenses, which are not a taxpayer’s usual and required expenditures, are not taxable under income statutes and regulations for calculating net earnings according to the P.290 U.S. 115 act (Welch v. Helvering, 1933). There is a slight variation between regular and basic expenses that the corporation occasionally overstates. According to Section 162 of the Internal Revenue Code, expenditures of a commercial liability by a non-corporate insurer are not taxable. In general, paying someone else’s debts is not a cost that is taxable under Article 162.
Discussion
The E. L. Welch Company was involved in the cereal industry in the trial of Welch v. Helvering. Their unintentional insolvency led to the relief from their obligations. Then, they entered into a deal with the Kellogg Company, and over five years, they made large repayments under that agreement. According to the Internal Revenue Commissioner’s decision, the installments made throughout the years to the Kellogg Company, deductions from regular earnings, and basic expenses did not happen. The investment from the company’s intention was to build reputation and trust. The resolution by the board prevailed, and the payments were not taxable.
In the trial of Thompson, Jr., he bought 50 percent of Cardinal Gem Coal Company, Inc., while his father held the remaining half. After the enterprise had financial setbacks, Thompson took over the company and attempted unsuccessfully to sell off the company’s property to pay off creditors. Cardinal Gem eventually filed for bankruptcy and was liquidated. He had a solid ethical need to repay the loans (Cornell Law School, 2010). The prosperity of Thompson & Litton, which was his own company, was negatively impacted by this. According to one of the sessions’ reports regarding one of the agreements with consumers, the customer is a debtor of Cardinal Gem. Cardinal Gem’s outstanding bills embarrassed the petitioner.
Eventually, they cleared off the loan, received the agreement, and made money. In this issue, the petitioner reported reimbursements of Cardinal Gem’s obligations on his tax filing. The determination was that the settlement served Thompson and Litton’s commercial interests (Thompson v. Commissioner, 1983). It was established out of a feeling of personal dignity, moral responsibility, and fairness to previous lenders but serviced no significant corporate advantage of Thompson and Litton. The compensation paid to Cardinal Gem Coal firm, Inc. debtors, was not taxable because there was no direct commercial tie.
William A. Thompson, Jr.’s situation is analogous to Richard Penn’s. Richard also thought the company’s accomplishment was directly related to his profile. Since Richards specialized in real estate development, many of the Oil Company’s debtors were also its lenders. He believed there was a connection between the oil company’s insolvency and his firm’s decline. As a result, he used the firm’s accrued earnings to pay his creditors. Therefore, the question was whether Richard could deduct the amount from his taxable income or not. There was no immediate monetary tie between the petroleum company and the corporation because of the direct reimbursements to the oil company’s lenders rather than the firm’s borrowers. The settlement of another obligation does not qualify, as a regular or essential expenditure is deductible under section 162 of the IRC.
Conclusion
In summary, amounts paid out of consciousness to uphold one’s moral principles or for other reasons have no advantage for the company. Since Richard believed that the oil firm was to blame for his firm’s decline, he was able to compensate the company’s lenders. Richard made this contribution out of integrity; it was not a regular or essential expenditure. Additionally, it was a debt owed to a different firm, which is not taxable according to Internal Revenue Code subsection 162.
References
Cornell Law School. (2010). 26 U.S. Code § 162 – Trade or business expenses. LII / Legal Information Institute. Web.
THOMPSON v. COMMISSIONER | 46 T.C.M. 1109 (1983) | tcm11091905 | Leagle.com. (n.d.). Leagle. Web.
Welch v. Helvering, 290 U.S. 111 (1933). (1933). Justia Law. Web.