Treasury, IRS Issue Charitable, Business Deduction Regulations

• Published date: 01 October 2020
• Date: 01 October 2020
• DOI: http://doi.org/10.1002/npc.30773

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

TREASURY, IRS

ISSUE CHARITABLE,

BUSINESS DEDUCTION

REGULATIONS

The Treasury Department and the IRS, on August 7, issued a package of

final regulations, including guidance as to when payments for business purposes

to charitable organizations qualify for the business expense deduction and appli-

cation of the quid pro quo principle to donors who receive or expect to receive

benefits from a third party (T.D. 9907). These regulations, in their proposed form,

are summarized in the February 2020 issue.

Business Expense Deduction

The regulations clarify that a person’s payment (or transfer) to or for the

use of a charitable organization may give rise to an allowable trade or business

expense deduction (IRC § 162) rather than an income tax charitable contribution

deduction (IRC § 170). The business expense deduction is available where the

payment has a “direct relationship” with the person’s business and is made with

a “reasonable expectation of financial return commensurate with the amount” of

the payment (revised Reg. § 1.162-15(a)(1)).

As an example of this rule, an individual manufactures musical instruments

and sells them by means of a website. This individual pays a church $1,000 for an

advertisement in the church’s program for a concert. In this program, the church

thanks its concert supporters. The individual’s advertisement includes the URL for

the website. The individual reasonably expects that the advertisement will facili-

tate the sale of more musical instruments. This individual may treat the payment

as a deductible business expense (Reg. § 1.162-15(a)(2)(i), Example 1).

Another example illustrates these concepts in the context of charitable sales

promotions (or commercial co-ventures). A partnership operates supermarkets,

some of which are located in State N. The partnership has a promotional pro-

gram pursuant to which it sets aside 1 percent of its annual sales, which it pays

to one or more charities. The partnership advertises this program, determining

which charities will receive payments. The partnership reasonably believes the

promotion will generate a significant degree of name recognition and goodwill in

the communities involved and thus increase its revenue. As part of the program, © 2020 Wiley Periodicals LLC

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DOI:10.1002/npc

Analysis of current developments in tax

and related law for nonprofit organiza-

tions and their professional advisors.

Volume 37 Number 10

October 2020

Also in This issue...

Tax Lawyers’ PGP EO Wishlist 3

…And Here Is the Accountants’

List 4

IRS Keeps on Winning in

Conservation Easement Gift

Deduction Cases 4

Donor Secures Major Win in

Quid Pro Quo Contribution Case 4

Recent Applications of

Commerciality Doctrine 5

Other Recent IRS Private Letter

Rulings 5

The Difficulties of Litigating

Property Tax Exemption in

Federal Court 6

NY AG Seeking Dissolution of

NRA, Removal of and Restitution

From Directors 6

Other Developments 7