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Commissioner, 343 U.S. 90 (1952); Commissioner v. Sullivan, 356
U.S. 27 (1958); Commissioner v. Tellier, 383 U.S. 687 (1966);
Grossman & Sons, Inc. v. Commissioner, 48 T.C. 15 (1967); and
Edwards v. Bromberg, 232 F.2d 107 (5th Cir. 1956). As we discuss
below, petitioners’ reliance on these cases is misplaced.
Consequently, petitioners’ contention is unpersuasive.
In Lilly v. Commissioner, supra, opticians sought to deduct
payments that they made to eye doctors as ordinary and necessary
business expenses. These payments were made pursuant to
agreements that reflected an established and widespread practice
in that industry whereby the eye doctors agreed to recommend
their patients to certain opticians and the opticians agreed to
pay those referring eye doctors one-third of the retail sales
price that they received for the eyeglasses that they sold. The
Court of Appeals for the Fourth Circuit held such payments
nondeductible on the grounds that they were against public
policy. The Supreme Court reversed, however, holding that the
payments did not stand on the same basis as expenditures that
violated some Federal or State law or that were incidental to
such violations. The Court drew a distinction between these
payments, which were at most professionally unethical, and
outlawed expenditures, which, by virtue of their illegality,
frustrated some sharply defined Federal or State policy.
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