Charity matches tied to PAC donations are not deductible

Plain-English summary

A corporation offered to make charitable donations in employees' names when the employees contributed specified amounts to its political action committee. The corporation asked to deduct those matching donations as ordinary and necessary business expenses. The IRS concluded that the charitable matches were designed to encourage PAC contributions and occurred only when employees made those political contributions. Because the two payments were inextricably linked, section 162(e)(1)(B) treated the matches as amounts paid in connection with political campaigns and denied the deduction.

Ruling snapshot

• Question: May the corporation deduct charitable matching payments that are conditioned on employee PAC contributions?
• Outcome: Denied
• Key authorities: IRC § 162(a), (e)(1)(B); Treas. Reg. § 1.162-20(c)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201616002                                             Third Party Communication: None
Release Date: 4/15/2016                                       Date of Communication: Not Applicable
Index Number: 162.05-10
                                                              Person To Contact:
-------------------------------------------                   ----------------------------, ID No. --------------
----------------------------------                            -------------------
 ----------------------------------------------               Telephone Number:
                                                              ----------------------
    Attn: ----------------------                              Refer Reply To:
           ---------------------------                        CC:ITA:B01
                                                              PLR-125029-15
   EIN: -----------------                                     Date:
                                                              January 21, 2016



LEGEND

Taxpayer                  =    -------------------------------------------
PAC                       =    ----------------------------------------------------------------------------------
Amount1                   =    -------
Amount2                   =    ----------
Date1                     =    -------------------
Dates                     =    -----------------------------------------------------------------------------------------
                               ----------------------


Dear ---------------:

This letter responds to the Date1 letter submitted by Taxpayer requesting a ruling that
contributions made by Taxpayer pursuant to a political action committee charity match
program are deductible under section 162 of the Internal Revenue Code (Code) as
ordinary and necessary business expenses. The Date1 letter was supplemented by
additional letters dated Dates.

FACTS

Taxpayer, a corporation, is prohibited by the Federal Election Campaign Act (FECA)
from contributing to federal election campaigns. 52 U.S.C. § 30118(a); 11 CFR
§ 114.2(b). Consistent with the FECA, Taxpayer established PAC, which is funded by
employees of Taxpayer and its subsidiaries. PAC is a political organization exempt
from taxation under section 527 of the Code. PAC’s purpose, as stated in its charter, is
to “disburse funds to candidates” for public office. The candidates are chosen by PAC’s
---------------------------.

PLR-125029-15                                2

To incentivize employee contributions of at least Amount1 but not more than Amount2
to PAC, Taxpayer matches each of these contributions with a contribution in the name
of the employee to one or more charities selected by the employee. Taxpayer requests
a ruling that it may deduct its matching contributions as ordinary and necessary
business expenses under section 162 of the Code.

LAW AND APPLICATION

Section 162 of the Code allows a taxpayer to deduct all of the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business.
“Ordinary” has been defined to mean “frequent” or “common” in the context of the
particular business. See Welch v. Helvering, 290 U.S. 111 (1933). “Necessary” has
been defined to mean “appropriate and helpful.” Id.

Regardless of whether such expenses are “ordinary” and “necessary,” deductions for
expenses made to political campaigns have long been prohibited. See, e.g.,
§ 162(e)(2) (1962) (prohibiting deductions for expenses “for participation in, or
intervention in, any political campaign on behalf of any candidate for public office”).
Congress expanded this prohibition to disallow a deduction of amounts paid or incurred
in connection with a political campaign. See § 162(e)(1)(B), as amended by the
Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, § 13222(a).

Under current section 162(e)(1)(B), amounts paid or incurred in connection with
participation in, or intervention in, any political campaign on behalf of (or in opposition
to) any candidate for public office are not deductible under section 162. Treasury
Regulation section 1.162-20(c) further states that, while certain types of expenses with
respect to legislative matters may be deductible, other expenditures, including those “for
political campaign purposes,” are not deductible from gross income. Treas. Reg.
§ 1.162-20(c).

Courts generally have read the phrase “in connection with” as it appears in the Code
broadly. See, e.g., Snow v. Commissioner, 416 U.S. 500 (1974) (“In connection with”
under section 174); Conopco v. United States, 572 F.3d 162 (3d Cir. 2009) (“In
connection with” under section 162(k)(1)); General Mills v. United States, 554 F.3d 727
(8th Cir. 2009) (“In connection with” under section 162(k)(1)); but see, Boise Cascade v.
United States, 329 F.3d 751 (9th Cir. 2003) (stating that the phrase “in connection with”
should be read narrowly; requiring one action to be a prerequisite of the other).

Here, the contributions to PAC and Taxpayer’s matching contributions are inextricably
linked. The contributions to PAC are a prerequisite for Taxpayer’s matching
contributions. Moreover, Taxpayer’s matching contributions are intended to incentivize
contributions of Amount1 or more to PAC. Applying section 162(e)(1)(B), the
regulations, and case law, we conclude that Taxpayer’s matching contributions are “in

PLR-125029-15                                  3

connection with” a political campaign on behalf of a candidate for public office, and are
not deductible under section 162.

This ruling is directed only to Taxpayer. Section 6110(k)(3) of the Code provides that it
may not be used or cited as precedent.

This ruling is based upon information submitted by Taxpayer and accompanied by a
penalty of perjury statement executed by an appropriate party. This office has not
verified any of the material submitted in support of the ruling request, and the material is
subject to verification on examination.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.




                                       Sincerely,

                                       John P. Moriarty
                                       Acting Associate Chief Counsel
                                       (Income Tax and Accounting)




                                  By: Karin G. Gross
                                      Senior Technical Reviewer, Branch 1
                                      (Income Tax & Accounting)

cc: