33 T.C. 861 (1960)
A business expense deduction is disallowed if allowing it would frustrate a clearly defined state public policy, even if the activity generating the expense is subject to a state tax.
Summary
The United States Tax Court considered whether a food broker could deduct the cost of alcoholic beverages purchased in Mississippi and served to business guests in Mississippi, where the sale and possession of alcohol were illegal. The court held that the deduction was not allowable because it would contravene the state’s sharply defined public policy against the traffic in alcoholic liquors, even though the state imposed a tax on illegal alcohol sales. The court also denied the deduction for the cost of the taxpayer’s meals on daily business trips where he returned home at night, finding these to be personal expenses.
Facts
Al J. Smith, a food broker in Mississippi, provided meals and alcoholic beverages to clients and potential clients as part of his business. Mississippi law prohibited the sale, possession, and transportation of intoxicating liquors. Despite the prohibition, the state levied a tax on sales of items prohibited by law, including alcohol. Smith claimed deductions for the cost of alcoholic beverages served to his business guests in Mississippi and for the cost of meals consumed on daily business trips where he returned home. The Commissioner disallowed these deductions.
Procedural History
The Commissioner of Internal Revenue determined a deficiency in Smith’s income tax for the taxable year 1953, disallowing the deductions for the cost of alcoholic beverages and meals. Smith petitioned the United States Tax Court to review the Commissioner’s decision.
Issue(s)
1. Whether the cost of alcoholic beverages, purchased in Mississippi and given to business guests, is deductible as a business expense, given that the sale and possession of alcohol is illegal in Mississippi.
2. Whether the cost of meals consumed by the taxpayer on daily business trips, where he returned home at night, is deductible as a business expense.
Holding
1. No, because allowing the deduction would frustrate the sharply defined public policy of Mississippi against the traffic in alcoholic liquors.
2. No, because the cost of meals consumed on daily business trips where the taxpayer returned home are considered personal expenses and are not deductible.
Court’s Reasoning
The court relied on the principle that a deduction is disallowed when it contravenes a sharply defined state or federal public policy. The court determined that Mississippi had a clearly defined policy against the traffic in alcoholic liquors, evidenced by its prohibition laws and a 1952 referendum where the majority of voters rejected the legalization of alcohol sales. The court found that allowing the deduction for liquor expenses would be inconsistent with this policy. The court distinguished the Mississippi law that taxed illegal liquor sales, finding that it did not negate the state’s policy against liquor sales. The court also disallowed the deduction for the meals on business trips because they were not incurred “away from home” within the meaning of the tax code, but were personal expenses.
Practical Implications
This case highlights the importance of considering state public policy when claiming business expense deductions. Businesses operating in jurisdictions with policies against certain activities (e.g., gambling, controlled substances) should be cautious about deducting expenses related to those activities, even if the activities are taxed. This principle applies regardless of whether the expenses are for the illegal activity itself or for related hospitality. This decision has been cited in numerous cases dealing with the deductibility of business expenses, reinforcing the principle that deductions will not be allowed where they would frustrate a clearly defined state policy. Attorneys must advise their clients on how this rule applies, and when relevant, attempt to argue that the state policy is not clearly defined or that allowing the deduction would not frustrate it.