Legal Definitions - public-policy limitation

Definition: Public-policy limitation is a principle developed by the courts that prevents a person from deducting expenses related to an activity that goes against the public welfare. This principle is reflected in the Internal Revenue Code's specific disallowance provisions, such as for kickbacks and bribes.

Example: Let's say a company tries to deduct expenses related to bribing a government official to secure a contract. This deduction would be disallowed under the public-policy limitation principle because it goes against the public welfare and is illegal.

Explanation: The example illustrates how the public-policy limitation principle prevents individuals or companies from deducting expenses related to illegal or unethical activities. In this case, bribing a government official is not only illegal but also goes against the public welfare by undermining the integrity of the government's procurement process. Therefore, the deduction is disallowed to discourage such behavior and promote ethical business practices.