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EXPENSES & DEDUCTIONS

necessary for this purpose if it is ap- purposes of interpreting the “ordinary enable the emission reduction actions of
propriate and helpful to the taxpayer’s and necessary” requirement. In Welch v. another party.
business. In determining whether an Helvering,13 the Supreme Court famous-
expenditure is appropriate and helpful, ly addressed principles regarding meet- Jenkins
the taxpayer’s judgment should generally ing this standard. Justice Benjamin N. The courts recognize that it is not
be respected. The relationship between Cardozo, writing for the Court, stated: “ordinary” that a party voluntarily pay
an expense and the income it is matched the obligations of another. As in Welch,
to is key in determining a transaction’s Now, what is ordinary, though there the analysis looks to the “why” for the
tax consequences across the Internal must always be a strain of constancy transaction. In Jenkins,15 the taxpayer,
Revenue Code. For example, Regs. Sec. within it, is none the less a variable the well-known singer Conway Twitty,16
1.269-2 states: affected by time and place and cir- repaid amounts to investors in a restau-
cumstance. … At such times there rant business, Twitty Burger Inc., upon
Under the Code, an amount oth- are norms of conduct that help to its demise. Although he was under no
erwise constituting a deduction, stabilize our judgment, and make it obligation to make these payments, he
credit, or other allowance becomes certain and objective. The instance presented a winning case that they were
unavailable as such under certain is not erratic, but is brought within a made to protect the existing reputation
circumstances … in which the effect known type. … The standard set up he had established in his trade or busi-
of the deduction, credit, or other by the statute is not a rule of law; it ness as an entertainer with his country
allowance would be to distort the is rather a way of life. Life in all its music fan base.
liability of the particular taxpayer. fullness must supply the answer to The Tax Court distinguished the
… The distortion may be evidenced, the riddle. situation from that in Welch in the fol-
for example, by the fact that the lowing manner:
transaction was not undertaken for Welch is relevant to the analysis of
reasons germane to the conduct of the deductibility of the payment for An exception to the general rule
the business of the taxpayer.12 VCOs. Offsets, along with many other that one person may not deduct the
aspects of ESG implementation, are still expenses of another person has been
Elements of this regulation are nascent and developing but within the recognized in those cases where the
similar in underlying tone to the re- norm of facts-and-circumstances busi- expenditures sought to be deducted
quirement that a deductible expense be ness judgment. were made by a taxpayer to protect
“ordinary and necessary” relative to the Ultimately, the Court found that or promote his own ongoing busi-
purpose of the business. the payments in question in Welch were ness, even though the transaction
The requirement of a proximate capital in nature for the ongoing benefit originated with another person. … In
relationship between an expenditure and development of the business rather order to determine whether the disal-
and deductibility is foundational to the than just benefiting the current period: lowed expenditures are deductible by
income tax framework. An assessment “Reputation and learning are akin to petitioner under section 162 we must
of “income” is based on a measurement capital assets, like the good will of an old (1) ascertain the purpose or motive of
of the net accretion of wealth in a given partnership.”14 the taxpayer in making the payments
period. Therefore, it is important to The payment of amounts in ques- and (2) determine whether there is
have a link between trade or business tion in Welch was made on behalf of a sufficient connection between the
revenue generated and the ordinary and another party without any obliga- expenditures and the taxpayer’s trade
necessary expenses paid or incurred to tion to do so. The taxpayer made the or business. [citation omitted]
generate that revenue. payments to repair and enhance his
reputation as he began a new business. The court agreed that the purpose
Welch v. Helvering The circumstance raises similarities to for the payments was to protect Twitty’s
The courts have often assessed the modern-day VCO payments. The pay- existing, and primary, business as a
rationale underpinning an expense for ments are not required and are made to country music entertainer. The payments

12. Regs. Sec. 1.269-2(b), applicable to acquisitions made to evade or avoid 14. Id. at 115, likening the petitioner’s payments to those for education that
income tax, most often of a “loss corporation.” enables a taxpayer to “practice his vocation with greater ease and profit.”
13. Welch v. Helvering, 290 U.S. 111 (1933). 15. Jenkins, T.C. Memo. 1983-667.
16. The stage name of the petitioner, Harold L. Jenkins.

22 January 2022 The Tax Adviser