Promotional donation program payments may be business expenses

Plain-English summary

A business promoted a program that distributed amounts to tax-exempt, nonprofit, and for-profit organizations. Chief Counsel preliminarily concluded that the money belonged to and was paid by the business, not its customers, because customers did not appear to control or own a share of the program funds. Payments to section 170 organizations and other recipients could be deductible under section 162 when they directly related to the business and were made with a reasonable expectation of a commensurate financial return. Deductions remained subject to limits for lobbying, political activity, and any notices received under section 6033(e). Merely donating to an organization that conducted some lobbying generally was not itself a lobbying communication or direct support for lobbying, though further factual development could affect particular payments.

Ruling snapshot

• Question: Whether promotional-program payments were the business’s expenses and were deductible under section 162
• Outcome: Preliminary advice favored business-expense deductions, subject to factual development and lobbying limits
• Key authorities: I.R.C. §§ 162, 170, 6033; Treas. Reg. §§ 1.162-15, 1.162-20, 1.162-29

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           memorandum
           Number: 201543013
           Release Date: 10/23/2015
           CC:ITA:03:
           POSTU-118158-15

 UILC:     162.01-08, 162.24-12, 162.29-00

  date:    July 10, 2015

     to:   Anthony J. Kim
           Senior Counsel (CC:LB&I:CTM:SF:1)

  from:    Christopher F. Kane,
           Chief, Branch 3
           Associate Chief Counsel, Income Tax & Accounting


subject:   POSTU-118158-15

           This Chief Counsel Advice responds to your request for assistance. This advice may
           not be used or cited as precedent. The advice we provide below in response to the
           issues you have presented for our consideration confirms in writing our telephone
           response of June 16, 2015.


           LEGEND

           Taxpayer        =   ----------------------------
           A               =   ----------------------------------------------------------
           B               =   -----------------
           Program X       =   ----------------------


           ISSUES

           Issue 1: Whether amounts remitted as part of Program X in tax years (TYs) 2011 and
           2012 to various organizations were paid by Taxpayer or by its customers?

           Issue 2: Assuming Taxpayer paid amounts to tax exempt charitable and educational
           organizations (described in § 170 of the Internal Revenue Code) as part of Program X in
           TYs 2011 and 2012, whether such amounts are deductible as ordinary and necessary
           business expenses under § 162?
POSTU-118158-15                                          2


Issue 3: Assuming Taxpayer paid such amounts to ---------------------------(not described
in § 170) as part of Program X in TYs 2011 and 2012, whether such amounts are
deductible as ordinary and necessary business expenses under § 162?

Issue 4: Assuming Taxpayer paid amounts to certified B corporations (for profit entities
with a social mission included in its corporate bylaws) as part of Program X in TYs 2011
and 2012, whether such amounts are deductible as ordinary and necessary business
expenses under § 162?

FACTS

Taxpayer is engaged in the business of providing ---------------------------------------------------
services. Taxpayer has operated Program X since its incorporation, advertising that it -
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------from Program X.
The actual list of selected recipients includes organizations that are exempt from federal
income taxation as well as other non-profit and for-profit entities. One past recipient is
exempt from federal income taxation but not described in § 170 and was engaged in
limited political activity. -------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------.

LAW AND ANALYSIS

Issue 1: Whether amounts remitted as part of its Program X in TYs 2011 and 2012 to
various organizations were paid by Taxpayer or by its customers?

As a general matter, a taxpayer may not deduct payments voluntarily made on
another’s behalf, even where there is a moral obligation to do so. Williams v. Comm’r,
T.C. Memo 1960-19.

United States v. American Bar Endowment, 477 U.S. 105 (1986), deals with a similar
issue. The respondent was an exempt organization described in § 170 that, among
other things, offered group insurance policies to its members. Respondent received a
dividend from the underwriter equal to the excess of premiums over costs. It retained
this dividend for use in its charitable endeavors rather than returning the dividend to
members. Id. at 108. The Court ruled that individual members’ portion of the dividend
was not a charitable donation to the respondent, in part because there was no practical
way for the members’ to retain their share of the dividend for themselves. Id. at 113-14.

Here, it does not appear that Taxpayer’s customers have a right to a share of the
amounts in Program X. The fact that the --------------------------------------------------------------
------------------------------------------------------------ does not by itself appear to give the
POSTU-118158-15                                  3

customers control over these funds such that Taxpayer is the agent of the customer or
is acting as a mere conduit for the dispersal of these funds.

You have indicated that factual development of this issue is ongoing. If you wish to
pursue the agency theory, we suggest that you develop the facts consistent with the
criteria set out in National Carbide v. Commissioner, 336 U.S. 422 (1949) and
Commissioner v. Bollinger, 485 U.S. 340 (1988). If you wish to pursue a conduit theory,
you may want to review Seven-Up Co. v. Commissioner, 14 T.C. 965 (1950) acq. in
result, 1974-2 C.B. 1. It does not appear from the facts supplied so far that the funds in
Program X belong to and are donated by Taxpayer’s customers.

Issue 2: Assuming Taxpayer paid amounts to tax exempt charitable and educational
organizations (described in § 170) as part of Program X in TYs 2011 and 2012, whether
such amounts are deductible as ordinary and necessary business expenses under §
162?

Section 170 of the Internal Revenue Code provides for a deduction for a contribution to,
or for the use of, any organization described in § 170(c) payment of which is made
within the taxable year.

Section 162(a) provides that all ordinary and necessary expenses paid or incurred
during the taxable year in carrying on a trade or business shall be allowed as a
deduction.

Section 162(b) provides that no deduction shall be allowed under subsection (a) for any
contribution or gift that would be allowed as a deduction under § 170 were it not for the
limitations set forth in that section.

Section 1.162-15(a) of the Income Tax Regulations states that no deduction is allowed
under § 162(a) for a contribution or gift if any part of it is deductible under § 170.

Section 1.170A-2(c)(5) states that transfers of property to an organization described in §
170(c) which bear a direct relationship to the taxpayer’s trade or business and which are
made with a reasonable expectation of commensurate financial return may constitute
valid expenses of a trade or business, deductible under § 162. See also Dharma
Enterprises v. Commissioner, 194 F.3d 1316 (9th Cir. 1999); Marquis v. Commissioner,
49 T.C. 695 (1968).

Here, Taxpayer offers relatively non-differentiable goods for sale to the public—-----------
----------------------------------------------------. Taxpayer prominently advertises Program X
and its -----------------------------------------------------------. Taxpayer appears to have acted
with the reasonable belief that in establishing Program X, it would enhance and
increase its business. You indicate that you are still developing the facts in this area.
The preliminary information supplied in your request suggests that Taxpayer had a
reasonable expectation of commensurate financial return for its donations through
POSTU-118158-15                                      4

Program X, and its donations to organizations described in § 170(c) are therefore
deductible under § 162(a) as business expenses to the extent not disallowed by other
provisions of §162 and to the extent they are not contributions under § 170.

Issue 3: Assuming Taxpayer paid such amounts to exempt organizations not described
in § 170 as part of Program X in TYs 2011 and 2012, whether such amounts are
deductible as ordinary and necessary business expenses under § 162?

Section 1.162-15(b) of the Income Tax Regulations states that donations to
organizations other than those described in § 170 which bear a direct relationship to the
taxpayer’s business and are made with a reasonable expectation of commensurate
financial return may constitute allowable deductions as business expenses, provided
the donation is not made for a non-deductible purpose.

Section 162(e)(1) of the Internal Revenue Code provides that no deduction shall be
allowed under § 162(a) for any amount paid in connection with influencing legislation or
participation in or intervention in any political campaign on behalf of (or in opposition to)
any candidate for public office.

Section 1.162-20 of the Regulations provides rules governing the deductibility or non-
deductibility of expenditures attributable to lobbying and political campaigns.

Section 6033(e)(1) of the Code generally states that organizations exempt from federal
income tax, but not described in § 170(c) must provide notice to contributors of the
proportion of their contributions allocable to expenditures of the organization that are
covered by § 162(e)(1) or else be subject to the provisions of § 6033(e)(2).

Section 1.162-15(b) provides a similar standard as to the deductibility under § 162 of
donations to organizations not described in § 170 as that provided in § 1.162-15(a) for
donations to § 170 organizations. For the reasons stated above, it appears that
Taxpayer has a reasonable expectation of commensurate financial return from the
donations it is making through Program X. In the absence of further development of the
facts that indicates otherwise, the donation expenses are deductible under § 162(a)
subject to the same limitations described above.

If Taxpayer has received any § 6033 notices from donee organizations, the appropriate
proportion of those donations would not be deductible. In the factual description you
provided, it is most likely that an organization that is exempt from federal income tax but
not described in § 170, such as A, would be subject to the reporting requirements of §
6033(e). Whether Taxpayer received any § 6033 notices or not, Taxpayer is still subject
to the provisions of § 162(e) in determining its deduction under § 162(a) for donations to
such organizations.

Issue 4: Assuming Taxpayer paid amounts to certified --------------------------------------------
------------------------------------------------------------------------------------ as part of Program X in
POSTU-118158-15                                5

TYs 2011 and 2012, whether such amounts are deductible as ordinary and necessary
business expenses under § 162?

To the extent that these donations qualify as ordinary and necessary business
expenses under § 162(a) as described above, they would qualify as deductible, subject
to the various other provisions of § 162 which may act to disallow such a deduction.
One such provision is § 162(e).

Section 162(e) denies a deduction for any amount paid or incurred in connection with
influencing legislation, participating in any political campaign, influencing the general
public or segments thereof with respect to elections or legislative matters, or any direct
communication with a covered executive branch official in an attempt to influence official
actions.

Section 1.162-29(b) of the Income Tax Regulations defines “influencing legislation” as
“any attempt to influence legislation through a lobbying communication.” A “lobbying
communication” is “any communication (other than any communication compelled by
subpoena, or otherwise compelled by Federal or State law) with any member or
employee of a legislative body or any other government official or employee who may
participate in the formulation of the legislation that—(i) refers to specific legislation and
reflects a view on that legislation; or (ii) clarifies, amplifies, modifies, or provides support
for views reflected in a prior lobbying communication.”

Section 1.162-20(c)(4) denies deductions for amounts paid “in connection with any
attempt to influence the general public, or segments thereof, with respect to legislative
matters, elections or referendums.” It includes as an example “grassroot” campaigns or
other attempts to encourage the public to contact members of a legislative body.

Section 1.162-29(d) provides that if a taxpayer engages in activities for purposes of
supporting a lobbying communication by another, the taxpayer’s activities are treated as
influencing legislation. “Activities” include research, preparation, planning, and
coordination.

Section 162(e)(5)(A) of the Code provides an exception to the general exclusion of §
162(e) denying deduction for lobbying expenses. Under that paragraph, a taxpayer in
the trade or business of lobbying may deduct expenses incurred in conducting lobbying
activities on behalf of another person, but such other person may not deduct amounts
paid to the lobbyist for such activities.

Here, Taxpayer donated money to various organizations that apparently conducted
some lobbying activities. The nature or extent of these organizations’ lobbying activities
is not clear. However, Taxpayer’s donation to these organizations is not a direct
communication with members or employees of a legislative body or other government
officials, and so is not itself a lobbying communication under § 1.162-29(b). Merely
donating money to an organization conducting lobbying activities is not an “activity for
POSTU-118158-15                                          6

purposes of supporting a lobbying communication,” which according to the examples is
intended to include more direct support such as research, planning, and coordination.
Nor is it clear that Taxpayer is attempting to influence the general public or segments
thereof with respect to legislative matters, as described in § 1.162-29(d). Even with
further factual development, it is unlikely that any of these donations could be lobbying
activities covered by § 1.162-29.

--------------may be a lobbying communication under § 1.162-29(b) if it is directed at
members of a legislative body or government official and expresses a view on specific
legislation. -----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------. Even if such activities were determined to result in the expenses incurred by
B to do this being within § 162(e), it is not clear from the facts provided that the
activities were conducted “on behalf of” Taxpayer thereby disallowing Taxpayer’s
donation under § 162(e)(5)(A). It appears that ------------------------------------------------------
------- for use as the organization saw fit. In addition, many of B’s activities are not
directed towards legislative members or legislative issues and therefore do not
constitute lobbying activity.

If you have any questions, please call Timothy Azarchs at (202) 317-4615