Treasury, IRS Issue Charitable, Business Deduction Regulations

Published date01 October 2020
Date01 October 2020
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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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

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