Ordinary and Necessary
i. 162(a): an expense must be ordinary and necessary in the taxpayer’s particular trade or business.
1. Ordinary: has the connotation of normal, usual or customary. To be sure, an expense may be ordinary thought it happens but once in a lifetime
a. Would Warren Buffet spend the money for a good faith business reason to make a buck?
2. Necessary: merely requires that the expense be appropriate and helpful in the taxpayer’s business. (Commissioner v. Tellier (1966))
a. Would Warren Buffet spend the money for a good faith business reason to make a buck?
b. Note: “necessary” is very broad. The Tellier court wasn’t kidding when it said “appropriate and helpful.” Suppose an IBM employee has a hangnail. He didn’t get it from his job. Nonetheless, it is “appropriate and helpful” to IBM’s business for a company doctor to fix the hangnail. Otherwise, the guy’s productivity will decrease.
3. courts usually look harder at the ordinary standard than they do to the necessary standard
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