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.
