TAM 200004001: Stadium ticket right may be deductible when the S corporation pays

Plain-English summary

An S corporation paid a university foundation for a skybox package that included the right to buy football tickets, the tickets, skybox use, parking, and guest passes. The IRS advised that 80% of the portion paid for the right to buy tickets could be deductible under § 170(l), even for skybox seating, but the tickets and other benefits were not deductible under that rule. Section 274(l)'s skybox limit did not disallow the qualifying charitable deduction because of § 274(f). The IRS left valuation of the separate benefits to the field. Although the corporation authorized the payment before year end, the deduction passed through to its shareholder only in the later year when the corporation actually paid; the special accrual basis corporation election in § 170(a)(2) did not apply to an S corporation.

Ruling snapshot

• Question: What portion of the skybox payment is deductible, and when may the S corporation shareholder take it?
• Outcome: Mixed: 80% of the ticket purchase right portion may qualify, but the shareholder cannot deduct it before the payment year.
• Key authorities: IRC §§ 170(l), 170(a)(2), 274(f), 274(l), 1363(b), 1366(a).

Full text (IRS public release)

                          INTERNAL REVENUE SERVICE
                NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM
                                  July 7, 1999

Number: 200004001
Release Date: 1/28/2000
Index (UIL) Numbers:    170.00-00; 274.13-02; 1366.00-00.
CASE MIS Number:        TAM-122293-98/CC:DOM:IT&A:B3




         Taxpayer’s Name:
         Taxpayer’s Address:


         Taxpayer’s Identification No:
         Years Involved:
         Date of Conference:

LEGEND:

S Corporation         =

Individual            =

University            =

Foundation            =

Date 1                =

Date 2                =

Date 3                =

Year 1                =

Year 2                =

$A                    =

$B                    =

$C                    =



$D                   =

$E                   =

$F                   =

$G                   =

$H                   =

Z                    =

Y                    =

X                    =

W                    =


ISSUES:

(1) Is a portion of the payment to a state university’s foundation, for which the donor
receives the right to purchase tickets for seating in a skybox at athletic events in an
athletic stadium of such university, deductible under 170(l)?

(2) Is a portion of the payment to a state university foundation, for which the donor
receives the right to purchase tickets for seating in a skybox at athletic events in an
athletic stadium of such university, that is otherwise deductible under § 170(l),
disallowed because of the limitations of § 274(l)?

(3) If an accrual-basis subchapter S corporation authorizes a charitable contribution on
the last day of its taxable year and pays the contribution by the 15th day of the third
month following the close of its taxable year, may the S corporation elect to treat such
charitable contribution as paid during such taxable year under § 170(a)(2), or is the
charitable deduction properly taken when paid under § 170(a)(1)?


CONCLUSIONS:

(1) The portion of the payment to a state university’s foundation, for which the donor
receives the rights to purchase tickets for seating in a skybox at athletic events in an
athletic stadium of such university, is deductible under 170(l).



(2) No, under the provisions of § 274(f), § 274(l) does not disallow a deduction
determined under § 170(l) that is specifically allowed a taxpayer without regard to the
payment’s connection with the taxpayer’s trade or business (or income-producing
activity).

(3) The special rule for charitable deductions by accrual-basis corporations set forth in
§ 170(a)(2) does not apply to S corporations because charitable deductions by S
corporations are not allowed to the S corporation but, rather, are passed through to
shareholders. Therefore, the deduction for a charitable contribution made by an S
corporation is properly passed through to shareholders and taken in the year that the
contribution is actually paid.


FACTS:

S Corporation is an accrual-basis subchapter S corporation whose taxable year ends
on Date 1. On Date 2, the last day of S Corporation’s fiscal year, S Corporation
authorized a payment of $A to University’s foundation (Foundation). Foundation is
represented to be an organization described in § 170(b)(1)(A)(iv) that is organized and
operated exclusively to receive, hold, invest, and administer property and to make
expenditures to or for the benefit of University, a state university, which is represented
to be an educational organization described under § 170(b)(1)(A)(ii) and an institution of
higher education as defined in § 3304(f). On Date 3, the 15th day of the third month
following the close of S Corporation’s taxable year, in the next calendar year, S
Corporation paid $A to Foundation.

Individual, S Corporation’s 100% shareholder and a calendar year taxpayer, took a
charitable deduction for a portion (as discussed below) of the $A on his Year 1 income
tax return.

S Corporation represented that, in return for its payment, it received: (1) a lease for a
specific skybox for University home football games in University’s stadium for Y years;
(2) parking for X cars for each game; and (3) passes for W guests to visit persons
sitting in the skybox before the game and at halftime. The terms under which S
Corporation could use the Z seats in the skybox were embodied in a license agreement.


S Corporation received a receipt from Foundation, as well as an opinion provided to
Foundation by Counsel regarding valuation of the personal benefits received in return
for the payment of $A. Foundation provided S Corporation with a receipt in which it
calculated as follows:



        Y season skybox license value                      $D
        Pre-game parking                                   $E
        Passes to visit skybox                            +$H
        Total:                                             $C

        Payment                                           $A
        less benefits valued                             -$C
        Amount subject to § 170(l)                        $B
        Times 80%                                          .80
        Deduction claimed                                $F

In filing his Year 1 return, Individual took a charitable deduction of $F. On audit, the
revenue agent proposed disallowance of the $F deduction under § 274(l) on the
grounds that it represented an amount paid for use of a skybox for more than 1 event.
Technical Advice was sought on the disallowed deduction of $F pursuant to § 274(l).

S Corporation’s representatives now concede that $G of the $B was paid for the tickets
for Z seats in the skybox. They concede that the claimed deduction under § 170(l)
should be reduced by 80% of that $G (which equals the amount incorrectly deducted).
We understand that the per seat ticket price paid by S Corporation was the same as
paid for other non-luxury seat tickets in the University’s stadium.


LAW AND ANALYSIS:

(1) Is a portion of the payment to a state university’s foundation, for which the donor
receives the rights to purchase tickets for seating in a skybox at athletic events,
deductible under 170(l)?

Section 170(a) of the Internal Revenue Code allows as a deduction any charitable
contribution (as defined in § 170(c)1) the payment of which is made within the taxable
year.2

Rev. Rul. 67-246, 1967-2 C.B. 104, states that, to be deductible as a charitable
contribution for Federal income tax purposes under § 170, a payment to or for the use


        1
         Section 170(c) defines “charitable contribution” as a contribution to or for the use of, among
others, a State or a foundation organized and operated exclusively for educational purposes.
        2
        Under § 170(b)(1), the percentage limitation on charitable contributions for an individual is 50%,
30%, or 20% of the taxpayer’s contribution base (generally adjusted gross income) for the taxable year
depending generally on the type of property and the type of qualified donee. Under § 170(b)(2), the
percentage limitation on charitable contributions by a corporation is 10% of the taxpayer's taxable
income with certain adjustments.



of a qualified charitable organization must be a gift. To be a gift for such purposes,
there must be, among other requirements, a payment of money or transfer of property
without adequate consideration. The Supreme Court has stated that the “sine qua non
of a charitable contribution is a transfer of money or property without adequate
consideration.” U.S. v. American Bar Endowment, 477 U.S. 105, 118 (1986) (American
Bar Endowment).

In American Bar Endowment, the Court observed that a payment to charity might have
a dual character and adopted a two-part test to determine whether part of the payment
is deductible as a charitable contribution. First, the payment is deductible only to the
extent that the payment exceeds the fair market value of the privileges or benefits
received. Second, the taxpayer must make the excess payment with the intention of
making a gift.

Generally, where a transaction involving a payment is in the form of a purchase of an
item of value, the presumption arises that no gift has been made for charitable
contribution purposes, the presumption being that the payment in such case is the
purchase price. Rev. Rul. 67-246. Thus, where consideration is received in connection
with payments to a charitable organization, the presumption generally is that the
payments are not gifts. If a charitable contribution deduction is claimed with respect to
a payment, generally the burden is on the taxpayer to establish that the amount paid is
not the purchase of the privileges or other benefits and that part of the payment, in fact,
does qualify as a gift. Rev. Rul. 86-63, 1986-1 C.B. 88, superseding Rev. Rul. 84-132,
1984-2 C.B. 55.

Under § 170(l),3 the taxpayer in certain circumstances is relieved of the burden of
establishing what portion of a dual payment does, in fact, qualify as a gift. Section
170(l) provides that 80 percent of the amount paid by a taxpayer to or for the benefit of
an educational organization, which is described in subsection (b)(1)(A)(ii) and which is
an institution of higher education (as defined in § 3304(f)), is allowable as a charitable
contribution deduction, if such amount would be allowable as a deduction under § 170
but for the fact that the taxpayer receives (directly or indirectly) as a result of paying
such amount the right to purchase tickets for seating at an athletic event in an athletic
stadium of such institution.

Section 170(l)(2) provides that, if a donor makes a payment to or for the benefit of an
educational institution both for the right to purchase tickets and for the purchase of the
tickets themselves, the portion of the payment subject to the 80 percent rule and the
portion representing the ticket purchase are treated as separate amounts for purposes
of § 170(l).

       3
        Section 170(l) was enacted by the Technical and Miscellaneous Revenue Act of 1988, P.L.
100-647, § 6001(a), 102 Stat. 3683 (1988), and is effective for taxable years beginning after December
31, 1983.



In this instance, the benefits that S Corporation received for its payment to Foundation
consisted of the right to purchase tickets, the tickets themselves, the right to use the
skybox, passes to visit the skybox, and parking. S Corporation made the payment to
Foundation, which has been represented to be an organization described in
§ 170(b)(1)(A)(iv)4 that is organized and operated exclusively the benefit of University,
which is represented to be an educational organization described under
§ 170(b)(1)(A)(ii)5 and an institution of higher education (as defined in § 3304(f)6).

The tickets that S Corporation received the right to buy were for seating at athletic
events in University’s athletic stadium. Section 170(l) is applicable despite the fact that
the seating is located in a special viewing area within the athletic stadium. Thus, the
portion of S Corporation’s payment to Foundation for the right to buy tickets for seating
is considered as paid for the benefit of University under § 170(l), and 80 percent of such
portion is deductible under § 170, subject to the percentage limitations and other
requirements of that section.

The remainder of the payment, which was for the ticket purchase, the right to use the
skybox, passes to visit the skybox, and parking privileges, is not deductible under
§ 170.



        4
         An organization described in § 170(b)(1)(A)(iv) is an organization which, as pertinent here,
normally receives a substantial part of its support from any State or from direct or indirect contributions
from the general public, and which is organized and operated exclusively to receive, hold, invest, and
administer property and to make expenditures for the benefit of a college or university that is an
educational organization (as described in § 170(b)(1)(A)(ii)) and that is an agency or instrumentality of a
State or which is owned or operated by a State or by an agency or instrumentality of a State.
        5
         An education organization defined in § 170(b)(1)(A)(ii) is one which normally maintains a
regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in
attendance at the place where its educational activities are regularly carried on.
        6
        Under § 3304(f), the term “institution of higher education” means an educational institution in
any State which–

        (1) admits as regular students only individuals having a certificate of graduation from a
        high school, or the recognized equivalent of such certificate;

        (2) is legally authorized within such State to provide a program of education beyond high
        school;

        (3) provides an educational program for which it awards a bachelor’s or higher degree,
        or provides a program which is acceptable for full credit toward such degree, or offers a
        program of training to prepare students for gainful employment in a recognized
        occupation; and

        (4) is a public or other nonprofit institution.



S Corporation contends that it is entitled to rely upon the allocation made by Foundation
for purposes of determining the value of goods and services S Corporation received in
exchange for the contribution. S Corporation cites § 1.170A-1(h)(4)(i) of the Income
Tax Regulations, which provides that:

        Donee estimates of the value of goods or services may be treated as fair market
        value – For purposes of section 170(a), a taxpayer may rely on either a
        contemporaneous written acknowledgment provided under section 170(f)7 and
        1.170A-13(f) or a written disclosure statement provided under section 6115 for
        the fair market value of any goods or services provided to the taxpayer by the
        donee organization.

Regulation § 1.170A-1(h)(4)(ii) provides an exception that a taxpayer may not treat an
estimate of the value of goods or services as their fair market value if the taxpayer
knows, or has reason to know, that such treatment is unreasonable.

We are not addressing the donee's valuation of the skybox, of the right to buy tickets, of
the passes to visit the skybox, or of the parking privileges in this technical advice
memorandum. Valuation involves determinations of fact that are best handled in the
field.

(2) Is a portion of the payment to a state university foundation, for which the donor
receives the right to purchase tickets for seating in a skybox at athletic events, that is
otherwise deductible under § 170(l), disallowed because of the limitations of § 274(l)?

Section 274(a)(1)(B) provides that no deduction otherwise allowable under the chapter
(§§1-1400C) shall be allowed with respect to a facility used in connection with an
activity referred to in § 274(a)(1)(A) (relating, generally, to entertainment). Section
1.274-2(b)(1)(i) of the Income Tax Regulations further provides that the term
“entertainment” means any activity which is of a type generally considered to constitute
entertainment, amusement, or recreation.

When § 274(a)(1)(B) was amended in 1978 to read as it applies to the year in question,
the legislative history provided that § 274(a)(1)(B) would be inapplicable to expenditures
for tickets to sporting and theatrical events regardless of whether the tickets are


        7
          Section 170(f)(8) provides that no deduction shall be allowed under § 170(a) for any
contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous
written acknowledgment of the contribution by the donee organization that includes the following
information: (1) the amount of cash and a description (but not value) of any property other than cash
contributed; (2) whether the donee organization provided any goods or services in consideration, in
whole or in part, for any property described in (1); and (3) a description and good faith estimate of the
value of any goods or services referred to in (2) or, if such goods or services consist solely of intangible
religious benefits, a statement to that effect.



purchased by a fee which entitles the taxpayer to use a seat, sky-box, lounge, box or
other similar facility which provides a viewing area for such a sporting or theatrical
event. These costs generally would be subject either to the existing provisions of law
relating to entertainment activities, or to those which govern the deductibility of business
gifts. H. Rept. No. 1800 95th Cong., 2d Sess. 250 (1978), 1978-3 C.B. (Vol 1) 521, 585.

Section 274(l)(2), added by the Tax Reform Act of 1986, provides that in the case of a
skybox or other private luxury box leased for more than one event, the amount
allowable as a deduction with respect to such events shall not exceed the sum of the
face value of non-luxury box seat tickets for the seats in such box covered by the lease.

Section 274(f) provides that § 274 shall not apply to any deduction allowable to the
taxpayer without regard to its connection with his trade or business (or with his income-
producing activity). In the case of a taxpayer which is not an individual, the preceding
sentence shall be applied as if it were an individual. The legislative history is brief:

       The restrictions provided by your committee’s bill are not to apply with respect to
       items which are deductible under specific provisions of law which apply both to
       business and nonbusiness taxpayers. Thus deduction for interest paid on a loan
       to acquire an entertainment facility or property taxes paid with respect to it would
       continue to be allowed as a deduction, whether or not the entertainment facilities
       meet the tests of the new provision.

H. Rept. No. 1447, 87th Cong. 2d. Sess., reprinted in 1962-3 C.B. 402, 430.

In this case, the amount S Corporation paid to Foundation in connection with the use of
a skybox for more than 1 event exceeded the sum of the face value of non-luxury box
seat tickets for the seats in the particular skybox. Under § 274(l), the excess would not
be deductible unless, in accordance with § 274(f), a deduction would be specifically
allowed, under another Code provision, to a taxpayer (treating as an individual a
taxpayer that is not an individual) without regard to the payment’s connection with the
taxpayer’s trade or business (or income-producing activity). As discussed in Issues (1)
and (3), a deduction of a portion of S Corporation’s payment is specifically allowed,
pursuant to § 170, without regard to the payment’s connection with its trade or
business. Accordingly, under § 274(f), § 274(l) does not disallow a deduction
determined under § 170 with respect to S Corporation’s payment to Foundation.

(3) If an accrual-basis subchapter S corporation authorizes a charitable contribution on
the last day of its taxable year and pays the contribution by the 15th day of the third
month following the close of its taxable year, may the S corporation elect to treat such
charitable contribution as paid during such taxable year under § 170(a)(2), or is the
charitable deduction properly taken when paid under § 170(a)(1)?



As discussed above, § 170(a) of the Internal Revenue Code allows as a deduction any
charitable contribution the payment of which is made within the taxable year. Under
§ 170(a)(2), however, a corporation reporting its taxable income on the accrual basis
may elect to deduct a charitable contribution in the year in which the board of directors
authorizes the contribution, if the payment is made by the 15th day of the third month
following the close of the taxable year.8

The legislative history to § 170(a)(2) provides that this exception for accrual basis
corporations was desirable because corporations intending to make the maximum
charitable contribution allowable as a deduction had experienced difficulty in
determining before the end of the taxable year what constituted 5 percent of their net
income [the § 170(b) gross income limitation for corporations at the time of enactment].
S. Rep. No. 831, 81st Cong., 1st Sess. (1949), 1949-2 C.B. 289.

Section 1363(b)(2) of the Code states that the taxable income of an S corporation is
computed in the same manner as in the case of an individual with certain exceptions,
among which is an exception that the deductions referred to in § 703(a)(2), including
the deduction for charitable contributions provided in § 170, are not allowed to the
corporation.
Section 1366(a)(1)(A) provides that in determining the tax of a shareholder, each
shareholder takes into account the shareholder's pro rata share of the corporation's
items of income (including tax-exempt income), loss, deduction or credit the separate
treatment of which could affect the liability for tax of any shareholder. Section
1366(a)(1) provides further that the items referred to in § 1366(a)(1)(A) include amounts
described in § 702(a)(4). Section 702(a)(4) refers to charitable contributions (as
defined in § 170(c)).

The legislative history of § 1366 provides that the corporate limitation on charitable
contributions will no longer apply. Instead, charitable contributions by S corporations
will pass through to the shareholders and be subject to the individual limitations on
deductibility. See H.R. Rep. No. 826, 97th Cong., 2d Sess. 14 (1982); S. Rep. No.
640, 97th Cong., 2d Sess. 16 (1982).

Under § 1363(b), an S corporation computes its taxable income in the same manner as
an individual. The election in § 170(a)(2) is not available to an individual. An individual
taxpayer may deduct a charitable contribution only in the year in which payment is
actually made to the charitable organization.


        8
          The election may be made only at the time of the filing of the return for such taxable year and is
made by reporting the contribution on the return. § 1.170A-11(b)(2). The regulations require the
taxpayer to attach to the return: (1) a written declaration, made under the penalties of perjury, by an
officer authorized to sign the return, stating that the resolution authorizing the contribution was adopted
by the board of directors during the taxable year; and (2) a copy of the resolution by the board of
directors.)





Accordingly, in this case, S Corporation should have reported the charitable contribution
on its tax return for the year in which it actually paid the charitable contribution, and S
Corporation’s shareholder, Individual, is not entitled to a charitable contribution
deduction until Year 2.

CAVEAT(S)

A copy of this technical advice memorandum is to be given to the taxpayer(s). Section
6110(j)(3) of the Code provides that it may not be used or cited as precedent.



SIGNED BY: MICHAEL D. FINLEY
           BRANCH CHIEF
           CC:DOM:IT&A:3