Court Opinion

ID: 9473309
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:26:07.05365+00
Date Added: 2024-06-11T17:43:26.922297
License: Public Domain

NATHANIEL R. JONES, Circuit Judge,
dissenting.
With due respect for the views of my esteemed colleagues, I am compelled to dissent. My views are straightforward. The issue in this case is whether legal kickback payments by Car-Ron Asphalt Paving Company are deductible under I.R.C. § 162(a) as “ordinary and necessary” business expenses. In Raymond Bertolini Trucking Co. v. Commissioner, 736 F.2d 1120 (6th Cir.1984), this Court reversed the Tax Court when it applied an erroneous legal standard to disallow legal kickback payments. Under virtually identical facts, this Court held that such payments were “ordinary” business expenses and properly deductible. Id. at 1125. The majority acknowledges that Bertolini controls our consideration of whether legal kickback payments are deductible as “ordinary.” It affirms, however, as not clearly erroneous, the Tax Court’s conclusion that the pay*1135ments were not “necessary” expenses. The Tax Court arrived at this conclusion by committing the reversible legal error of defining “necessary” expenses to include only “essential” expenses.
The proper question is whether Car-Ron’s legal kickback payments were “appropriate and helpful” for developing its business. The Supreme Court has consistently construed “necessary” as imposing “only the minimal requirement that the expense be ‘appropriate and helpful’ for the ‘development of the [taxpayer’s] business.’ ” Commissioner v. Tellier, 383 U.S. 687, 689, 86 S.Ct. 1118, 1119, 16 L.Ed.2d 185 (1966) (brackets in original) (citing Welch v. Helvering, 290 U.S. 111, 113, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933)); Mason & Dixon Lines, Inc., 708 F.2d 1043, 1046 (6th Cir.1983). Rather than apply this minimal standard, the Tax Court merely demonstrated that Car-Ron’s legal kickback payments were not essential to its business.
Car-Ron received two contracts worth approximately $1,000,000 only by paying $92,-000 in legal kickbacks to Nicholas Festa, who controlled the bidding process. Car-Ron’s president testified that he believed that executing the contracts could lead to further business by enhancing the company’s reputation. The legal kickback payments were both “appropriate and helpful” for the development of Car-Ron as a business. Courts should be “slow to override his [the taxpayer’s] judgment” of whether expenses are “appropriate and helpful.” Welch v. Helvering, 290 U.S. 111, 113, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933).
The majority purports to apply the “appropriate and helpful” standard to the facts of this case. The majority determines as a matter of fact that the legal kickback payments were not “helpful” because the payments reduced Car-Ron’s profits by $90,000. Yet, the Tax Court’s findings of fact reveal that Car-Ron would not have received approximately $1,000,000 in contracts without the legal kickback payments. The majority also finds that Car-Ron’s legal kickback payments were not “appropriate.” This finding, unsupported by either precedent or reasoning, disregards the substance of I.R.C. § 162(c), which expressly prohibits the deduction of illegal kickback payments. The majority does not distinguish the kickbacks in this case from any other legal kickbacks. Although the majority characterizes its holding as a finding of fact, this interpretation of the threshold requirement of “ordinary and necessary”, effectively renders I.R.C. § 162(c) superfluous.
Despite the majority’s understandable expression of moral indignation, Car-Ron’s kickback payments were legal under Ohio law. This Court has stated that “Congress has written the tax laws so as to allow deductions for such costs [legal kickback payments] so long as the payments made are within the bounds of federal and state law.” Bertolini, 736 F.2d at 1125. The majority warns that dishonesty results from construing tax statutes to reward graft and corruption. Tax law, however, is morally neutral and should not be used as “a sanction against wrongdoing.” Tellier, 383 U.S. at 691, 86 S.Ct. at 1120. Further, even if the majority’s concern were appropriate, deduction of legal kickback payments does not encourage dishonesty. Here, as in Bertolini, legitimate deductions for legal kickback payments revealed Festa’s income tax evasion and led to his conviction for tax fraud.
Car-Ron’s legal kickback payments are deductible under I.R.C. § 162(a) as “ordinary and necessary” business expenses. Under this Court’s holding in Bertolini, these payments were “ordinary.” The Tax Court’s findings establish that the payments were “necessary” for Car-Ron’s receipt of the contracts. For these reasons, I respectfully dissent.