CCA 9952017: Cell service sales commissions need more factual development

Plain-English summary

An IRS office asked whether a cellular telephone provider could currently deduct commissions paid to independent sales representatives for signing customers. Chief Counsel answered only that further case development was required. The memorandum contrasts section 162 business expense deductions with section 263 capitalization and says the distinction depends heavily on the facts. It gives no final answer on whether these particular commissions were deductible or had to be capitalized. The Field Service Advice was not binding on Examination or Appeals and was not a final case determination.

Ruling snapshot

• Question: Are commissions for signing cellular service customers currently deductible?
• Outcome: Advice given: more facts were needed; deductibility was undecided.
• Key authorities: IRC §§ 162(a), 263; Treas. Reg. § 1.263(a)-2(a); INDOPCO, Inc. v. Commissioner.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
I N T E R N AL R E V E N U E S E R V I C E WASHINGTON, D.C. 20224
September 27, 1999

Number: 199952017
Release Date: 12/30/1999
CC:DOM:FS:IT&A
TL-N-2571-99
UILC: 162.07-05

INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE

MEMORANDUM FOR

FROM: Assistant Chief Counsel (Field Service)
CC:DOM:FS

SUBJECT: Commissions Paid to Independent Sales Representatives

This Field Service Advice responds to your memorandum dated July 1,1999. Field Service Advice is not binding on Examination or Appeals and is not a final case determination. This document is not to be cited as precedent.

ISSUE:

Whether commissions paid to independent representatives for the signing of customers to the cellular telephone service provided by the taxpayer are currently deductible by the taxpayer.

CONCLUSION:

Further case development is required.

LAW AND ANALYSIS

I.R.C. § 162(a) provides that there will be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Section 263 generally provides that no deduction shall be allowed for the cost of permanent improvements or betterments made to increase the value of any property. Further clarification is found in Treas. Reg. § 1.263(a)- 2(a), specifying that costs incurred to acquire property having a useful life substantially beyond the close of the taxable year are required to be capitalized under section 263. 2

It is well-established that deductions are a matter of legislative grace and that the taxpayer bears the burden of proving entitlement to the deduction sought. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352 (1971); INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992).

The case law illustrates the highly factual nature of the inquiry and that the distinction between capital and deductible items is often a matter of "degree and not kind", INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992)(quoting Welch v. Helvering, 290 U.S. 111, 114 (1933)), and therefore, each case "turns on its own special facts", id. (quoting Deputy v. du Pont, 308 488, 496 (1940).

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS: 3

DEBORAH A. BUTLER

By:
CLIFFORD M. HARBOURT
Senior Technician Reviewer
Income Tax & Accounting Branch
(Field Service)