Commissioner v. Tellier
383 U.S. 687 (1966)

  • Tellier was an underwriter who was involved in buying and selling securities. He was arrested on suspicion of mail fraud related to some shady securities deals.
    • Eventually, Tellier was convicted of fraud and sentenced to 4.5 years in prison.
  • Tellier spent almost $23k for his unsuccessful defense against the criminal charges. He claimed the $23k as a deduction on his taxes. The IRS denied the deduction. Tellier appealed.
    • Tellier argued that the $23k was a business expense and thus deductible under 26 U.S.C. 162.
  • The Tax Court found for the IRS. Tellier appealed.
    • The Tax Court conceded that the money was spent while "carrying on a trade or business," and that the expenses were "ordinary and necessary," and thus met the literal requirements of 162.
    • However, the Tax Court found that it was against public policy to give tax benefits to help people defend against criminal charges.
  • The Appellate Court reversed. The IRS appealed.
  • The US Supreme Court affirmed and allowed the deduction.
    • The Court noted that criminals are still expected to pay taxes on income from criminal activities. So it would only be fair to allow them to claim the same deductions as would normally apply to legal activities.
      • The Court looked to their decision in United States v. Sullivan (274 U.S. 259 (1927)), which said that, "the fact that a business is unlawful does not exempt it from paying the taxes that if lawful it would have to pay."
    • The US Supreme Court found that nothing in 162 said anything about public policy exceptions.
      • The Court noted that Congress was silent on the issue, and if they wanted to restrict 162 by adding a public policy exception they were free to do so, but so far they hadn't.
    • The Court found that defending oneself against criminal charges is itself legal and desirable, so is not against public policy anyway.
      • In fact, taxing defense costs makes it more likely that an innocent man will not be able to pay his attorney's fees and would chose to plead guilty. That would be against public policy.