Rev. Rul. 66-330

Reconsideration has been given to I.T. 2303, C.B. V-2, 38 (1926), Revenue Ruling 62-175, C.B. 1962-2, 50, and Revenue Ruling 64-224, C.B. 1964-2, 52, in light of the decision in the case of Commissioner v. Walter F. Tellier et ux, 383 U.S. 687 (1966), Ct. D. 1907, C.B. 1966-1, 32, handed down by the Supreme Court of the United States on March 24, 1966.

I.T. 2303 holds that attorneys' fees and legal expenses incurred by a corporation in defending an indictment for an alleged violation of the Sherman Act are not "ordinary and necessary expenses" in carrying on a trade or business irrespective of the guilt or innocence of the taxpayer.

Revenue Ruling 62-175 holds that attorneys' fees and related legal expenses paid or incurred in the unsuccessful defense of a prosecution for a criminal violation of the Sherman Anti-Trust Act are not deductible under section 162 of the Internal Revenue Code of 1954.

Revenue Ruling 64-224 holds, in part, that legal expenses paid or incurred in the unsuccessful defense of claims by the United States under section 4A of the Clayton Act or under the Federal False Claims Act, are not deductible under section 162 of the Code.

In the Tellier decision, the Supreme Court held that legal expenses incurred by the taxpayer for the unsuccessful defense of a business-related criminal prosecution for violation of the Securities Act of 1933 and the mail fraud statute are deductible as ordinary and necessary business expenses under section 162(a) of the Code.

The Internal Revenue Service will apply the principle of the Tellier decision and will allow as deductions attorneys' fees and related legal expenses paid or incurred in the unsuccessful defense of a prosecution for violation of the Sherman Anti-Trust Act or in the unsuccessful defense of claims under section 4A of the Clayton Act or the Federal False Claims Act, provided such expenditures are otherwise deductible under the Code as ordinary and necessary business expenses. Such deductions will no longer be disallowed on the ground that allowance of such deductions would frustrate sharply defined public policy.

Accordingly, I.T. 2303 and Revenue Ruling 62-175 are revoked. Revenue Ruling 64-224 is modified to the extent it denies the deduction of business-related legal expenses.

¹ Also released as Technical Information Release 861, dated Oct. 12, 1966.