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Describe what the IRS means by “both ordinary and necessary.”

Describe what the IRS means by “both ordinary and necessary.”

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Describe what the IRS means by “both ordinary and necessary.”
Tax code 280e was created in 1982 after Jeffrey Edmondson, a Minneapolis-based man who dealt amphetamines, cocaine, and marijuana, won a lawsuit against the IRS to claim business expenses. During the taxable year of 1974, Edmondson received 1.1 million amphetamine pills, 100 pounds of marijuana, and 13 ounces of cocaine from a supplier on consignment. Edmondson reported on his 1974 return that his cost of goods sold for these products was $105,300, itemizing deductions, which included a couple thousand miles he put on his automobile, the cost of a scale to weigh his product, packaging costs, a couple hundred dollars in long-distance and local business calls and a portion of his rent for his home office. The court decided that he was entitled to "both ordinary and necessary" business expenses in 1981. The next year, however, Congress passed tax code 280e, banning businesses that trafficked Schedule I or Schedule II substances from taking business expenses besides the cost of goods sold.
Transcribed Image Text:Tax code 280e was created in 1982 after Jeffrey Edmondson, a Minneapolis-based man who dealt amphetamines, cocaine, and marijuana, won a lawsuit against the IRS to claim business expenses. During the taxable year of 1974, Edmondson received 1.1 million amphetamine pills, 100 pounds of marijuana, and 13 ounces of cocaine from a supplier on consignment. Edmondson reported on his 1974 return that his cost of goods sold for these products was $105,300, itemizing deductions, which included a couple thousand miles he put on his automobile, the cost of a scale to weigh his product, packaging costs, a couple hundred dollars in long-distance and local business calls and a portion of his rent for his home office. The court decided that he was entitled to "both ordinary and necessary" business expenses in 1981. The next year, however, Congress passed tax code 280e, banning businesses that trafficked Schedule I or Schedule II substances from taking business expenses besides the cost of goods sold.
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