- 16 -
were both ordinary and necessary.” Id. In discussing the case
in the context of the then-current law, the Senate Finance
Committee stated in its report:
Ordinary and necessary trade or business expenses
are generally deductible in computing taxable income.
A recent U.S. Tax Court case allowed deductions for
telephone, auto, and rental expense incurred in the
illegal drug trade. In that case, the Internal Revenue
Service challenged the amount of the taxpayer’s
deduction for cost of goods (illegal drugs) sold, but
did not challenge the principle that such amounts were
deductible.
On public policy grounds, the Code makes certain
otherwise ordinary and necessary expenses incurred in a
trade or business nondeductible in computing taxable
income. These nondeductible expenses include fines,
illegal bribes and kickbacks, and certain other illegal
payments. [S. Rept. 97-494 (Vol. 1), supra at 309.]
The report then expressed the following reasons the committee
intended to change the law:
There is a sharply defined public policy against
drug dealing. To allow drug dealers the benefit of
business expense deductions at the same time that the
U.S. and its citizens are losing billions of dollars
per year to such persons is not compelled by the fact
that such deductions are allowed to other, legal,
enterprises. Such deductions must be disallowed on
public policy grounds. [Id.]
The report explained that the enactment of section 280E has the
following effect:
All deductions and credits for amounts paid or
incurred in the illegal trafficking in drugs listed in
the Controlled Substances Act are disallowed. To
preclude possible challenges on constitutional grounds,
the adjustment to gross receipts with respect to
effective costs of goods sold is not affected by this
provision of the bill. [Id.]
Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Next
Last modified: November 10, 2007