Authoritative Support Materials for Tax Research Memo

This web page contains the primary tax authorities cited in the tax research memo and, to a lesser extent, client letters. Cited passages are highlighted in yellow.

Sec. 162. Trade or business expenses.

(a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including--

(1) a reasonable allowance for salaries or other compensation for personal services actually rendered;

(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and

(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes in excess of $3,000. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.

For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes in excess of $3,000. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.

(b) Charitable contributions and gifts excepted. Notio deduction shall be allowed under subsection (a) for any contribution or gift which would be allowable as a deduction under secn 170 were it not for the percentage limitations, the dollar limitations, or the requirements as to the time of payment, set forth in such section.

(c) Illegal bribes, kickbacks, and other payments.

(1) Illegal payments to government officials or employees. No deduction shall be allowed under subsection (a) for any payment made, directly or indirectly, to an official or employee of any government, or of any agency or instrumentality of any government, if the payment constitutes an illegal bribe or kickback or, if the payment is to an official or employee of a foreign government, the payment is unlawful under the Foreign Corrupt Practices Act of 1977. The burden of proof in respect of the issue, for the purposes of this paragraph, as to whether a payment constitutes an illegal bribe or kickback (or is unlawful under the Foreign Corrupt Practices Act of 1977) shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud).

(2) Other illegal payments. No deduction shall be allowed under subsection (a) for any payment (other than a payment described in paragraph (1)) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer. The burden of proof in respect of the issue, for purposes of this paragraph, as to whether a payment constitutes an illegal bribe, illegal kickback, or other illegal payment shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud).

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(3) Kickbacks, rebates, and bribes under medicare and medicaid. No deduction shall be allowed under subsection (a) for any kickback, rebate, or bribe made by any provider of services, supplier, physician, or other person who furnishes items or services for which payment is or may be made under the Social Security Act, or in whole or in part out of Federal funds under a State plan approved under such Act, if such kickback, rebate, or bribe is made in connection with the furnishing of such items or services or the making or receipt of such payments. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, or customer.

(d) Capital contributions to Federal National Mortgage Association. For purposes of this subtitle, whenever the amount of capital contributions evidenced by a share of stock issued pursuant to section 303(c) of the Federal National Mortgage Association Charter Act (12 U.S.C., sec. 1718) exceeds the fair market value of the stock as of the issue date of such stock, the initial holder of the stock shall treat the excess as ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.

(e) Denial of deduction for certain lobbying and political expenditures.

(1) In general. No deduction shall be allowed under subsection (a) for any amount paid or incurred in connection with--

(A) influencing legislation,

(B) participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office,

(C) any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums, or

(D) any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.

(2) Exception for local legislation. In the case of any legislation of any local council or similar governing body--

(A) paragraph (1)(A) shall not apply, and

(B) the deduction allowed by subsection (a) shall include all ordinary and necessary expenses (including, but not limited to, traveling expenses described in subsection (a)(2) and the cost of preparing testimony) paid or incurred during the taxable year in carrying on any trade or business--

(i) in direct connection with appearances before, submission of statements to, or sending communications to the committees, or individual members, of such council or body with respect to legislation or proposed legislation of direct interest to the taxpayer, or

(ii) in direct connection with communication of information between the taxpayer and an organization of which the taxpayer is a member with respect to any such legislation or proposed legislation which is of direct interest to the taxpayer and to such organization,and that portion of the dues so paid or incurred with respect to any organization of which the taxpayer is a member which is attributable to the expenses of the activities described in clauses (i) and (ii) carried on by such organization.

(3) Application to dues of tax-exempt organizations. No deduction shall be allowed under subsection (a) for the portion of dues or other similar amounts paid by the taxpayer to an organization which is exempt from tax under this subtitle which the organization notifies the taxpayer under section 6033(e)(1)(A)(ii) is allocable to expenditures to which paragraph (1) applies.

(4) Influencing legislation. For purposes of this subsection--

(A) In general. The term “influencing legislation” means any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation.

(B) Legislation. The term “legislation” has the meaning given such term by section 4911(e)(2).

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(5) Other special rules.

(A) Exception for certain taxpayers. In the case of any taxpayer engaged in the trade or business of conducting activities described in paragraph (1), paragraph (1) shall not apply to expenditures of the taxpayer in conducting such activities directly on behalf of another person (but shall apply to payments by such other person to the taxpayer for conducting such activities).

(B) De minimis exception.

(i) In general. Paragraph (1) shall not apply to any in-house expenditures for any taxable year if such expenditures do not exceed $2,000. In determining whether a taxpayer exceeds the $2,000 limit under this clause, there shall not be taken into account overhead costs otherwise allocable to activities described in paragraphs (1)(A) and (D).

(ii) In-house expenditures. For purposes of clause (i), the term “in-house expenditures” means expenditures described in paragraphs (1)(A) and (D) other than--

(I) payments by the taxpayer to a person engaged in the trade or business of conducting activities described in paragraph (1) for the conduct of such activities on behalf of the taxpayer, or

(II) dues or other similar amounts paid or incurred by the taxpayer which are allocable to activities described in paragraph (1).

(C) Expenses incurred in connection with lobbying and political activities. Any amount paid or incurred for research for, or preparation, planning, or coordination of, any activity described in paragraph (1) shall be treated as paid or incurred in connection with such activity.

(6) Covered executive branch official. For purposes of this subsection, the term “covered executive branch official” means--

(A) the President,

(B) the Vice President,

(C) any officer or employee of the White House Office of the Executive Office of the President, and the 2 most senior level officers of each of the other agencies in such Executive Office, and

(D) (i) any individual serving in a position in level I of the Executive Schedule under section 5312 of title 5, United States Code, (ii) any other individual designated by the President as having Cabinet level status, and (iii) any immediate deputy of an individual described in clause (i) or (ii).

(7) Special rule for indian tribal governments. For purposes of this subsection, an Indian tribal government shall be treated in the same manner as a local council or similar governing body.

(8) Cross reference. For reporting requirements and alternative taxes related to this subsection, see section 6033(e).

(f) Fines and penalties. No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.

(g) Treble damage payments under the antitrust laws. If in a criminal proceeding a taxpayer is convicted of a violation of the antitrust laws, or his plea of guilty or nolo contendere to an indictment or information charging such a violation is entered or accepted in such a proceeding, no deduction shall be allowed under subsection (a) for two-thirds of any amount paid or incurred--

(1) on any judgment for damages entered against the taxpayer under section 4 of the Act entitled “An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes”, approved October 15, 1914 (commonly known as the Clayton Act), on account of such violation or any related violation of the antitrust laws which occurred prior to the date of the final judgment of such conviction, or

(2) in settlement of any action brought under such section 4 on account of such violation or related violation.

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The preceding sentence shall not apply with respect to any conviction or plea before January 1, 1970, or to any conviction or plea on or after such date in a new trial following an appeal of a conviction before such date.

(h) State legislators’ travel expenses away from home.

(1) In general. For purposes of subsection (a), in the case of any individual who is a State legislator at any time during the taxable year and who makes an election under this subsection for the taxable year--

(A) the place of residence of such individual within the legislative district which he represented shall be considered his home,

(B) he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual during the taxable year by the greater of--

(i) the amount generally allowable with respect to such day to employees of the State of which he is a legislator for per diem while away from home, to the extent such amount does not exceed 110 percent of the amount described in clause (ii) with respect to such day, or

(ii) the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States, and

(C) he shall be deemed to be away from home in the pursuit of a trade or business on each legislative day.

(2) Legislative days. For purposes of paragraph (1), a legislative day during any taxable year for any individual shall be any day during such year on which--

(A) The legislature was in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less), or

(B) The legislature was not in session but the physical presence of the individual was formally recorded at a meeting of a committee of such legislature.

(3) Election. An election under this subsection for any taxable year shall be made at such time and in such manner as the Secretary shall by regulations prescribe.

(4) Section not to apply to legislators who reside near capitol. For taxable years beginning after December 31, 1980, this subsection shall not apply to any legislator whose place of residence within the legislative district which he represents is 50 or fewer miles from the capitol building of the State.

(i) Repealed.

(j) Certain foreign advertising expenses.

(1) In general. No deduction shall be allowed under subsection (a) for any expenses of an advertisement carried by a foreign broadcast undertaking and directed primarily to a market in the United States. This paragraph shall apply only to foreign broadcast undertakings located in a country which denies a similar deduction for the cost of advertising directed primarily to a market in the foreign country when placed with a United States broadcast undertaking.

(2) Broadcast undertaking. For purposes of paragraph (1), the term “broadcast undertaking” includes (but is not limited to) radio and television stations.

(k) Stock reacquisition expenses.

(1) In general. Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person (as defined in section 465(b)(3)(C)).

(2) Exceptions. Paragraph (1) shall not apply to--

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(A) Certain specific deductions. Any--

(i) deduction allowable under section 163 (relating to interest),

(ii) deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness, or

(iii) deduction for dividends paid (within the meaning of section 561).

(B) Stock of certain regulated investment companies. Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder.

(l) Special rules for health insurance costs of self-employed individuals.

(1) Allowance of deduction.

(A) In general. In the case of an individual who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the applicable percentage of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.

(B) Applicable percentage. For purposes of subparagraph (A), the applicable percentage shall be determined under the following table:

For taxable years beginning in The applicable

calendar year-- percentage is--

1999 through 2001................ 60

2002................................. 70

2003 and thereafter................ 100

(2) Limitations.

(A) Dollar amount. No deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer’s earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.

(B) Other coverage. Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of the taxpayer. The preceding sentence shall be applied separately with respect to--

(i) plans which include coverage for qualified long-term care services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and

(ii) plans which do not include such coverage and are not such contracts.

(C) Long-term care premiums. In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account under paragraph (1).

(3) Coordination with medical deduction. Any amount paid by a taxpayer for insurance to which paragraph (1) applies shall not be taken into account in computing the amount allowable to the taxpayer as a deduction under section 213(a).

(4) Deduction not allowed for self-employment tax purposes. The deduction allowable by reason of this subsection shall not be taken into account in determining an individual’s net earnings from self-employment (within the meaning of section 1402(a)) for purposes of chapter 2.

(5) Treatment of certain S corporation shareholders. This subsection shall apply in the case of any individual treated as a partner under section 1372(a), except that--

(A) for purposes of this subsection, such individual’s wages (as defined in section 3121) from the S corporation shall be treated as such individual’s earned income (within the meaning of section 401(c)(1)), and

(B) there shall be such adjustments in the application of this subsection as the Secretary may by regulations prescribe.

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(m) Certain excessive employee remuneration. [Caution: For applicability to amounts which would otherwise be deductible for taxable years beginning on or after 1/1/94, see note below with respect to amendments made by P.L. 103-66, Sec. 13211(a)].

(1) In general. In the case of any publicly held corporation, no deduction shall be allowed under this chapter for applicable employee remuneration with respect to any covered employee to the extent that the amount of such remuneration for the taxable year with respect to such employee exceeds $1,000,000.

(2) Publicly held corporation. For purposes of this subsection, the term “publicly held corporation” means any corporation issuing any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934 [ 15 USCS §78l].

(3) Covered employee. For purposes of this subsection, the term “covered employee” means any employee of the taxpayer if--

(A) as of the close of the taxable year, such employee is the chief executive officer of the taxpayer or is an individual acting in such a capacity, or

(B) the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 [ 15 USCS §§78a et seq.] by reason of such employee being among the 4 highest compensated officers for the taxable year (other than the chief executive officer).

(4) Applicable employee remuneration. For purposes of this subsection--

(A) In general. Except as otherwise provided in this paragraph, the term “applicable employee remuneration” means, with respect to any covered employee for any taxable year, the aggregate amount allowable as a deduction under this chapter for such taxable year (determined without regard to this subsection) for remuneration for services performed by such employee (whether or not during the taxable year).

(B) Exception for remuneration payable on commission basis. The term “applicable employee remuneration” shall not include any remuneration payable on a commission basis solely on account of income generated directly by the individual performance of the individual to whom such remuneration is payable.

(C) Other performance-based compensation. The term “applicable employee remuneration” shall not include any remuneration payable solely on account of the attainment of one or more performance goals, but only if--

(i) the performance goals are determined by a compensation committee of the board of directors of the taxpayer which is comprised solely of 2 or more outside directors,

(ii) the material terms under which the remuneration is to be paid, including the performance goals, are disclosed to shareholders and approved by a majority of the vote in a separate shareholder vote before the payment of such remuneration, and

(iii) before any payment of such remuneration, the compensation committee referred to in clause (i) certifies that the performance goals and any other material terms were in fact satisfied.

(D) Exception for existing binding contracts. The term “applicable employee remuneration” shall not include any remuneration payable under a written binding contract which was in effect on February 17, 1993, and which was not modified thereafter in any material respect before such remuneration is paid.

(E) Remuneration. For purposes of this paragraph, the term “remuneration” includes any remuneration (including benefits) in any medium other than cash, but shall not include--

(i) any payment referred to in so much of section 3121(a)(5) as precedes subparagraph (E) thereof, and

(ii) any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from gross income under this chapter.

For purposes of clause (i), section 3121(a)(5) shall be applied without regard to section 3121(v)(1).

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(F) Coordination with disallowed golden parachute payments. The dollar limitation contained in paragraph (1) shall be reduced (but not below zero) by the amount (if any) which would have been included in the applicable employee remuneration of the covered employee for the taxable year but for being disallowed under section 280G.

(n) Special rule for certain group health plans

(1) In general. No deduction shall be allowed under this chapter to an employer for any amount paid or incurred in connection with a group health plan if the plan does not reimburse for inpatient hospital care services provided in the State of New York--

(A) except as provided in subparagraphs (B) and (C), at the same rate as licensed commercial insurers are required to reimburse hospitals for such services when such reimbursement is not through such a plan,

(B) in the case of any reimbursement through a health maintenance organization, at the same rate as health maintenance organizations are required to reimburse hospitals for such services for individuals not covered by such a plan (determined without regard to any government-supported individuals exempt from such rate), or

(C) in the case of any reimbursement through any corporation organized under Article 43 of the New York State Insurance Law, at the same rate as any such corporation is required to reimburse hospitals for such services for individuals not covered by such a plan.

(2) State law exception. Paragraph (1) shall not apply to any group health plan which is not required under the laws of the State of New York (determined without regard to this subsection or other provisions of Federal law) to reimburse at the rates provided in paragraph (1).

(3) Group health plan. For purposes of this subsection, the term “group health plan” means a plan of, or contributed to by, an employer or employee organization (including a self-insured plan) to provide health care (directly or otherwise) to any employee, any former employee, the employer, or any other individual associated or formerly associated with the employer in a business relationship, or any member of their family.

(o) Treatment of certain reimbursed expenses of rural mail carriers.

(1) General rule. In the case of any employee of the United States Postal Service who performs services involving the collection and delivery of mail on a rural route and who receives qualified reimbursements for the expenses incurred by such employee for the use of a vehicle in performing such services--

(A) the amount allowable as a deduction under this chapter for the use of a vehicle in performing such services shall be equal to the amount of such qualified reimbursements; and

(B) such qualified reimbursements shall be treated as paid under a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) (and section 62(c) shall not apply to such qualified reimbursements).

(2) Definition of qualified reimbursements. For purposes of this subsection, the term “qualified reimbursements” means the amounts paid by the United States Postal Service to employees as an equipment maintenance allowance under the 1991 collective bargaining agreement between the United States Postal Service and the National Rural Letter Carriers’ Association. Amounts paid as an equipment maintenance allowance by such Postal Service under later collective bargaining agreements that supersede the 1991 agreement shall be considered qualified reimbursements if such amounts do not exceed the amounts that would have been paid under the 1991 agreement, adjusted for changes in the Consumer Price Index (as defined in section 1(f)(5)) since 1991.

(p) Cross reference.

(1) For special rule relating to expenses in connection with subdividing real property for sale, see section 1237.

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(2) For special rule relating to the treatment of payments by a transferee of a franchise, trademark, or trade name, see section 1253.

(3) For special rules relating to--

(A) funded welfare benefit plans, see section 419, and

(B) deferred compensation and other deferred benefits, see section 404.

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Sec. 170. Charitable, etc., contributions and gifts.

(a) Allowance of deduction.

(1) General rule. There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.

(2) Corporations on accrual basis. In the case of a corporation reporting its taxable income on the accrual basis, if--

(A) the board of directors authorizes a charitable contribution during any taxable year, and

(B) payment of such contribution is made after the close of such taxable year and on or before the 15th day of the third month following the close of such taxable year, then the taxpayer may elect to treat such contribution as paid during such taxable year. The election may be made only at the time of the filing of the return for such taxable year, and shall be signified in such manner as the Secretary shall by regulations prescribe.

(3) Future interests in tangible personal property. For purposes of this section, payment of a charitable contribution which consists of a future interest in tangible personal property shall be treated as made only when all intervening interests in, and rights to the actual possession or enjoyment of, the property have expired or are held by persons other than the taxpayer or those standing in a relationship to the taxpayer described in section 267(b) or 707(b). For purposes of the preceding sentence, a fixture which is intended to

be severed from the real property shall be treated as tangible personal property.

(b) Percentage limitations.

(1) Individuals. In the case of an individual, the deduction provided in subsection (a) shall be limited as provided in the succeeding subparagraphs.

(A) General rule. Any charitable contribution to--

(i) a church or a convention or association of churches,

(ii) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on,

(iii) an organization the principal purpose or functions of which are the providing of medical or hospital care or medical education or medical research, if the organization is a hospital, or if the organization is a medical research organization directly engaged in the continuous active conduct of medical research in conjunction with a hospital, and during the calendar year in which the contribution is made such organization is committed to spend such contributions for such research before January 1 of the fifth calendar year which begins after the date such contribution is made,

(iv) an organization which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public, and which is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organization referred to in clause (ii) of this subparagraph and which is an agency or instrumentality of a State or political subdivision thereof, or which is owned or operated by a State or political subdivision thereof or by an agency or instrumentality of one or more States or political subdivisions,

(v) a governmental unit referred to in subsection (c)(1),

(vi) an organization referred to in subsection (c)(2) which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from the general public,

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(vii) a private foundation described in subparagraph (E), or

(viii) an organization described in section 509(a)(2) or (3), shall be allowed to the extent that the aggregate of such contributions does not exceed 50 percent of the taxpayer’s contribution base for the taxable year.

(B) Other contributions. Any charitable contribution other than a charitable contribution to which subparagraph (A) applies shall be allowed to the extent that the aggregate of such contributions does not exceed the lesser of--

(i) 30 percent of the taxpayer’s contribution base for the taxable year, or

(ii) the excess of 50 percent of the taxpayer’s contribution base for the taxable year over the amount of charitable contributions allowable under subparagraph (A) (determined without regard to subparagraph (C)).

If the aggregate of such contributions exceeds the limitation of the preceding sentence, such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution (to which subparagraph (A) does not apply) in each of the 5 succeeding taxable years in order of time.

(C) Special limitation with respect to contributions described in subparagraph (A) of certain capital gain property.

(i) In the case of charitable contributions described in subparagraph (A) of capital gain property to which subsection (e)(1)(B) does not apply, the total amount of contributions of such property which may be taken into account under subsection (a) for any taxable year shall not exceed 30 percent of the taxpayer’s contribution base for such year. For purposes of this subsection, contributions of capital gain property to which this subparagraph applies shall be taken into account after all other charitable contributions (other than charitable contributions to which subparagraph (D) applies).

(ii) If charitable contributions described in subparagraph (A) of capital gain property to which clause (i) applies exceeds 30 percent of the taxpayer’s contribution base for any taxable year, such excess shall be treated, in a manner consistent with the rules of subsection (d)(1), as a charitable contribution of capital gain property to which clause (i) applies in each of the 5 succeeding taxable years in order of time.

(iii) At the election of the taxpayer (made at such time and in such manner as the Secretary prescribes by regulations), subsection (e)(1) shall apply to all contributions of capital gain property (to which subsection (e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year. If such an election is made, clauses (i) and (ii) shall not apply to contributions of capital gain property made during the taxable year, and, in applying subsection (d)(1) for such taxable year with respect to contributions of capital gain property made in any prior contribution year for which an election was not made under this clause, such contributions shall be reduced as if subsection (e)(1) had applied to such contributions in the year in which made.

(iv) For purposes of this paragraph, the term “capital gain property” means, with respect to any contribution, any capital asset the sale of which at its fair market value at the time of the contribution would have resulted in gain which would have been long-term capital gain. For purposes of the preceding sentence, any property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset.

(D) Special limitation with respect to contributions of capital gain property to organizations not described in subparagraph (A).

(i) In general. In the case of charitable contributions (other than charitable contributions to which subparagraph (A) applies) of capital gain property, the total amount of such contributions of such property taken into account under subsection (a) for any taxable year shall not exceed the lesser of--

(I) 20 percent of the taxpayer’s contribution base for the taxable year, or

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(II) the excess of 30 percent of the taxpayer’s contribution base for the taxable year over the amount of the contributions of capital gain property to which subparagraph (C) applies.

For purposes of this subsection, contributions of capital gain property to which this subparagraph applies shall be taken into account after all other charitable contributions.

(ii) Carryover. If the aggregate amount of contributions described in clause (i) exceeds the limitation of clause (i), such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution of capital gain property to which clause (i) applies in each of the 5 succeeding taxable years in order of time.

(E) Certain private foundations. The private foundations referred to in subparagraph (A)(vii) and subsection (e)(1)(B) are--

(i) a private operating foundation (as defined in section 4942(j)(3)),

(ii) any other private foundation (as defined in section 509(a)) which, not later than the 15th day of the third month after the close of the foundation’s taxable year in which contributions are received, makes qualifying distributions (as defined in section 4942(g), without regard to paragraph (3) thereof), which are treated, after the application of section 4942(g)(3), as distributions out of corpus (in accordance with section 4942(h)) in an amount equal to 100 percent of such contributions, and with respect to which the taxpayer obtains adequate records or other sufficient evidence from the foundation showing that the foundation made such qualifying distributions, and

(iii) a private foundation all of the contributions to which are pooled in a common fund and which would be described in section 509(a)(3) but for the right of any substantial contributor (hereafter in this clause called “donor”) or his spouse to designate annually the recipients, from among organizations described in paragraph (1) of section 509(a), of the income attributable to the donor’s contribution to the fund and to direct (by deed or by will) the payment, to an organization described in such paragraph (1), of the corpus in the common fund attributable to the donor’s contribution; but this clause shall apply only if all of the income of the common fund is required to be (and is) distributed to one or more organizations described in such paragraph (1) not later than the 15th day of the third month after the close of the taxable year in which the income is realized by the fund and only if all of the corpus attributable to any donor’s contribution to the fund is required to be (and is) distributed to one or more of such organizations not later than one year after his death or after the death of his surviving spouse if she has the right to designate the recipients of such corpus.

(F) Contribution base defined. For purposes of this section, the term “contribution base” means adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under section 172).

(2) Corporations. In the case of a corporation, the total deductions under subsection (a) for any taxable year shall not exceed 10 percent of the taxpayer’s taxable income computed without regard to--

(A) this section,

(B) part VIII (except section 248),

(C) any net operating loss carryback to the taxable year under section 172, and

(D) any capital loss carryback to the taxable year under section 1212(a)(1).

(c) Charitable contribution defined. For purposes of this section, the term “charitable contribution” means a contribution or gift to or for the use of--

(1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.

(2) A corporation, trust, or community chest, fund, or foundation--

(A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States;

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(B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals;

(C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; and

(D) which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

A contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions exclusively for purposes specified in subparagraph (B). Rules similar to the rules of section 501(j) shall apply for purposes of this paragraph.

(3) A post or organization of war veterans, or an auxiliary unit or society of, or trust or foundation for, any such post or organization--

(A) organized in the United States or any of its possessions, and

(B) no part of the net earnings of which inures to the benefit of any private shareholder or individual.

(4) In the case of a contribution or gift by an individual, a domestic fraternal society, order, or association, operating under the lodge system, but only if such contribution or gift is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals.

(5) A cemetery company owned and operated exclusively for the benefit of its members, or any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, if such company or corporation is not operated for profit and no part of the net earnings of such company or corporation inures to the benefit of any private shareholder or individual.

For purposes of this section, the term “charitable contribution” also means an amount treated under subsection (g) as paid for the use of an organization described in paragraph (2), (3), or (4).

(d) Carryovers of excess contributions.

(1) Individuals.

(A) In general. In the case of an individual, if the amount of charitable contributions described in subsection (b)(1)(A) payment of which is made within a taxable year (hereinafter in this paragraph referred to as the “contribution year”) exceeds 50 percent of the taxpayer’s contribution base for such year, such excess shall be treated as a charitable contribution described in subsection (b)(1)(A) paid in each of the 5 succeeding taxable years in order of time, but, with respect to any such succeeding taxable year, only to the extent of the lesser of the two following amounts:

(i) the amount by which 50 percent of the taxpayer’s contribution base for such succeeding taxable year exceeds the sum of the charitable contributions described in subsection (b)(1)(A) payment of which is made by the taxpayer within such succeeding taxable year (determined without regard to this subparagraph) and the charitable contributions described in subsection (b)(1)(A) payment of which was made in taxable years before the contribution year which are treated under this subparagraph as having been paid in such succeeding taxable year; or

(ii) in the case of the first succeeding taxable year, the amount of such excess, and in the case of the second, third, fourth, or fifth succeeding taxable year, the portion of such excess not treated under this subparagraph as a charitable contribution described in subsection (b)(1)(A) paid in any taxable year intervening between the contribution year and such succeeding taxable year.

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(B) Special rule for net operating loss carryovers. In applying subparagraph (A), the excess determined under subparagraph (A) for the contribution year shall be reduced to the extent that such excess reduces taxable income (as computed for purposes of the second sentence of section 172(b)(2)) and increases the net operating loss deduction for a taxable year succeeding the contribution year.

(2) Corporations.

(A) In general. Any contribution made by a corporation in a taxable year (hereinafter in this paragraph referred to as the “contribution year”) in excess of the amount deductible for such year under subsection (b)(2) shall be deductible for each of the 5 succeeding taxable years in order of time, but only to the extent of the lesser of the two following amounts: (i) the excess of the maximum amount deductible for such succeeding taxable year under subsection (b)(2) over the sum of the contributions made in such year plus the aggregate of the excess contributions which were made in taxable years before the contribution year and which are deductible under this subparagraph for such succeeding taxable year; or (ii) in the case of the first succeeding taxable year, the amount of such excess contribution, and in the case of the second, third, fourth, or fifth succeeding taxable year, the portion of such excess contribution not deductible under this subparagraph for any taxable year intervening between the contribution year and such succeeding taxable year.

(B) Special rule for net operating loss carryovers. For purposes of subparagraph (A), the excess of--

(i) the contributions made by a corporation in a taxable year to which this section applies, over

(ii) the amount deductible in such year under the limitation in subsection (b)(2),

shall be reduced to the extent that such excess reduces taxable income (as computed for purposes of the second sentence of section 172(b)(2)) and increases a net operating loss carryover under section 172 to a succeeding taxable year.

(e) Certain contributions of ordinary income and capital gain property.

(1) General rule. The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of--

(A) the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution), and

(B) in the case of a charitable contribution--

(i) of tangible personal property, if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501 (or, in the case of a governmental unit, to any purpose or function described in subsection(c)), or

(ii) to or for the use of a private foundation (as defined in section 509(a)), other than a private foundation described in subsection (b)(1)(E), the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution).

For purposes of applying this paragraph (other than in the case of gain to which section 617(d)(1), 1245(a), 1250(a), 1252(a), or 1254(a) applies), property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset. For purposes of applying this paragraph in the case of a charitable contribution of stock in an S corporation, rules similar to the rules of section 751 shall apply in determining whether gain on such stock would have been long-term capital gain if such stock were sold by the taxpayer.

(2) Allocation of basis. For purposes of paragraph (1), in the case of a charitable contribution of less than the taxpayer’s entire interest in the property contributed, the taxpayer’s adjusted basis in such property shall be allocated between the interest contributed and any interest not contributed in accordance with regulations prescribed by the Secretary.

(3) Special rule for certain contributions of inventory and other property.

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(A) Qualified contributions. For purposes of this paragraph, a qualified contribution shall mean a charitable contribution of property described in paragraph (1) or (2) of section 1221, by a corporation (other than a corporation which is an S corporation) to an organization which is described in section 501(c)(3) and is exempt under section 501(a) (other than a private foundation, as defined in section 509(a), which is not an operating foundation, as defined in section 4942(j)(3)), but only if--

(i) the use of the property by the donee is related to the purpose or function constituting the basis for its exemption under section 501 and the property is to be used by the donee solely for the care of the ill, the needy, or infants;

(ii) the property is not transferred by the donee in exchange for money, other property, or services;

(iii) the taxpayer receives from the donee a written statement representing that its use and disposition of the property will be in accordance with the provisions of clauses (i) and (ii); and

(iv) in the case where the property is subject to regulation under the Federal Food, Drug, and Cosmetic Act, as amended, such property must fully satisfy the applicable requirements of such Act and regulations promulgated thereunder on the date of transfer and for one hundred and eighty days prior thereto.

(B) Amount of reduction. The reduction under paragraph (1)(A) for any qualified contribution (as defined in subparagraph (A)) shall be no greater than the sum of--

(i) one-half of the amount computed under paragraph (1)(A) (computed without regard to this paragraph), and

(ii) the amount (if any) by which the charitable contribution deduction under this section for any qualified contribution (computed by taking into account the amount determined in clause (i), but without regard to this clause) exceeds twice the basis of such property.

(C) This paragraph shall not apply to so much of the amount of the gain described in paragraph (1)(A) which would be long-term capital gain but for the application of sections 617, 1245, 1250, or 1252.

(4) Special rule for contributions of scientific property used for research.

(A) Limit on reduction. In the case of a qualified research contribution, the reduction under paragraph (1)(A) shall be no greater than the amount determined under paragraph (3)(B).

(B) Qualified research contributions. For purposes of this paragraph, the term “qualified research contribution” means a charitable contribution by a corporation of tangible personal property described in paragraph (1) of section 1221, but only if--

(i) the contribution is to an organization described in subparagraph (A) or subparagraph (B) of section 41(e)(6),

(ii) the property is constructed by the taxpayer,

(iii) the contribution is made not later than 2 years after the date the construction of the property is substantially completed,

(iv) the original use of the property is by the donee,

(v) the property is scientific equipment or apparatus substantially all of the use of which by the donee is for research or experimentation (within the meaning of section 174), or for research training, in the United States in physical or biological sciences,

(vi) the property is not transferred by the donee in exchange for money, other property, or services, and

(vii) the taxpayer receives from the donee a written statement representing that its use and disposition of the property will be in accordance with the provisions of clauses (v) and (vi).

(C) Construction of property by taxpayer. For purposes of this paragraph, property shall be treated as constructed by the taxpayer only if the cost of the parts used in the construction of such property (other than parts manufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer’s basis in such property.

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(D) Corporation. For purposes of this paragraph, the term “corporation” shall not include

(i) an S corporation,

(ii) a personal holding company (as defined in section 542), and

(iii) a service organization (as defined in section 414(m)(3)).

(5) Special rule for contributions of stock for which market quotations are readily available.

(A) In general. Subparagraph (B)(ii) of paragraph (1) shall not apply to any contribution of qualified appreciated stock.

(B) Qualified appreciated stock. Except as provided in subparagraph (C), for purposes of this paragraph, the term “qualified appreciated stock” means any stock of a corporation--

(i) for which (as of the date of the contribution) market quotations are readily available on an established securities market, and

(ii) which is capital gain property (as defined in subsection (b)(1)(C)(iv)).

(C) Donor may not contribute more than 10 percent of stock of corporation.

(i) In general. In the case of any donor, the term “qualified ,appreciated stock” shall not include any stock of a corporation contributed by the donor in a contribution to which paragraph (1)(B)(ii) applies (determined without regard to this paragraph) to the extent that the amount of the stock so contributed (when increased by the aggregate amount of all prior such contributions by the donor of stock in such corporation) exceeds 10 percent (in value) of all of the outstanding stock of such corporation.

(ii) Special rule. For purposes of clause (i), an individual shall be treated as making all contributions made by any member of his family (as defined in section 267(c)(4)).

(D) [Deleted]

(6) Special rule for contributions of computer technology and equipment for elementary or secondary school purposes.

(A) Limit on reduction. In the case of a qualified elementary or secondary educational contribution, the reduction under paragraph (1)(A) shall be no greater than the amount determined under paragraph (3)(B).

(B) Qualified elementary or secondary educational contribution. For purposes of this paragraph, the term “qualified elementary or secondary educational contribution” means a charitable contribution by a corporation of any computer technology or equipment, but only if--

(i) the contribution is to--

(I) an educational organization described in subsection (b)(1)(A)(ii), or

(II) an entity described in section 501(c)(3) and exempt from tax under section 501(a) (other than an entity described in subclause (I)) that is organized primarily for purposes of supporting elementary and secondary education,

(ii) the contribution is made not later than 2 years after the date the taxpayer acquired the property (or in the case of property constructed by the taxpayer, the date the construction of the property is substantially completed),

(iii) the original use of the property is by the donor or the donee,

(iv) substantially all of the use of the property by the donee is for use within the United States for educational purposes in any of the grades K-12 that are related to the purpose or function of the donee,

(v) the property is not transferred by the donee in exchange for money, other property, or services, except for shipping, installation and transfer costs,

(vi) the property will fit productively into the donee’s education plan, and

(vii) the donee’s use and disposition of the property will be in accordance with the provisions of clauses (iv) and (v).

(C) Contribution to private foundation. A contribution by a corporation of any computer technology or equipment to a private foundation (as defined in section 509) shall be treated as a qualified elementary or secondary educational contribution for purposes of this paragraph if--

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(i) the contribution to the private foundation satisfies the requirements of clauses (ii) and (v) of subparagraph (B), and

(ii) within 30 days after such contribution, the private foundation--

(I) contributes the property to a donee described in clause (i) of subparagraph (B) that satisfies the requirements of clauses (iv) through (vii) of subparagraph (B), and

(II) notifies the donor of such contribution.

(D) Special rule relating to construction of property. For the purposes of this paragraph, the rules of paragraph (4)(C) shall apply.

(E) Definitions. For the purposes of this paragraph--

(i) Computer technology or equipment. The term “computer technology or equipment” means computer software (as defined by section 197(e)(3)(B)), computer or peripheral equipment (as defined by section 168(i)(2)(B)), and fiber optic cable related to computer use.

(ii) Corporation. The term “corporation” has the meaning given to such term by paragraph (4)(D).

(F) Termination. This paragraph shall not apply to any contribution made during any taxable year beginning after December 31, 2000.

(f) Disallowance of deduction in certain cases and special rules.

(1) In general. No deduction shall be allowed under this section for a contribution to or for the use of an organization or trust described in section 508(d) or 4948(c)(4) subject to the conditions specified in such sections.

(2) Contributions of property placed in trust.

(A) Remainder interest. In the case of property transferred in trust, no deduction shall be allowed under this section for the value of a contribution of a remainder interest unless the trust is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664), or a pooled income fund (described in section 642(c)(5)).

(B) Income interests, etc. No deduction shall be allowed under this section for the value of any interest in property (other than a remainder interest) transferred in trust unless the interest is in the form of a guaranteed annuity or the trust instrument specifies that the interest is a fixed percentage distributed yearly of the fair market value of the trust property (to be determined yearly) and the grantor is treated as the owner of such interest for purposes of applying section 671. If the donor ceases to be treated as the owner of such an interest for purposes of applying section 671, at the time the donor ceases to be so treated, the donor shall for purposes of this chapter be considered as having received an amount of income equal to the amount of any deduction he received under this section for the contribution reduced by the discounted value of all amounts of income earned by the trust and taxable to him before the time at which he ceases to be treated as the owner of the interest. Such amounts of income shall be discounted to the date of the contribution. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph.

(C) Denial of deduction in case of payments by certain trusts. In any case in which a deduction is allowed under this section for the value of an interest in property described in subparagraph (B), transferred in trust, no deduction shall be allowed under this section to the grantor or any other person for the amount of any contribution made by the trust with respect to such interest.

(D) Exception. This paragraph shall not apply in a case in which the value of all interests in property transferred in trust are deductible under subsection (a).

(3) Denial of deduction in case of certain contributions of partial interests in property.

(A) In general. In the case of a contribution (not made by a transfer in trust) of an interest in property which consists of less than the taxpayer’s entire interest in such property, a deduction shall be allowed under this section only to the extent that the value of the interest contributed would be allowable as a deduction under this section if such interest had been transferred in trust. For purposes of this subparagraph, a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer’s entire interest in such property.

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(B) Exceptions. Subparagraph (A) shall not apply to--

(i) a contribution of a remainder interest in a personal residence or farm,

(ii) a contribution of an undivided portion of the taxpayer’s entire interest in property, and

(iii) a qualified conservation contribution.

(4) Valuation of remainder interest in real property. For purposes of this section, in determining the value of a remainder interest in real property, depreciation (computed on the straight line method) and depletion of such property shall be taken into account, and such value shall be discounted at a rate of 6 percent per annum, except that the Secretary may prescribe a different rate.

(5) Reduction for certain interest. If, in connection with any charitable contribution, a liability is assumed by the recipient or by any other person, or if a charitable contribution is of property which is subject to a liability, then, to the extent necessary to avoid the duplication of amounts, the amount taken into account for purposes of this section as the amount of the charitable contribution--

(A) shall be reduced for interest (i) which has been paid (or is to be paid) by the taxpayer,

(ii) which is attributable to the liability, and

(iii) which is attributable to any period after the making of the contribution, and

(B) in the case of a bond, shall be further reduced for interest (i) which has been paid (or is to be paid) by the taxpayer on indebtedness incurred or continued to purchase or carry such bond, and (ii) which is attributable to any period before the making of the contribution.

The reduction pursuant to subparagraph (B) shall not exceed the interest (including interest equivalent) on the bond which is attributable to any period before the making of the contribution and which is not (under the taxpayer’s method of accounting) includible in the gross income of the taxpayer for any taxable year. For purposes of this paragraph, the term “bond” means any bond, debenture, note, or certificate or other evidence of indebtedness.

(6) Deductions for out-of-pocket expenditures. No deduction shall be allowed under this section for an out-of-pocket expenditure made by any person on behalf of an organization described in subsection (c) (other than an organization described in section 501(h)(5) (relating to churches, etc.)) if the expenditure is made for the purpose of influencing legislation (within the meaning of section 501(c)(3)).

(7) Reformations to comply with paragraph (2).

(A) In general. A deduction shall be allowed under subsection (a) in respect of any qualified reformation (within the meaning of section 2055(e)(3)(B)).

(B) Rules similar to section 2055(e)(3) to apply. For purposes of this paragraph, rules similar to the rules of section 2055(e)(3) shall apply.

(8) Substantiation requirement for certain contributions.

(A) General rule. No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).

(B) Content of acknowledgment. An acknowledgment meets the requirements of this subparagraph if it includes the following information:

(i) The amount of cash and a description (but not value) of any property other than cash contributed.

(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i).

(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.

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For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.

(C) Contemporaneous. For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of--

(i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or

(ii) the due date (including extensions) for filing such return.

(D) Substantiation not required for contributions reported by the donee organization. Subparagraph (A) shall not apply to a contribution if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution.

(E) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations that may provide that some or all of the requirements of this paragraph do not apply in appropriate cases.

(9) Denial of deduction where contribution for lobbying activities. No deduction shall be allowed under this section for a contribution to an organization which conducts activities to which section 162(e)(1) applies on matters of direct financial interest to the donor’s trade or business, if a principal purpose of the contribution was to avoid Federal income tax by securing a deduction for such activities under this section which would be disallowed by reason of section 162(e) if the donor had conducted such activities directly. No deduction shall be allowed under section 162(a) for any amount for which a deduction is disallowed under the preceding sentence.

(g) Amounts paid to maintain certain students as members of taxpayer’s household.

(1) In general. Subject to the limitations provided by paragraph (2), amounts paid by the taxpayer to maintain an individual (other than a dependent, as defined in section 152, or a relative of the taxpayer) as a member of his household during the period that such individual is--

(A) a member of the taxpayer’s household under a written agreement between the taxpayer and an organization described in paragraph (2), (3), or (4) of subsection (c) to implement a program of the organization to provide educational opportunities for pupils or students in private homes, and

(B) a full-time pupil or student in the twelfth or any lower grade at an educational organization described in section 170 (b)(1)(A)(ii) located in the United States, shall be treated as amounts paid for the use of the organization.

(2) Limitations.

(A) Amount. Paragraph (1) shall apply to amounts paid within the taxable year only to the extent that such amounts do not exceed $50 multiplied by the number of full calendar months during the taxable year which fall within the period described in paragraph (1). For purposes of the preceding sentence, if 15 or more days of a calendar month fall within such period such month shall be considered as a full calendar month.

(B) Compensation or reimbursement. Paragraph (1) shall not apply to any amount paid by the taxpayer within the taxable year if the taxpayer receives any money or other property as compensation or reimbursement for maintaining the individual in his household during the period described in paragraph (1).

(3) Relative defined. For purposes of paragraph (1), the term “relative of the taxpayer” means an individual who, with respect to the taxpayer, bears any of the relationships described in paragraphs (1) through (8) of section 152(a). \

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(4) No other amount allowed as deduction. No deduction shall be allowed under subsection (a) for any amount paid by a taxpayer to maintain an individual as a member of his household under a program described in paragraph (1)(A) except as provided in this subsection.

(h) Qualified conservation contribution.

(1) In general. For purposes of subsection (f)(3)(B)(iii), the term “qualified conservation contribution” means a contribution--

(A) of a qualified real property interest,

(B) to a qualified organization,

(C) exclusively for conservation purposes.

(2) Qualified real property interest. For purposes of this subsection, the term “qualified real property interest“ means any of the following interests in real property:

(A) the entire interest of the donor other than a qualified mineral interest,

(B) a remainder interest, and

(C) a restriction (granted in perpetuity) on the use which may be made of the real property.

(3) Qualified organization. For purposes of paragraph (1), the term “qualified organization” means an organization which--

(A) is described in clause (v) or (vi) of subsection (b)(1)(A), or

(B) is described in section 501(c)(3) and--

(i) meets the requirements of section 509(a)(2), or

(ii) meets the requirements of section 509(a)(3) and is controlled by an organization described in subparagraph (A) or in clause (i) of this subparagraph.

(4) Conservation purpose defined.

(A) In general. For purposes of this subsection, the term “conservation purpose” means--

(i) the preservation of land areas for outdoor recreation by, or the education of, the general public,

(ii) the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem,

(iii) the preservation of open space (including farmland and forest land) where such preservation is--

(I) for the scenic enjoyment of the general public, or

(II) pursuant to a clearly delineated Federal, State, or local governmental conservation policy, and will yield a significant public benefit, or

(iv) the preservation of an historically important land area or a certified historic structure.

(B) Certified historic structure. For purposes of subparagraph (A)(iv), the term “certified historic structure” means any building, structure, or land area which--

(i) is listed in the National Register, or

(ii) is located in a registered historic district (as defined in section 47(c)(3)(B)) and is certified by the Secretary of the Interior to the Secretary as being of historic significance to the district.

A building, structure, or land area satisfies the preceding sentence if it satisfies such sentence either at the time of the transfer or on the due date (including extensions) for filing the transferor’s return under this chapter for the taxable year in which the transfer is made.

(5) Exclusively for conservation purposes. For purposes of this subsection--

(A) Conservation purpose must be protected. A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.

(B) No surface mining permitted.

(i) In general. Except as provided in clause (ii), in the case of a contribution of any interest where there is a retention of a qualified mineral interest, subparagraph (A) shall not be treated as met if at any time there may be extraction or removal of minerals by any surface mining method.

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(ii) Special rule. With respect to any contribution of property in which the ownership of the surface estate and mineral interests has been and remains separated, subparagraph (A) shall be treated as met if the probability of surface mining occurring on such property is so remote as to be negligible.

(6) Qualified mineral interest. For purposes of this subsection, the term “qualified mineral interest” means--

(A) subsurface oil, gas, or other minerals, and

(B) the right to access to such minerals.

(i) Standard mileage rate for use of passenger automobile. For purposes of computing the deduction under this section for use of a passenger automobile, the standard mileage rate shall be 14 cents per mile.

(j) Denial of deduction for certain travel expenses. No deduction shall be allowed under this section for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel.

(k) Disallowance of deductions in certain cases. For disallowance of deductions for contributions to or for the use of communist controlled organizations, see section 11(a) of the Internal Security Act of 1950 (50 U.S.C. 790).

(l) Treatment of certain amounts paid to or for the benefit of institutions of higher education.

(1) In general. For purposes of this section, 80 percent of any amount described in paragraph (2) shall be treated as a charitable contribution.

(2) Amount described. For purposes of paragraph (1), an amount is described in this paragraph if--

(A) the amount is paid by the taxpayer to or for the benefit of an educational organization--

(i) which is described in subsection (b)(1)(A)(ii), and

(ii) which is an institution of higher education (as defined in section 3304(f)), and

(B) such amount would be allowable as a deduction under this section but for the fact that the taxpayer receives (directly or indirectly) as a result of paying such amount the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution.

If any portion of a payment is for the purchase of such tickets, such portion and the remaining portion (if any) of such payment shall be treated as separate amounts for purposes of this subsection.

(m) Other cross references.

(1) For treatment of certain organizations providing child care, see section 501(k).

(2) For charitable contributions of estates and trusts, see section 642(c).

(3) For nondeductibility of contributions by common trust funds, see section 584.

(4) For charitable contributions of partners, see section 702.

(5) For charitable contributions of nonresident aliens, see section 873.

(6) For treatment of gifts for benefit of or use in connection with the Naval Academy as gifts to or for the use of the United States, see section 6973 of title 10, United States Code.

(7) For treatment of gifts accepted by the Secretary of State, the Director of the International Communication Agency, or the Director of the United States International Development Cooperation Agency, as gifts to or for the use of the United States, see section 25 of the State Department Basic Authorities Act of 1956.

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(8) For treatment of gifts of money accepted by the Attorney General for credit to the “Commissary Funds, Federal Prisons” as gifts to or for the use of the United States, see section 4043 of title 18, United States Code.

(9) For charitable contributions to or for the use of Indian Tribal governments (or their subdivisions), see section 7871.

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Reg. §1.170A-1 Charitable, etc., contributions and gifts; allowance of deduction.

(a) Allowance of deduction. Any charitable contribution, as defined in section 170(c), actually paid during the taxable year is allowable as a deduction in computing taxable income irrespective of the method of accounting employed or of the date on which the contribution is pledged. However, charitable contributions by corporations may under certain circumstances be deductible even though not paid during the taxable year as provided in section 170(a)(2) and §1.170A-11. For rules relating to recordkeeping and return requirements in support of deductions for charitable contributions (whether by an itemizing or nonitemizing taxpayer) see §1.170A-13. The deduction is subject to the limitations of section 170(b) and §1.170A-8 or §1.170A-11. Subject to the provisions of section 170(d) and §§1.170A-10 and 1.170A-11, certain excess charitable contributions made by individuals and corporations shall be treated as paid in certain succeeding taxable years. For provisions relating to direct charitable deductions under section 63 by nonitemizers, see section 63 (b)(1)(C) and (i) and section 170(i). For rules relating to the determination of, and the deduction for, amounts paid to maintain certain students as members of the taxpayer’s household and treated under section 170(g) as paid for the use of an organization described in section 170(c) (2), (3), or (4), see §1.170A-2. For the reduction of any charitable contributions for interest on certain indebtedness, see section 170(f)(5) and §1.170A-3. For a special rule relating to the computation of the amount of the deduction with respect to a charitable contribution of certain ordinary income or capital gain property, see section 170(e) and §§1.170A-4 and 1.170A-4A. For rules for postponing the time for deduction of a charitable contribution of a future interest in tangible personal property, see section 170(a)(3) and §1.170A-5. For rules with respect to transfers in trust and of partial interests in property, see section 170(e), section 170(f) (2) and (3), §§1.170A-4, 1.170A-6, and 1.170A-7. For definition of the term “section 170(b)(1)(A) organization,” see §1.170A-9. For valuation of a remainder interest in real property, see section 170(f)(4) and the regulations thereunder. The deduction for charitable contributions is subject to verification by the district director.

(b) Time of making contribution. Ordinarily, a contribution is made at the time delivery is effected. The unconditional delivery or mailing of a check which subsequently clears in due course will constitute an effective contribution on the date of delivery or mailing. If a taxpayer unconditionally delivers or mails a properly endorsed stock certificate to a charitable donee or the donee’s agent, the gift is completed on the date of delivery or, if such certificate is received in the ordinary course of the mails, on the date of mailing. If the donor delivers the stock certificate to his bank or broker as the donor’s agent, or to the issuing corporation or its agent, for transfer into the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation. For rules relating to the date of payment of a contribution consisting of a future interest in tangible personal property, see section 170(a)(3) and §1.170A-5.

(c) Value of a contribution in property.

(1) If a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution reduced as provided in section 170(e)(1) and paragraph (a) of §1.170A-4, or section 170(e)(3) and paragraph (c) of §1.170A-4A.

(2) The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. If the contribution is made in property of a type which the taxpayer sells in the course of his business, the fair market value is the price which the taxpayer would have received if he had sold the contributed property in the usual market in which he customarily sells, at the time and place of the contribution and, in the case of a contribution of goods in quantity, in the quantity contributed. The usual market of a manufacturer or other producer consists of the wholesalers or other distributors to or through whom he customarily sells, but if he sells only at retail the usual market consists of his retail customers.

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(3) If a donor makes a charitable contribution of property, such as stock in trade, at a time when he could not reasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is the amount for which the quantity of property contributed would have been sold by the donor at the time of the contribution.

(4) Any costs and expenses pertaining to the contributed property which were incurred in taxable years preceding the year of contribution and are properly reflected in the opening inventory for the year of contribution must be removed from inventory and are not a part of the cost of goods sold for purposes of determining gross income for the year of contribution. Any costs and expenses pertaining to the contributed property which are incurred in the year of contribution and would, under the method of accounting used, be properly reflected in the cost of goods sold for such year are to be treated as part of the costs of goods sold for such year. If costs and expenses incurred in producing or acquiring the contributed property are, under the method of accounting used, properly deducted under section 162 or other section of the Code, such costs and expenses will be allowed as deductions for the taxable year in which they are paid or incurred whether or not such year is the year of the contribution. Any such costs and expenses which are treated as part of the cost of goods sold for the year of contribution, and any such costs and expenses which are properly deducted under section 162 or other section of the Code, are not to be treated under any section of the Code as resulting in any basis for the contributed property. Thus, for example, the contributed property has no basis for purposes of determining under section 170(e)(1)(A) and paragraph (a) of §1.170A-4 the amount of gain which would have been recognized if such property had been sold by the donor at its fair market value at the time of its contribution. The amount of any charitable contribution for the taxable year is not to be reduced by the amount of any costs or expenses pertaining to the contributed property which was properly deducted under section 162 or other section of the Code for any taxable year preceding the year of the contribution. This subparagraph applies only to property which was held by the taxpayer for sale in the course of a trade or business. The application of this subparagraph may be illustrated by the following examples:

Example 1. In 1970, A, an individual using the calendar year as the taxable year and the accrual method of accounting, contributed to a church property from inventory having a fair market value of $600. The closing inventory at the end of 1969 properly included $400 of costs attributable to the acquisition of such property, and in 1969 A properly deducted under section 162 $50 of administrative and other expenses attributable to such property. Under section 170(e)(1)(A) and paragraph (a) of §1.170A-4, the amount of the charitable contribution allowed for 1970 is $400 ($600 - [$600 - $400]). Pursuant to this subparagraph, the cost of goods sold to be used in determining gross income for 1970 may not include the $400 which was included in opening inventory for that year.

Example 2. The facts are the same as in example (1) except that the contributed property was acquired in 1970 at a cost of $400. The $400 cost of the property is included in determining the cost of goods sold for 1970, and $50 is allowed as a deduction for that year under section 162. A is not allowed any deduction under section 170 for the contributed property, since under section 170(e)(1)(A) and paragraph (a) of §1.170A-4 the amount of the charitable contribution is reduced to zero ($600 - [$600 - $0]).

Example 3. In 1970, B, an individual using the calendar year as the taxable year and the accrual method of accounting, contributed to a church property from inventory having a fair market value of $600. Under §1.471-3(c), the closing inventory at the end of 1969 properly included $450 costs attributable to the production of such property, including $50 of administrative and other indirect expenses which, under his method of accounting, was properly added to inventory rather than deducted as a business expense. Under section 170(e)(1)(A) and paragraph (a) of §1.170A-4, the amount of the charitable contribution allowed 1970 is $450 ($600 - [$600 - $450]). Pursuant to this subparagraph, the cost of goods sold to be used in determining gross income for 1970 may not include the $450 which was included in opening inventory for that year.

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Example 4. The facts are the same as in example (3) except that the contributed property was produced in 1970 at a cost of $450, including $50 of administrative and other indirect expenses. The $450 cost of the property is included in determining the cost of goods sold for 1970. B is not allowed any deduction under section 170 for the contributed property, since under section 170(e) (1)(A) and paragraph (a) of §1.170A-4 the amount of the charitable contribution is reduced to zero ($600 - [$600 - $0]).

Example 5. In 1970, C, a farmer using the cash method of accounting and the calendar year as the taxable year, contributed to a church a quantity of grain which he had raised having a fair market value of $600. In 1969, C paid expenses of $450 in raising the property which he properly deducted for such year under section 162. Under section 170(e)(1)(A) and paragraph (a) of §1.170A-4, the amount of the charitable contribution in 1970 is reduced to zero ($600 - [$600 - $0]). Accordingly, C is not allowed any deduction under section 170 for the contributed property.

Example 6. The facts are the same as in example (5) except that the $450 expenses incurred in raising the contributed property were paid in 1970. The result is the same as in example (5), except the amount of $450 is deductible under section 162 for 1970.

(5) Transfers of property to an organization described in section 170(c) which bear a direct relationship to the taxpayer’s trade or business and which are made with a reasonable expectation of financial return commensurate with the amount of the transfer may constitute allowable deductions as trade or business expenses rather than as charitable contributions. See section 162 and the regulations thereunder.

(d) Purchase of an annuity.

(1) In the case of an annuity or portion thereof purchased from an organization described in section 170(c), there shall be allowed as a deduction the excess of the amount paid over the value at the time of purchase of the annuity or portion purchased.

(2) The value of the annuity or portion is the value of the annuity determined in accordance with paragraph (e)(1)(iii) (b)(2) of §1.101-2.

(3) For determining gain on any such transaction constituting a bargain sale, see section 1011(b) and §1.1011-2.

(e) Transfers subject to a condition or power. If as of the date of a gift a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. If an interest in property passes to, or is vested in, charity on the date of the gift and the interest would be defeated by the subsequent performance of some act or the happening of some event, the possibility of occurrence of which appears on the of the gift to be so remote as to be negligible, the deduction is allowable. For example, A transfers land to a city government for as long as the land is used by the city for a public park. If on the date of the gift the city does plan to use the land for a park and the possibility that the city will not use the land for a public park is so remote as to be negligible, A is entitled to a deduction under section 170 for his charitable contribution.

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(f) Special rules applicable to certain contributions.

(1) See section 14 of the Wild and Scenic Rivers Act (Pub. L. 90-542, 82 Stat. 918) for provisions relating to the claim and allowance of the value of certain easements as a charitable contribution under section 170.

(2) For treatment of gifts accepted by the Secretary of State or the Secretary of Commerce, for the purpose of organizing and holding an international conference to negotiate a Patent Corporation Treaty, as gifts to or for the use of the United States, see section 3 of joint resolution of December 24, 1969 (Pub. L. 91-160, 83 Stat. 443).

(3) For treatment of gifts accepted by the Secretary of the Department of Housing and Urban Development, for the purpose of aiding or facilitating the work of the Department, as gifts to or for the use of the United States, see section 7(k) of the Department of Housing and Urban Development Act (42 U.S.C. 3535), as added by section 905 of Pub. L. 91-609 (84 Stat. 1809).

(g) Contributions of services. No deduction is allowable under section 170 for a contribution of services. However, unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution. For example, the cost of a uniform without general utility which is required to be worn in performing donated services is deductible. Similarly, out-of-pocket transportation expenses necessarily incurred in performing donated services are deductible. Reasonable expenditures for meals and lodging necessarily incurred while away from home in the course of performing donated services also are deductible. For the purposes of this paragraph, the phrase “while away from home” has the same meaning as that phrase is used for purposes of section 162 and the regulations thereunder.

(h) Payment in exchange for consideration--

(1) Burden on taxpayer to show that all or part of payment is a charitable contribution or gift. No part of a payment that a taxpayer makes to or for the use of an organization described in section 170(c) that is in consideration for (as defined in §1.170A-13 (f)(6)) goods or services (as defined in §1.170A-13 (f)(5)) is a contribution or gift within the meaning of section 170(c) unless the taxpayer--

(i) Intends to make a payment in an amount that exceeds the fair market value of the goods or services; and

(ii) Makes a payment in an amount that exceeds the fair market value of the goods or services.

(2) Limitation on amount deductible--

(i) In general. The charitable contribution deduction under section 170(a) for a payment a taxpayer makes partly in consideration for goods or services may not exceed the excess of--

(A) The amount of any cash paid and the fair market value of any property (other than cash) transferred by the taxpayer to an organization described in section 170(c); over

(B) The fair market value of the goods or services the organization provides in return.

(ii) Special rules. For special limits on the deduction for charitable contributions of ordinary income and capital gain property, see section 170(e) and §§1.170A-4 and 1.170A-4A.

(3) Certain goods or services disregarded. For purposes of section 170(a) and paragraphs (h)(1) and (h)(2) of this section, goods or services described in §1.170A-13 (f)(8)(i) or §1.170A-13 (f)(9)(i) are disregarded.

(4) Donee estimates of the value of goods or services may be treated as fair value--

(i) In general. For purposes of section 170(a), a taxpayer may rely on either a contemporaneous written acknowledgment provided under section 170(f)(8) and §1.170A-13 (f) or a written disclosure statement provided under section 6115 for the fair market value of any goods or services provided to the taxpayer by the donee organization.

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(ii) Exception. A taxpayer may not treat an estimate of the value of goods or services as their fair market value if the taxpayer knows, or has reason to know, that such treatment is unreasonable. For example, if a taxpayer knows, or has reason to know, that there is an error in an estimate provided by an organization described in section 170(c) pertaining to goods or services that have a readily ascertainable value, it is unreasonable for the taxpayer to treat the estimate as the fair market value of the goods or services. Similarly, if a taxpayer is a dealer in the type of goods or services provided in consideration for the taxpayer’s payment and knows, or has reason to know, that the estimate is in error, it is unreasonable for the taxpayer to treat the estimate as the fair market value of the goods or services.

(5) Examples. The following examples illustrate the rules of this paragraph (h).

Example 1. Certain goods or services disregarded. Taxpayer makes a $50 payment to Charity B, an organization described in section 170(c), in exchange for a family membership. The family membership entitles Taxpayer and members of Taxpayer’s family to certain benefits. These benefits include free admission to weekly poetry readings, discounts on merchandise sold by B in its gift shop or by mail order, and invitations to special events for members only, such as lectures or informal receptions. When B first offers its membership package for the year, B reasonably projects that each special event for members will have a to B, excluding any allocable overhead, of $5 or less per person attending the event. Because the family membership benefits are disregarded pursuant to §1.170A-13 (f)(8)(i), Taxpayer may treat the $50 payment as a contribution or gift within the meaning of section 170(c), regardless of Taxpayer’s intent and whether or not the payment exceeds the fair market value of the goods or services. Furthermore, any charitable contribution deduction available to Taxpayer may be calculated without regard to the membership benefits.

Example 2. Treatment of good faith estimate at auction as the fair market value. Taxpayer attends an auction held by Charity C, an organization described in section 170(c). Prior to the auction, C publishes a catalog that meets the requirements for a written disclosure statement under section 6115(a) (including C’s good faith estimate of the value of items that will be available for bidding). A representative of C gives a copy of the catalog to each individual (including Taxpayer) who attends the auction. Taxpayer notes that in the catalog C’s estimate of the value of a vase is $100. Taxpayer has no reason to doubt the accuracy of this estimate. Taxpayer successfully bids and pays $500 for the vase. Because Taxpayer knew, prior to making her payment, that the estimate in the catalog was less than the amount of her payment, Taxpayer satisfies the requirement of paragraph (h)(1)(i) of this section. Because Taxpayer makes a payment in an amount that exceeds that estimate, Taxpayer satisfies the requirements of paragraph (h)(1)(ii) of this section. Taxpayer may treat C’s estimate of the value of the vase as its fair market value in determining the amount of her charitable contribution deduction.

Example 3. Good faith estimate not in error. Taxpayer makes a $200 payment to Charity D, an organization described in section 170(c). In return for Taxpayer’s payment, D gives Taxpayer a book that Taxpayer could buy at retail prices typically ranging from $18 to $25. D provides Taxpayer with a good faith estimate, in a written disclosure statement under section 6115(a), of $20 for the value of the book. Because the estimate is within the range of typical retail prices for the book, the estimate contained in the written disclosure statement is not in error. Although Taxpayer knows that the book is sold for as much as $25, Taxpayer may treat the estimate of $20 as the fair market value of the book in determining the amount of his charitable contribution deduction.

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(i) [Reserved]

(j) Exceptions and other rules.

(1) The provisions of section 170 do not apply to contributions by an estate; nor do they apply to a trust unless the trust is a private foundation which, pursuant to section 642(c)(6) and §1.642(c)-4, is allowed a deduction under section 170 subject to the provisions applicable to individuals.

(2) No deduction shall be allowed under section 170 for a charitable contribution to or for the use of an organization or trust described in section 508(d) or 4948(c)(4), subject to the conditions specified in such sections and the regulations thereunder.

(3) For disallowance of deductions for contributions to or for the use of communist controlled organizations, see section 11(a) of the Internal Security Act of 1950, as amended (50 U.S.C. 790).

(4) For denial of deductions for charitable contributions as trade or business expenses and rules with respect to treatment of payments to organizations other than those described in section 170(c), see section 162 and the regulations thereunder.

(5) No deduction shall be allowed under section 170 for amounts paid to an organization:

(i) Which is disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, or

(ii) Which participates in, or intervenes in (including the publishing or distribution of statements), any political campaign on behalf of or in opposition to any candidate for public office. For purposes of determining whether an organization is attempting to influence legislation or is engaging in political activities, see sections 501(c)(3), 501(h), 4911 and the regulations thereunder.

(6) No deduction shall be allowed under section 170 for expenditures for lobbying purposes, the promotion or defeat of legislation, etc. See also the regulations under sections 162 and 4945.

(7) No deduction for charitable contributions is allowed in computing the taxable income of a common trust fund or of a partnership. See sections 584(d) (3) and 703(a)(2)(D). However, a partner’s distributive share of charitable contributions actually paid by a partnership during its taxable year may be allowed as a deduction in the partner’s separate return for his taxable year with or within which the taxable year of the partnership ends, to the extent that the aggregate of his share of the partnership contributions and his own contributions does not exceed the limitations in section 170(b).

(8) For charitable contributions paid by a nonresident alien individual or a foreign corporation, see §1.170A-4(b)(5) and sections 873, 876, 877, and 882(c), and the regulations thereunder.

(9) For charitable contributions paid by a citizen of the United States or a domestic corporation entitled to the benefits of section 931 (relating to income from sources within possessions of the United States), see section 931(d) and the regulations thereunder.

(10) For carryover of excess charitable contributions in certain corporate acquisitions, see section 381(c)(19) and the regulations thereunder.

(11) No deduction shall be allowed under section 170 for out-of-pocket expenditures on behalf of an eligible organization (within the meaning of §1.501(h)-2(b)(1)) if the expenditure is made in connection with influencing legislation (within the meaning of section 501(c)(3) or §56.4911-2), or in connection with the payment of the organization’s tax liability under section 4911. For the treatment of similar expenditures on behalf of other organizations see paragraph (h)(6) of this section.

(k) Effective date. In general this section applies to contributions made in taxable years beginning after December 31, 1969. Paragraph (j)(11) of this section, however, applies only to out-of-pocket expenditures made in taxable years beginning after

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December 31, 1976. In addition, paragraph (h) of this section applies only to payments made on or after December 16, 1996. However, taxpayers may rely on the rules of paragraph (h) of this section for payments made on or after January 1, 1994.

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Commissioner of Internal Revenue v. Duberstein et ux.

SUPREME COURT OF THE UNITED STATES

363 U.S. 278; 80 S. Ct. 1190; 4 L. Ed. 2d 1218; 60-2 U.S. Tax Cas. (CCH) P9515; 5 A.F.T.R.2d (RIA) 1626

March 23, 1960, Argued

June 13, 1960, Decided*

*Together with No. 546, Stanton et ux. v. United States, on certiorari to the United States Court of Appeals for the Second Circuit, argued March 24, 1960.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT.

265 F.2d 28, reversed. 268 F.2d 727, judgment vacated and cause remanded.

SUMMARY: Questions whether transfers of property and money were gifts excludible from the transferees’ gross income, under 22(b)(3) of the Internal Revenue Code of 1939, were presented by two cases. No. 376 involved a transfer of an automobile from a corporation to a taxpayer who had provided the corporation’s president with the names of potential customers for the corporation’s products. A determination by the Commissioner of Internal Revenue that the transfer was not a gift was affirmed by the Tax Court, whose decision was reversed by the United States Court of Appeals for the Sixth Circuit. (265 F2d 28.) In No. 546, a church corporation had made a cash payment to the taxpayer upon his resignation from a church office; the church corporation denominated the payment a gratuity, and the United States District Court for the Eastern District of New York agreed; the District Court’s decision was reversed by the Court of Appeals for the Second Circuit. (268 F2d 727.)

  On certiorari, the United States Supreme Court reversed the judgment below on No. 376, and vacated the judgment below on No. 546.

  In an opinion reflecting the views of five members of the court, Brennan, J., stated the rule to be that the conclusion whether a transfer amounts to a gift, so as to be excludible from gross income, is one that must be reached on consideration of all the factors, and that primary weight is to be given to the conclusion reached by the trier of fact.

  In No. 376, the finding of the Tax Court that the transfer of the automobile was not a gift was upheld as not clearly erroneous by eight members of the court (including Frankfurter, Harlan, and Whittaker, JJ., who concurred in the result). Douglas, J., dissented.

  In No. 546, it was held by five members of the Court (including Whittaker, J., who concurred in the result) that the District Court’s determination that the transfer by the church corporation was a gift was not supported by adequate findings. Black, Frankfurter, Douglas, and Harlan, JJ., dissented.

Headnote: [1]

  In determining whether a transfer of property is a gift, excludible from the recipient’s gross income under the federal income tax laws, analogies and inferences drawn from other revenue provisions, such as the estate and gift taxes, are dubious.

Headnote: [2]

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  Section 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Code of 1954), providing for exclusion from gross income of property acquired by gift, does not use the term “gift” in the common-law sense, but in a more colloquial sense.

Headnote: [3]

  The mere absence of a legal or moral obligation to make a payment does not establish that the payment is a gift excludible from the recipient’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 (102 (a) of the Internal Revenue Code of 1954).

Headnote: [4]

  If a payment proceeds primarily from the constraining force of any moral or legal duty, or from the incentive of an anticipated benefit of an economic nature, it is not a gift which is excludible from the recipient’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Internal Code of 1954).

Headnote: [5]

  Payment made in return for services rendered is not a gift, excludible from the recipient’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Internal Code of 1954), notwithstanding that the payor derives no economic benefit from it; this rule is illustrated by cases including tips in the recipient’s gross income.

Headnote: [6]

  A gift, in the sense in which the term is used in 22(b)(3) of the Internal Revenue Code of 1939 (102 (a) of the Internal Revenue Code of 1954) excluding gifts from the donee’s gross income, proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses.

Headnote: [7]

  In determining whether a transfer of property is a gift, excludible from the recipient’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Internal Revenue Code of 1954), the controlling factor is the intention with which the transfer, however voluntary, has been made.

Headnote: [8]

  The intention of the transferor which is, for purposes of 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Internal Revenue Code of 1954), controlling on the question whether a transfer is a gift excludible from the recipient’s gross income, is not the same as the intention to which the common law concept of “donative intent” refers.

Headnote: [9]

  In determining whether a transfer is a gift, excludible from the recipient’s gross income under 22(b) (3) of the Internal Revenue Code of 1939 (102(a) of the Internal Revenue Code of 1954), the transferor’s characterization of his action is not controlling; there must be an objective inquiry as to whether what is called a gift amounts to it in reality.

Headnote: [10]

  In determining whether a transfer of property is a gift excludible from the recipient’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 ( 102(a) of the Internal Revenue Code of 1954), the parties’ expectations or hopes as to the tax treatment of their conduct is irrelevant.

Headnote: [11]

  In determining whether a transfer of property is a gift, excludible from the recipient’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Internal Revenue Code of 1954), the proper criterion is one that inquires what the basic reason for the transferor’s conduct was in fact--the dominant reason that explains his action in making the transfer.

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Headnote: [12]

  Section 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Code of 1954), providing for exclusion of gifts from the recipient’s gross income, does not make nondeductibility by the transferor a condition on the exclusion, nor does it draw any distinction, in terms, between transfers by corporations and individuals, as to the availability of the gift exclusion to the transferee; the conclusion whether a transfer amounts to a gift is one that must be reached on consideration of all the factors.

Headnote: [13]

  In determining whether a transfer of property is a gift, excludible from the recipient’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Code of 1954), primary weight must be given to the conclusion of the trier of fact, in view of the nontechnical nature of the statutory standard, the close relationship of it to the data of practical human experience, and the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each.

Headnote: [14]

  Appellate review of a determination whether a transfer of property is a gift, excludible from the recipient’s gross income under 22(b)(3) of the Internal Code of 1939 (102 (a) of the Code of 1954), must be quite restricted; where a jury has tried the matter upon correct instructions, the only inquiry is whether it cannot be said that reasonable men could reach differing conclusions on the issue, and where the trial has been by a judge without a jury the judge’s findings must stand unless clearly erroneous.

Headnote: [15]

  For purposes of Rule 52(a) of the Federal Rules of Civil Procedure, providing that findings of fact in actions tried without a jury shall not be set aside unless clearly erroneous, a finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed; and this rule is also applicable to factual inferences from undisputed facts.

Headnote: [16]

  The provision of 1141(a) of the Internal Revenue Code of 1939, stating that the United States Court of Appeals has exclusive jurisdiction to review the decisions of the Tax Court in the same manner and to the same extent as decisions of the District Courts in civil actions tried without a jury, is designed to remove from the law the favored position enjoyed by the Tax Court in comparison with the District Courts and Court of Claims as respects rulings in tax matters.

Headnote: [17]

  A finding of the Tax Court that a transfer of an automobile from a corporation to a taxpayer who had provided the corporation’s president--a personal friend--with the names of potential customers for the corporation’s products was not a gift excludible from the taxpayer’s gross income under 22(b)(3) of the Internal Revenue Code of 1939 (102(a) of the Code of 1954) cannot be said to be clearly erroneous, so as to be subject to being overturned on review, where, notwithstanding the parties characterized the transfer as a gift, and the corporation was under no obligation, even of a moral nature, to make it, there was evidence indicating that the transfer was at bottom a recompense for the taxpayer’s past services or an inducement for him to be of further service in the future.

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Headnote: [18]

  In findings of fact, conciseness is to be strived for and prolixity avoided.

Headnote: [19]

  Conclusory, general findings which give no revelation of what the fact finder’s concept of the determining facts and legal standards may be do not constitute compliance with Rule 52 of the Federal Rules of Civil Procedure which directs federal courts to find the facts specially and state separately conclusions of law thereon.

Headnote: [20]

  Whether the determination of a federal District Court sitting without a jury, that a cash payment made by a church corporation to a former officer upon his resignation to go in business for himself, and denominated a gratuity, was a gift, excludible from the officer’s gross income under 22 (b)(3) of the Internal Revenue Code of 1939 (102(a) of the Code of 1954), is clearly erroneous, so as to be subject to be overturned on review, cannot be determined where the finding is in the form of nothing more than a simple and unelaborated conclusion that the transfer in question was a “gift”; in this situation the United States Supreme Court, on reviewing a judgment of the Court of Appeals reversing the District Court’s judgment, will vacate the judgment of the Court of Appeals and remand the case to the District Court for further proceedings looking toward new and adequate findings of fact.

SYLLABUS: 1. This Court rejects the Government’s suggestion that it promulgate a new “test” to serve as a standard to be applied by the lower courts and by the Tax Court in dealing with numerous cases involving the question what is a “gift” excludable from income under the Internal Revenue Code, since the governing principles are necessarily general and have already been spelled out in the opinions of this Court. Pp. 284-286.

  2. The conclusion whether a transfer amounts to a “gift” is one that must be reached on consideration of all the factors. While the principles urged by the Government may, in nonabsolute form as crystallizations of experience, prove persuasive to the trier of facts in a particular case, they cannot be laid down as a matter of law. Pp. 287-289.

  3. Determination in each individual case as to whether the transaction in question was a “gift” must be based ultimately on the application of the fact-finding tribunal’s experience with the mainsprings of human conduct to the totality of the facts in the case; and appellate review of the conclusion reached by the fact-finding tribunal must be quite restricted. Pp. 289-291.

  4. In No. 376, Duberstein, an individual taxpayer, gave to a business corporation, upon request, the names of potential customers. The information proved valuable, and the corporation reciprocated by giving Duberstein a Cadillac automobile, charging the cost thereof as a business expense on its own corporate income tax return. The Tax Court concluded that the car was not a “gift” excludable from income under §22 (b)(3) of the Internal Revenue Code of 1939. Held: On the record in this case, it cannot be said that the Tax Court’s conclusion was “clearly erroneous,” and the Court of Appeals erred in reversing its judgment. Pp. 279-281, 291-292.

  5. In No. 546, Stanton, upon resigning as comptroller of a church corporation and as president of its wholly owned subsidiary created to manage its extensive real estate holdings, was given “a gratuity” of $20,000 “in appreciation of” his past services. The Commissioner assessed an income-tax deficiency against him for failure to include this amount in his gross income. Stanton paid the deficiency and sued in a Federal District Court for a refund. The trial judge, sitting without a jury, made the simple finding that the payment was a “gift” and entered judgment for Stanton. The Court of Appeals reversed. Held: The finding of the District Court was inadequate; the judgment of the Court of Appeals is vacated; and the case is remanded to the District Court for further proceedings. Pp. 281-283, 292-293.

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COUNSEL: Philip Elman argued the cause for petitioner in No. 376. On the brief were Solicitor General Rankin, Assistant Attorney General Rice and Wayne G. Barnett.

Clendon H. Lee argued the cause for petitioners in No. 546. With him on the brief were John C. Farber, William F. Snyder and Theodore Q. Childs.

Sidney G. Kusworm argued the cause and filed a brief for respondents in No. 376.

Wayne G. Barnett argued the cause for the United States in No. 546. With him on the brief were Solicitor General Rankin and Assistant Attorney General Rice.

JUDGES: Warren, Black, Frankfurter, Douglas, Clark, Harlan, Brennan, Whittaker, Stewart

OPINION: MR. JUSTICE BRENNAN delivered the opinion of the Court.

  These two cases concern the provision of the Internal Revenue Code which excludes from the gross income of an income taxpayer “the value of property acquired by gift.” They pose the frequently recurrent question whether a specific transfer to a taxpayer in fact amounted to a “gift” to him within the meaning of the statute. The importance to decision of the facts of the cases requires that we state them in some detail.

  No. 376, Commissioner v. Duberstein . The taxpayer, Duberstein, was president of the Duberstein Iron & Metal Company, a corporation with headquarters in Dayton, Ohio. For some years the taxpayer’s company had done business with Mohawk Metal Corporation, whose headquarters were in New York City. The president of Mohawk was one Berman. The taxpayer and Berman had generally used the telephone to transact their companies’ business with each other, which consisted of buying and selling metals. The taxpayer testified, without elaboration, that he knew Berman “personally” and had known him for about seven years. From time to time in their telephone conversations, Berman would ask Duberstein whether the latter knew of potential customers for some of Mohawk’s products in which Duberstein’s company itself was not interested. Duberstein provided the names of potential customers for these items.

  One day in 1951 Berman telephoned Duberstein and said that the information Duberstein had given him had proved so helpful that he wanted to give the latter a present. Duberstein stated that Berman owed him nothing. Berman said that he had a Cadillac as a gift for Duberstein, and that the latter should send to New York for it; Berman insisted that Duberstein accept the car, and the latter finally did so, protesting however that he had not intended to be compensated for the information. At the time Duberstein already had a Cadillac and an Oldsmobile, and felt that he did not need another car. Duberstein testified that he did not think Berman would have sent him the Cadillac if he had not furnished him with information about the customers. It appeared that Mohawk later deducted the value of the Cadillac as a business expense on its corporate income tax return.

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  Duberstein did not include the value of the Cadillac in gross income for 1951, deeming it a gift. The Commissioner asserted a deficiency for the car’s value against him, and in proceedings to review the deficiency the Tax Court affirmed the Commissioner’s determination. It said that “The record is significantly barren of evidence revealing any intention on the part of the payor to make a gift…. The only justifiable inference is that the automobile was intended by the payer to be remuneration for services rendered to it by Duberstein. ”The Court of Appeals for the Sixth Circuit reversed. 265 F.2d 28.

  No. 546, Stanton v. United States. The taxpayer, Stanton, had been for approximately 10 years in the employ of Trinity Church in New York City. He was comptroller of the Church corporation, and president of a corporation, Trinity Operating Company, the church set up as a fully owned subsidiary to manage its real estate holdings, which were more extensive than simply the church property. His salary by the end of his employment there in 1942 amounted to $22,500 a year. Effective November 30, 1942, he resigned from both positions to go into business for himself. The Operating Company’s directors, who seem to have included the rector and vestrymen of the church, passed the following resolution upon his resignation: “BE IT RESOLVED that in appreciation of the services rendered by Mr. Stanton … a gratuity is hereby awarded to him of Twenty Thousand Dollars, payable to him in equal installments of Two Thousand Dollars at the end of each and every month commencing with the month of December, 1942; provided that, with the discontinuance of his services, the Corporation of Trinity Church is released from all rights and claims to pension and retirement benefits not already accrued up to November 30, 1942.”

  The Operating Company’s action was later explained by one of its directors as based on the fact that, “Mr. Stanton was liked by all of the Vestry personally. He had a pleasing personality. He had come in when Trinity’s affairs were in a difficult situation. He did a splendid piece of work, we felt. Besides that … he was liked by all of the members of the Vestry personally.” And by another: “We were all unanimous in wishing to make Mr. Stanton a gift. Mr. Stanton had loyally and faithfully served Trinity in a very difficult time. We thought of him in the highest regard. We understood that he was going in business for himself. We felt that he was entitled to that evidence of good will.”

  On the other hand, there was a suggestion of some ill-feeling between Stanton and the directors, arising out of the recent termination of the services of one Watkins, the Operating Company’s treasurer, whose departure was evidently attended by some acrimony. At a special board meeting on October 28, 1942, Stanton had intervened on Watkins’ side and asked reconsideration of the matter. The minutes reflect that “resentment was expressed as to the ‘presumptuous’ suggestion that the action of the Board, taken after long deliberation, should be changed.” The Board adhered to its determination that Watkins be separated from employment, giving him an opportunity to resign rather than be discharged. At another special meeting two days later it was revealed that Watkins had not resigned; the previous resolution terminating his services was then viewed as effective; and the Board voted the payment of six months’ salary to Watkins in a resolution similar to that quoted in regard to Stanton, but which did not use the term “gratuity.” At the meeting, Stanton announced that in order to avoid any such embarrassment or question at any time as to his willingness to resign if the Board desired, he was tendering his resignation. It was tabled, though not without dissent. The next week, on November 5, at another special meeting, Stanton again tendered his resignation which this time was accepted.

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  The “gratuity” was duly paid. So was a smaller one to Stanton’s (and the Operating Company’s) secretary, under a similar resolution, upon her resignation at the same time. The two corporations shared the expense of the payments. There was undisputed testimony that there were in fact no enforceable rights or claims to pension and retirement benefits which had not accrued at the time of the taxpayer’s resignation, and that the last proviso of the resolution was inserted simply out of an abundance of caution. The taxpayer received in cash a refund of his contributions to the retirement plans, and there is no suggestion that he was entitled to more. He was required to perform no further services for Trinity after his resignation.

  The Commissioner asserted a deficiency against the taxpayer after the latter had failed to include the payments in question in gross income. After payment of the deficiency and administrative rejection of a refund claim, the taxpayer sued the United States for a refund in the District Court for the Eastern District of New York. The trial judge, sitting without a jury, made the simple finding that the payments were a “gift,” and judgment was entered for the taxpayer. The Court of Appeals for the Second Circuit reversed. 268 F.2d 727.

  The Government, urging that clarification of the problem typified by these two cases was necessary, and that the approaches taken by the Courts of Appeals for the Second and the Sixth Circuits were in conflict, petitioned for certiorari in No. 376, and acquiesced in the taxpayer’s petition in No. 546. On this basis, and because of the importance of the question in the administration of the income tax laws, we granted certiorari in both cases. 361 U.S. 923. [1]

  The exclusion of property acquired by gift from gross income under the federal income tax laws was made in the first income tax statute passed under the authority of the Sixteenth Amendment, and has been a feature of the income tax statutes ever since. The meaning of the term “gift” as applied to particular transfers has always been a matter of contention. Specific and illuminating legislative history on the point does not appear to exist. Analogies and inferences drawn from other revenue provisions, such as the estate and gift taxes, are dubious. See Lockard v. Commissioner, 166 F.2d 409. The meaning of the statutory term has been shaped largely by the decisional law. With this, we turn to the contentions made by the Government in these cases.

  First. The Government suggests that we promulgate a new “test” in this area to serve as a standard to be applied by the lower courts and by the Tax Court in dealing with the numerous cases that arise. We reject this invitation. We are of opinion that the governing principles are necessarily general and have already been spelled out in the opinions of this Court, and that the problem is one which, under the present statutory framework, does not lend itself to any more definitive statement that would produce a talisman for the solution of concrete cases. The cases at bar are fair examples of the settings in which the problem usually arises. They present situations in which payments have been made in a context with business overtones--an employer making a payment to a retiring employee; a businessman giving something of value to another businessman who has been of advantage to him in his business. In this context, we review the law as established by the prior cases here.

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[2] [3] [4] [5] [6] [7]

  The course of decision here makes it plain that the statute does not use the term “gift” in the common-law sense, but in a more colloquial sense. This Court has indicated that a voluntary executed transfer of his property by one to another, without any consideration or compensation therefor, though a common-law gift, is not necessarily a “gift” within the meaning of the statute. For the Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 730. And, importantly, if the payment proceeds primarily from “the constraining force of any moral or legal duty,” or from “the incentive of anticipated benefit” of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41, it is not a gift. And, conversely, “where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it.” Robertson v. United States, 343 U.S. 711, 714. A gift in the statutory sense, on the other hand, proceeds from a “detached and disinterested generosity,” Commissioner v. LoBue, 351 U.S. 243, 246; “out of affection, respect, admiration, charity or like impulses.” Robertson v. United States, supra, at 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor’s “intention.” Bogardus v. Commissioner, 302 U.S. 34, 43. “What controls is the intention with which payment, however voluntary, has been made.” Id., at 45 (dissenting opinion).

[8] [9] [10]

  The Government says that this “intention” of the transferor cannot mean what the cases on the common-law concept of gift call “donative intent.” With that we are in agreement, for our decisions fully support this. Moreover, the Bogardus case itself makes it plain that the donor’s characterization of his action is not determinative--that there must be an objective inquiry as to whether what is called a gift amounts to it in reality. 302 U.S., at 40. It scarcely needs adding that the parties’ expectations or hopes as to the tax treatment of their conduct in themselves have nothing to do with the matter. [11] It is suggested that the Bogardus criterion would be more apt if rephrased in terms of “motive” rather than “intention.” We must confess to some skepticism as to whether such a verbal mutation would be of any practical consequence. We take it that the proper criterion, established by decision here, is one that inquiries what the basic reason for his conduct was in fact--the dominant reason that explains his action in making the transfer. Further than that we do not think it profitable to go.

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[12]

  Second. The Government’s proposed “test,” while apparently simple and precise in its formulation, depends frankly on a set of “principles” or “presumptions” derived from the decided cases, and concededly subject to various exceptions; and it involves various corollaries, which add to its detail. Were we to promulgate this test as a matter of law, and accept with it its various presuppositions and stated consequences, we would be passing far beyond the requirements of the cases before us, and would be painting on a large canvas with indeed a broad brush. The Government derives its test from such propositions as the following: That payments by an employer to an employee, even though voluntary, ought, by and large, to be taxable; that the concept of a gift is inconsistent with a payment’s being a deductible business expense; that a gift involves “personal” elements; that a business corporation cannot properly make a gift of its assets. The Government admits that there are exceptions and qualifications to these propositions. We think, to the extent they are correct, that those propositions are not principles of law but rather maxims of experience that the tribunals which have tried the facts of cases in this area have enunciated in explaining their factual determinations. Some of them simply represent truisms: it doubtless is, statistically speaking, the exceptional payment by an employer to an employee that amounts to a gift. Others are overstatements of possible evidentiary inferences relevant to a factual determination on the totality of circumstances in the case: it is doubtless relevant to the over-all inference that the transferor treats a payment as a business deduction, or that the transferor is a corporate entity. But these inferences cannot be stated in absolute terms. Neither factor is a shibboleth. The taxing statute does not make nondeductibility by the transferor a condition on the “gift” exclusion; nor does it draw any distinction, in terms, between transfers by corporations and individuals, as to the availability of the “gift” exclusion to the transferee. The conclusion whether a transfer amounts to a “gift” is one that must be reached on consideration of all the factors.

  Specifically, the trier of fact must be careful not to allow trial of the issue whether the receipt of a specific payment is a gift to turn into a trial of the tax liability, or of the propriety, as a matter of fiduciary or corporate law, attaching to the conduct of someone else. The major corollary to the Government’s suggested “test” is that, as an ordinary matter, a payment by a corporation cannot be a gift, and, more specifically, there can be no such thing as a “gift” made by a corporation which would allow it to take a deduction for an ordinary and necessary business expense. As we have said, we find no basis for such a conclusion in the statute; and if it were applied as a determinative rule of “law,” it would force the tribunals trying tax cases involving the donee’s liability into elaborate inquiries into the local law of corporations or into the peripheral deductibility of payments as business expenses. The former issue might make the tax tribunals the most frequent investigators of an important and difficult issue of the laws of the several States, and the latter inquiry would summon one difficult and delicate problem of federal tax law as an aid to the solution of another. Or perhaps there would be required a trial of the vexed issue whether there was a “constructive” distribution of corporate property, for income tax purposes, to the corporate agents who had sponsored the transfer. These considerations, also, reinforce us in our conclusion that while the principles urged by the Government may, in nonabsolute form as crystallizations of experience, prove persuasive to the trier of facts in a particular case, neither they, nor any more detailed statement than has been made, can be laid down as a matter of law.

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[13]

  Third. Decision of the issue presented in these cases must be based ultimately on the application of the fact-finding tribunal’s experience with the mainsprings of human conduct to the totality of the facts of each case. The nontechnical nature of the statutory standard, the close relationship of it to the data of practical human experience, and the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each, confirm us in our conclusion primary weight in this area must be given to the conclusions of the trier of fact. Baker v. Texas & Pacific R. Co., 359 U.S. 227; Commissioner v. Heininger, 320 U.S. 467, 475; United States v. Yellow Cab Co., 338 U.S. 338, 341; Bogardus v. Commissioner, supra, at 45 (dissenting opinion).

  This conclusion may not satisfy an academic desire for tidiness, symmetry and precision in this area, any more than a system based on the determinations of various fact-finders ordinarily does. But we see it as implicit in the present statutory treatment of the exclusion for gifts, and in the variety of forums in which federal income tax cases can be tried. If there is fear of undue uncertainty or overmuch litigation, Congress may make more precise its treatment of the matter by singling out certain factors and making them determinative of the matter, as it has done in one field of the “gift” exclusion’s former application, that of prizes and awards. Doubtless diversity of result will tend to be lessened somewhat since federal income tax decisions, even those in tribunals of first instance turning on issues of fact, tend to be reported, and since there may be a natural tendency of professional triers of fact to follow one another’s determinations, even as to factual matters. But the question here remains basically one of fact, for determination on a case-by-case basis.

[14] [15]

  One consequence of this is that appellate review of determinations in this field must be quite restricted. Where a jury has tried the matter upon correct instructions, the only inquiry is whether it cannot be said that reasonable men could reach differing conclusions on the issue. Baker v. Texas & Pacific R. Co., supra, at 228. Where the trial has been by a judge without a jury, the judge’s findings must stand unless “clearly erroneous.” Fed. Rules Civ. Proc., 52 (a). “A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395. The rule itself applies also to factual inferences from undisputed basic facts, id., at 394, as will on many occasions be presented in this area. Cf. Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 609-610. And Congress has in the most explicit terms attached the identical weight to the findings of the Tax Court. I.R.C., §7482 (a).

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[16] [17]

  Fourth. A majority of the Court is in accord with the principles just outlined. And, applying them to the Duberstein case, we are in agreement, on the evidence we have set forth, that it cannot be said that the conclusion of the Tax Court was “clearly erroneous.” It seems to us plain that as trier of the facts it was warranted in concluding that despite the characterization of the transfer of the Cadillac by the parties and the absence of any obligation, even of a moral nature, to make it, it was at bottom a recompense for Duberstein’s past services, or an inducement for him to be of further service in the future. We cannot say with the Court of Appeals that such a conclusion was “mere suspicion” on the Tax Court’s part. To us it appears based in the sort of informed experience with human affairs that fact-finding tribunals should bring to this task. [18] [19] [20]

  As to Stanton, we are in disagreement. To four of us, it is critical here that the District Court as trier of fact made only the simple and unelaborated finding that the transfer in question was a “gift.” To be sure, conciseness is to be strived for, and prolixity avoided, in findings; but, to the four of us, there comes a point where findings become so sparse and conclusory as to give no revelation of what the District Court’s concept of the determining facts and legal standard may be. See Matton Oil Transfer Corp . v. The Dynamic, 123 F.2d 999, 1000-1001. Such conclusory, general findings do not constitute compliance with Rule 52’s direction to “find the facts specially and state separately … conclusions of law thereon.” While the standard of law in this area is not a complex one, we four think the unelaborated finding of ultimate fact here cannot stand as a fulfillment of these requirements. It affords the reviewing court not the semblance of an indication of the legal standard with which the trier of fact has approached his task. For all that appears, the District Court may have viewed the form of the resolution or the simple absence of legal consideration as conclusive. While the judgment of the Court of Appeals cannot stand, the four of us think there must be further proceedings in the District Court looking toward new and adequate findings of fact. In this, we are joined by MR. JUSTICE WHITTAKER, who agrees that the findings were inadequate, although he does not concur generally in this opinion.

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  Accordingly, in No. 376, the judgment of this Court is that the judgment of the Court of Appeals is reversed, and in No. 546, that the judgment of the Court of Appeals is vacated, and the case is remanded to the District Court for further proceedings not inconsistent with this opinion.

  It is so ordered.

B-40


Welch v. Helvering, Commissioner of Internal Revenue

SUPREME COURT OF THE UNITED STATES

290 U.S. 111; 54 S. Ct. 8; 78 L. Ed. 212; 3 U.S. Tax Cas. (CCH) P1164; 12 A.F.T.R. (P-H) 1456; 1933-2 C.B. 112; 1934 P.H. P307

October 19, 1933, Argued

November 6, 1933, Decided

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE EIGHTH CIRCUIT. CERTIORARI, 289 U.S. 720, to review a judgment of the Circuit Court of Appeals which affirmed the action of the Board of Tax Appeals, 25 B.T.A. 117, disallowing certain deductions in an income tax return. 63 F.2d 976, affirmed.

SYLLABUS: 1. What are “ordinary and necessary expenses” in carrying on a business, within the meaning of provisions of Revenue Acts allowing deductions of such expenses in computing net income, must be determined by conduct and forms of speech prevailing in the business world. P. 113.

  2. The Court can not say, in the absence of proof and as a matter of judicial knowledge, that payments on the debts of a corporation, made by its former officer after its discharge in bankruptcy and for the purpose of strengthening own business standing and credit, were ordinary and necessary expenses of his business. P. 115.

  3. A finding by the Commissioner of Internal Revenue that such payments are not ordinary and necessary expenses of a taxpayer, and hence not deductible under the revenue acts and regulations in computing his net income, is presumptively correct. P. 115.

COUNSEL: Mr. Edward S. Stringer, with whom Messrs. Thomas D. O’Brien, and Alexander E. Horn were on the brief, for petitioner.

Mr. H. Brian Holland argued the cause, and Solicitor General Biggs and Messrs. Sewall Key and John G. Remey filed a brief, for respondent.

JUDGES: Hughes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo

OPINION: MR. JUSTICE CARDOZO delivered the opinion of the Court.

  The question to be determined is whether payments by a taxpayer, who is in business as a commission agent, are allowable deductions in the computation of his income if made to the creditors of a bankrupt corporation in an endeavor to strengthen his own standing and credit.

  In 1922 petitioner was the secretary of the E. L. Welch Company, a Minnesota corporation, engaged in the grain business. The company was adjudged an involuntary bankrupt, and had a discharge from its debts. Thereafter the petitioner made a contract with the Kellogg Company to purchase grain for it on a commission. In order to reestablish his relations with customers whom he had known when acting for the Welch Company and to solidify his credit and standing, he decided to pay the debts of the Welch business so far as he was able. In fulfillment of that resolve, he made payments of substantial amounts during five successive years. In 1924, the commissions were $18,028.20; the payments $3,975.97; in 1923, the commissions $31,377.07; the payments $11,968.20; in 1926, the commissions $20,925.25, the payments $12,815.72; in 1927, the commissions $22,119.61, the payments $7,379.72; and in 1928, the commissions $26,177.56, the payments $11,068.25. The Commissioner ruled that these payments were not deductible from income as ordinary and necessary expenses, but were rather in the nature of capital expenditures, an outlay for the development of reputation and good will. The Board of Tax Appeals sustained the action of the Commissioner (25 B.T.A. 117), and the Court of Appeals for the Eighth Circuit affirmed. 63 F.2d 976. The case is here on certiorari.

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  “In computing net income there shall be allowed as deductions … all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Revenue Act of 1924, c. 234, 43 Stat. 253, 269, §214; 26 U.S. C. §955; Revenue Act of 1926, c. 27, 44 Stat. 9, 26, §214; 26 U.S. C. App. §955; Revenue Act of 1928, c. 852, 45 Stat. 791, 799, §23; cf. Treasury Regulations 65, Arts. 101, 292, under the Revenue Act of 1924, and similar regulations under the Acts of 1926 and 1928.

  We may assume that the payments to creditors of the Welch Company were necessary for the development of the petitioner’s business, at least in the sense that they were appropriate and helpful. McCulloch v. Maryland, 4 Wheat. 316. He certainly thought they were, and we should be slow to override his judgment. But the problem is not solved when the payments are characterized as necessary. Many necessary payments are charges upon capital. There is need to determine whether they are both necessary and ordinary. Now, what is ordinary, though there must always be a strain of constancy within it, is none the less a variable affected by time and place and circumstance. Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. Cf. Kornhauser v. United States, 276 U.S. 145. The situation is unique in the life of the individual affected, but not in the life of the group, the community, of which he is a part. At such times there are norms of conduct that help to stabilize our judgment, and make it certain and objective. The instance is not erratic, but is brought within a known type.

  The line of demarcation is now visible between the case that is here and the one supposed for illustration. We try to classify this act as ordinary or the opposite, and the norms of conduct fail us. No longer can we have recourse to any fund of business experience, to any known business practice. Men do at times pay the debts of others without legal obligation or the lighter obligation imposed by the usages of trade or by neighborly amenities, but they do not do so ordinarily, not even though the result might be to heighten their reputation for generosity and opulence. Indeed, if language is to be read in its natural and common meaning (Old Colony R. Co. v. Commissioner, 284 U.S. 552, 560; Woolford Realty Co. v. Rose, 286 U.S. 319, 327), we should have to say that payment in such circumstances, instead of being ordinary is in a high degree extraordinary. There is nothing ordinary in the stimulus evoking it, and none in the response. Here, indeed, as so often in other branches of the law, the decisive distinctions are those of degree and not of kind. One struggles in vain for any verbal formula that will supply a ready touchstone. The standard set up by the statute is not a rule of law; it is rather a way of life. Life in all its fullness must supply the answer to the riddle.

  The Commissioner of Internal Revenue resorted to that standard in assessing the petitioner’s income, and found that the payments in controversy came closer to capital outlays than to ordinary and necessary expenses in the operation of a business. His ruling has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong. Wickwire v. Reinecke, 275 U.S. 101; Jones v. Commissioner, 38 F.2d 550, 552. Unless we can say from facts within our knowledge that these are ordinary and necessary expenses according to the ways of conduct and the forms of speech prevailing in the business world, the tax must be confirmed. But nothing told us by this record or within the sphere of our judicial notice permits us to give that extension to what is ordinary and necessary. Indeed, to do so would open the door to many bizarre analogies. One man has a family name that is clouded by thefts committed by an ancestor. To add to his own standing he repays the stolen money, wiping off, it may be, his income for the year. The payments figure in his tax return as ordinary expenses. Another man conceives the notion that he will be able to practice his vocation with greater ease and profit if he has an opportunity to enrich his culture. Forthwith the price of his education becomes an expense of the business, reducing the income subject to taxation. There is little difference between these expenses and those in controversy here. Reputation and learning are akin to capital assets, like the good will of an old partnership. Cf. Colony Coal & Coke Corp. v. Commissioner, 52 F.2d 923. For many, they are the only tools with which to hew a pathway to success. The money spent in acquiring them is well and wisely spent. It is not an ordinary expense of the operation of a business.

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  Many cases in the federal courts deal with phases of the problem presented in the case at bar. To attempt to harmonize them would be a futile task. They involve the appreciation of particular situations, at times with borderline conclusions. Typical illustrations are cited in the margin.

  The decree should be affirmed.

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J. Morgan Wilson v. Commissioner.

UNITED STATES TAX COURT

11 T.C.M. (CCH) 159; T.C.M. (RIA) 52046

Feb. 21, 1952

COUNSEL: J. Morgan Wilson, pro se. Thomas A. Steele, Jr., Esq., for the respondent.

HARRON, Judge: The respondent has determined a deficiency in income tax for the year 1945 in the amount of $246.69. Prior to the trial of this proceeding, by his amended answer, the respondent made claim for an increase in the deficiency to the extent of $87, so that the total amount of the deficiency involved in this proceeding is $333.69.

  There are two questions for decision: (1) whether the petitioner paid $868 to churches and charitable organizations so as to be entitled to deduction in that amount under section 23 (o) of the Code; and (2) whether the petitioner was “away from home” in the pursuit of his business activities when he lived in a hotel at Cedar Rapids, Iowa, so as to be entitled to a business traveling expense deduction, for hotel room expenses, under section 23 (a) (1) (A) of the Code, in the amount of $300.

  The petitioner filed his return with the collector for the district of Wisconsin.

Findings of Fact

  The petitioner and his wife resided in Madison, Wisconsin, during most of 1945, where the family home was located. In the latter part of 1945, he and his family moved to Minneapolis.

  The petitioner’s mother received her chief support from him. She used part of the allowance she received from him for her contributions to her church. The petitioner has deducted $310 for church contributions, most of which represents the contributions of the petitioner’s mother, and the rest, contributions of the petitioner’s wife. The petitioner has no records or other evidence of church contributions.

  The petitioner, his wife, and his mother made gifts of goods - “furnishings” -, not money, to the U.S.O. for its meeting place.

  The petitioner does not have cancelled checks or other evidence to substantiate alleged donations to charitable organizations such as the Animal Rescue League, Hennepin County War Chest, Salvation Army, U.S.O., Red Cross, and others to which he claims donations were made in the total amount of $615.

  The petitioner was employed by Honeymead Products Company during the first six months of 1945 and received $2,579.33 for his services. He was employed by Cargill, Inc., during the last six months of 1945, and received $4,375 for his services. No travel expense deduction is claimed in connection with services performed for Cargill, Inc.

  Honeymead Products Company, hereinafter called Honeymead, manufactures and sells livestock and other feeds. It maintains offices in Cedar Rapids, Iowa. The petitioner was a sales supervisor for Honeymead. He was given a sales territory. His work required traveling. He did not have a desk or office in Honeymead’s offices. He had the responsibility of employing and directing salesmen to work in his sales territory. The system followed by the petitioner, as a sales supervisor, was to develop sales in the area, with salesmen, and then to proceed to another area, where the same process was repeated. The petitioner helped the salesmen sell feed. He had from ten to fifteen salesmen whose work he supervised. It was his practice to set up his headquarters in a hotel located in the area in which he was working with salesmen. He spent two to four months, within his own discretion, in developing sales in an area, and then he moved to another area, where he set up headquarters in another hotel from which he went out selling in that area for several months. Honeymead paid petitioner a commission based on tons of feed sold but did not pay his traveling or hotel expenses. The petitioner’s contract with Honeymead contemplated that his work would be done outside, away from its offices; that he would develop sales in various areas, setting up his own headquarters in hotels, and traveling about within the radius of a town.

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  The petitioner worked for Honeymead under the same arrangements prior to 1945. His territory covered Iowa, Minnesota, Wisconsin, North and South Dakota. When he worked in Minnesota he stayed in Sioux Falls, or Fairmont, or Rochester. He did not cover his entire territory in any one year.

 During the first six months of 1945 when the petitioner worked for Honeymead, he worked in an area within a radius of 75 miles around Cedar Rapids, and in an area around Spencer, Iowa. He spent about four months working with salesmen in the Cedar Rapids area, and about two months working in the Spencer area. While he was working in the Cedar Rapids area, he set up his headquarters at a hotel in Cedar Rapids, and while he was working in the Spencer area, he set up his headquarters in a hotel in Spencer. The expense of a hotel room in Cedar Rapids was $300, and the expense of a hotel room at Spencer was $200. While the petitioner was in Cedar Rapids he was not located at the headquarters of Honeymead and did not do his work from its offices. He set up his headquarters in Cedar Rapids, rather than in some other town, as a matter of convenience, and in the same way as he would set up his headquarters at Sioux Falls, or Rochester, or Spencer.

  The petitioner, during the four months he was working in the area around Cedar Rapids, was traveling for his employer and was as much away from his employer’s headquarters as he was when he was located at Spencer, or any other city which served as a central point for his operations.

Opinion

  There are two issues: (1) Whether the petitioner is entitled to deduction of $868 for donations to churches and charitable organizations. (2) Whether the petitioner is entitled to deduct $300, the expense of hotel accommodations in Cedar Rapids.

  The petitioner appeared in Court without the aid of counsel. He has not filed a brief. He is unacquainted with practice before this Court. In so far as it is proper to do so, we have taken these matters into consideration.

 Issue 1. The petitioner took deduction for charitable contributions, in his return, in the total amount of $925. The respondent has allowed deduction of $57 and disallowed deduction of $868. The petitioner has the burden of proving that he made the contributions to the organizations and in the amounts which he has alleged.

  The petitioner is not entitled to deduction of $868 for charitable and church contributions for two reasons. First, he has no proof of the alleged donations, - no receipts, cancelled checks, or any other evidence to substantiate his claim. And, in the

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instance of alleged gifts of furnishings to the U.S.O., he has not proved the fair market value thereof at the time of the alleged gifts. Second, the petitioner admits that a large part of the deduction claimed for church contributions represents his mother’s donations. Under the provisions of section 23 (o) of the Internal Revenue Code, deductions are allowed for charitable and church gifts of the taxpayer. If a taxpayer makes a gift of money to another person, and that person makes a gift to a church or a charity, deduction is allowed to the person who makes the church contribution but is not allowed to the taxpayer who gave funds to the other person. Petitioner is allowed deductions for dependents, and he has received such deduction for his mother whose support he provided in 1945. But petitioner is not entitled to deduct his mother’s church contributions. Therefore, the respondent’s determination with respect to the church contributions is correct. Also, the alleged church contributions must be disallowed for failure of proof. And for failure of proof, deductions for alleged contributions by the petitioner to the Red Cross, Salvation Army, U.S.O., Animal Rescue League, and other organizations in the alleged amount of about $610 is denied. The respondent has allowed deduction of $5 for such gifts, and $52 for church contributions.

  Issue 2. Section 23 (a) (1) (A) of the Internal Revenue Code allows deduction for traveling expenses while away from home in pursuit of a trade or business. The respondent’s view in this proceeding is that the petitioner is entitled to deduct hotel expense incurred in Spencer, Iowa, because when there, the petitioner was away from his employer’s home office; but that he is not entitled to deduct hotel expense in Cedar Rapids because his employer’s home office was located there. In other words, the respondent admits that the petitioner’s contract with Honeymead required that he travel, but he questions the status of the petitioner during the four months he worked in the area around Cedar Rapids and had hotel accommodations there. The first question, therefore, is a fact question, whether the petitioner was in a travel status during the four months he had hotel accommodations in Cedar Rapids.

  Upon this question we have found from all of the evidence before us that the petitioner was traveling for his employer and was away from his employer’s headquarters during the time he worked in the 75 mile area around Cedar Rapids. If there had been some town other than Cedar Rapids from which the petitioner could have as conveniently worked and in which the petitioner had set up his hotel headquarters, there would not be any question about his hotel expense, just as there is no question about his hotel expense in Spencer, which has been allowed. In principle and in fact the Cedar Rapids hotel expense is not different from the Spencer hotel expense. The petitioner with his salesmen was developing and making sales in the area around the city of Cedar Rapids, and it is immaterial that the offices of Honeymead happened to be located in Cedar Rapids. The petitioner was not “headquartered” at Honeymead’s offices, as the respondent argues. He did not have an office or a desk there, and he was not doing his work there. Whether he was or was not is a question of fact, and the entire record supports the conclusion that the petitioner was not, but that he simply had set up his own headquarters in a hotel in Cedar Rapids while doing his sales supervision work in the area around Cedar Rapids, in the same way as was his custom in other cities when he was working in other areas.

  The petitioner’s situation was similar to that of the taxpayer in the case of Charles G. Gustafson, 3 T.C. 998, and the question comes within the rule of that case. We are satisfied that the Cedar Rapids hotel expense was required by the exigencies of the

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petitioner’s contract with Honeymead, i.e., by his business, which not only involved moving about from one area to another, and moving about within an area, but which consisted of being “on the road” and away from Honeymead’s offices. Cf. Barnhill v. Commissioner, 148 Fed. (2d) 913, 917. The petitioner was not “stationed” in Cedar Rapids by his employer and his more or less permanent place of business was not there. He was there only temporarily. It was merely another one of his two or three month stands on his traveling circuit through his sales territory which embraced several states. This proceeding is distinguishable, therefore, from Commissioner v. Flowers, 326 U.S. 465; Arnold P. Bark, 6 T.C. 851; John D. Johnson, 8 T.C. 303; and Grover Tyler, 13 T.C. 186.

  The respondent questions, also, the adequacy of petitioner’s proof that his Cedar Rapids hotel expense amounted to $300, but we are satisfied that it was $75 per month for four months, or $300.

  It is held that the petitioner is entitled to a deduction of $300 under section 23 (a) (1) (A) of the Code for business traveling expense.

  Decision will be entered that there is a deficiency for 1945 in the amount of $246.69.

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Rev. Rul. 76-232, 1976-1 C.B. 62

  Charitable contribution; weekend marriage seminar. Participants in a weekend marriage seminar conducted by a charitable organization are not entitled to a charitable contribution deduction for any part of a donation made to the organization at the conclusion of the seminar unless the participants establish that the amount donated exceeds the monetary value of all benefits and privileges received and that the amount claimed as a charitable contribution is the amount of such excess.

  Advice has been requested whether, under the circumstances described below, a taxpayer is entitled to a charitable contribution deduction for any part of a donation made to an organization that conducts weekend marriage seminars.

  An organization, contributions to which are deductible pursuant to section 170(c)(2) of the Internal Revenue Code of 1954, conducts weekend seminars for the purpose of bringing harmony into marriages. The taxpayer and the taxpayer’s spouse participated in one of these seminars and upon completion of the seminar contributed an amount to the organization. Participants in the weekend sessions are not obligated to pay any enrollment or entrance fee, but are given the opportunity to make a donation to the organization conducting the sessions at the conclusion of the weekend. The organization suggests, but does not require, that participants donate a specified amount to cover the costs incurred by the organization in providing the weekend seminar. The suggested amount does not include a profit element, but includes only the cost of materials used and the weekend cost of room and board and of staff personnel and their training, and a nominal amount for the cost of follow-up programs and the initiation of future seminars.

  Section 170(a) of the Code provides, subject to certain limitations, for the allowance of a deduction for charitable contributions or gifts to or for the use of organizations described in section 170(c), payment of which is made during the taxable year.

A contribution or gift, for the purposes of section 170 of the Code, is a voluntary transfer of money or property made by the transferor without receipt or expectation of a financial benefit commensurate with the money or property transferred. See section 1.170A-1(c)(5) of the Income Tax Regulations; H.R. Rep. No. 1337, 83d Cong., 2d Sess. A44 (1954); S. Rep. No. 1622, 83d Cong., 2d Sess. 196 (1954). If the transferor receives (or reasonably expects to receive) a financial benefit that is commensurate with the money or property transferred, no deduction under section 170 is allowable. United States v. Transamerica Corp., 392 F.2d 522 (9th Cir. 1968); Harris W. Seed, 57 T.C. 265, 278 (1971). If the transferor receives (or reasonably expects to receive) a financial benefit that is substantial but less than the amount of the transfer, then the transaction may involve both a purchase and a gift, and, assuming the requirements in that section are otherwise met, a deduction under that section would be allowable for only the excess of the amount transferred over the amount of the financial benefit received or reasonably expected to be received by the transferor. Oppewal v. Commissioner, 468 F.2d 1000 (1st Cir. 1972); Harold DeJong, 36 T.C. 896, 899 (1961), aff’d, 309 F.2d 373 (9th Cir. 1962).

  Rev. Rul. 67-246, 1967-2 C.B. 104, which deals with the deductibility under section 170 of the Code of payments made in connection with admission to or other participation in fundraising activities for charity, states the general rule that where a transaction involving a payment is in the form of a purchase of an item of value, the presumption arises that no gift has been

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made for charitable contribution purposes, the presumption being that the payment in such case is the purchase price. Thus, the burden is on the taxpayer to establish that the amount claimed as a gift under section 170 is the excess of the amount paid over the value of the consideration received therefor.

  Accordingly, in the instant case, the taxpayer is not entitled to a charitable contribution deduction for any part of the donations made to the charitable organization at the close of the weekend marriage seminar unless the taxpayer establishes that the amount donated exceeded the monetary value of all benefits and privileges received and that the amount claimed as a charitable contribution is the amount of such excess.

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Rev. Rul. 67-246, 1967-2 C.B. 104

  Deductibility, as charitable contributions under section 170 of the Internal Revenue Code of 1954, of payments made by taxpayers in connection with admission to or other participation in fund-raising activities for charity such as charity balls, bazaars, banquets, shows, and athletic events.

  Advice has been requested concerning certain fund-raising practices which are frequently employed by or on behalf of charitable organizations and which involve the deductibility, as charitable contributions under section 170 of the Internal Revenue Code of 1954, of payments in connection with admission to or other participation in fund-raising activities for charity such as charity balls, bazaars, banquets, shows, and athletic events.

  Affairs of the type in question are commonly employed to raise funds for charity in two ways. One is from profit derived from sale of admissions or other privileges or benefits connected with the event at such prices as their value warrants. Another is through the use of the affair as an occasion for solicitation of gifts in combination with the sale of the admissions or other privileges or benefits involved. In cases of the latter type the sale of the privilege or benefit is combined with solicitation of a gift or donation of some amount in addition to the sale value of the admission or privilege.

  The need for guidelines on the subject is indicated by the frequency of misunderstanding of the requirements for deductibility of such payments and increasing incidence of their erroneous treatment for income tax purposes.

In particular, an increasing number of instances are being reported in which the public has been erroneously advised in advertisements or solicitations by sponsors that the entire amounts paid for tickets or other privileges in connection with fund-raising affairs for charity are deductible. Audits of returns are revealing other instances of erroneous advice and misunderstanding as to what, if any, portion of such payments is deductible in various circumstances. There is evidence also of instances in which taxpayers are being misled by questionable solicitation practices which make it appear from the wording of the solicitation that taxpayer’s payment is a “contribution,” whereas the payment solicited is simply the purchase price of an item offered for sale by the organization.

Section 170 of the Code provides for allowance of deductions for charitable contributions, subject to certain requirements and limitations. To the extent here relevant a charitable contribution is defined by that section as “a contribution or gift to or for the use of” certain specified types of organizations.

To be deductible as a charitable contribution for Federal income tax purposes under section 170 of the Code, a payment to or for the use of a qualified charitable organization must be a gift. To be a gift for such purposes in the present context there must be, among other requirements, a payment of money or transfer of property without adequate consideration.

As a general rule, where a transaction involving a payment is in the form of a purchase of an item of value, the presumption arises that no gift has been made for charitable contribution purposes, the presumption being that the payment in such case is the purchase price.

Thus, where consideration in the form of admissions or other privileges or benefits is received in connection with payments by patrons of fund-raising affairs of the type in question, the presumption is that the payments are not gifts. In such case, therefore, if a charitable contribution deduction is claimed with respect to the payment, the burden is on the taxpayer to establish that the amount paid is not the purchase price of the privileges or benefits and that part of the payment, in fact, does qualify as a gift.

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In showing that a gift has been made, an essential element is proof that the portion of the payment claimed as a gift represents the excess of the total amount paid over the value of the consideration received therefor. This may be established by evidence that the payment exceeds the fair market value of the privileges or other benefits received by the amount claimed to have been paid as a gift.

Another element which is important in establishing that a gift was made in such circumstances, is evidence that the payment in excess of the value received was made with the intention of making a gift. While proof of such intention may not be an essential requirement under all circumstances and may sometimes be inferred from surrounding circumstances, the intention to make a gift is, nevertheless, highly relevant in overcoming doubt in those cases in which there is a question whether an amount was in fact paid as a purchase price or as a gift.

Regardless of the intention of the parties, however, a payment of the type in question can in any event qualify as a deductible gift only to the extent that it is shown to exceed the fair market value of any consideration received in the form of privileges or other benefits.

In those cases in which a fund-raising activity is designed to solicit payments which are intended to be in part a gift and in part the purchase price of admission to or other participation in an event of the type in question, the organization conducting the activity should employ procedures which make clear not only that a gift is being solicited in connection with the sale of the admissions or other privileges related to the fund-raising event, but also, the amount of the gift being solicited. To do this, the amount properly attributable to the purchase of admissions or other privileges and the amount solicited as a gift should be determined in advance of solicitation. The respective amounts should be stated in making the solicitation and clearly indicated on any ticket, receipt, or other evidence issued in connection with the payment.

In making such a determination, the full fair market value of the admission and other benefits or privileges must be taken into account. Where the affair is reasonably comparable to events for which there are established charges for admission, such as theatrical or athletic performances, the established charges should be treated as fixing the fair market value of the admission or privilege. Where the amount paid is the same as the standard admission charge there is, of course, no deductible contribution, regardless of the intention of the parties. Where the event has no such counterpart, only that portion of the payment which exceeds a reasonable estimate of the fair market value of the admission or other privileges may be designated as a charitable contribution.

  The fact that the full amount or a portion of the payment made by the taxpayer is used by the organization exclusively for charitable purposes has no bearing upon the determination to be made as to the value of the admission or other privileges and the amount qualifying as a contribution.

  Also, the mere fact that tickets or other privileges are not utilized does not entitle the patron to any greater charitable contribution deduction than would otherwise be allowable. The test of deductibility is not whether the right to admission or privileges is exercised but whether the right was accepted or rejected by the taxpayer. If a patron desires to

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support an affair, but does not intend to use the tickets or exercise the other privileges being offered with the event, he can make an outright gift of the amount he wishes to contribute, in which event he would not accept or keep any ticket or other evidence of any of the privileges related to the event connected with the solicitation.

The foregoing summary is not intended to be all inclusive of the legal requirements relating to deductibility of payments as charitable contributions for Federal income tax purposes. Neither does it attempt to deal with many of the refinements and distinctions which sometimes arise in connection with questions of whether a gift for such purposes has been made in particular circumstances.

The principles stated are intended instead to summarize with as little complexity as possible, those basic rules which govern deductibility of payments in the majority of the circumstances involved. They have their basis in section 170 of the Code, the regulations thereunder, and in court decisions. The observance of these provisions will provide greater assurance to taxpayer contributors that their claimed deductions in such cases are allowable.

Where it is disclosed that the public or the patrons of a fundraising affair for charity have been erroneously informed concerning the extent of the deductibility of their payments in connection with the affair, it necessarily follows that all charitable contribution deductions claimed with respect to payments made in connection with the particular event or affair will be subject to special scrutiny and may be questioned in audit of returns.

  In the following examples application of the principles discussed above is illustrated in connection with various types of fund-raising activities for charity. Again, the examples are drawn to illustrate the general rules involved without attempting to deal with distinctions that sometimes arise in special situations. In each instance, the charitable organization involved is assumed to be an organization previously determined to be qualified to receive deductible charitable contributions under section 170 of the Code, and the references to deductibility are to deductibility as charitable contributions for Federal income tax purposes.

Example 1:

  The M Charity sponsors a symphony concert for the purpose of raising funds for M’ s charitable programs. M agrees to pay a fee which is calculated to reimburse the symphony for hall rental, musicians’ salaries, advertising costs, and printing of tickets. Under the agreement, M is entitled to all receipts from ticket sales. M sells tickets to the concert charging $5 for balcony seats and $10 for orchestra circle seats. These prices approximate the established admission charges for concert performances by the symphony orchestra. The tickets to the concert and the advertising material promoting ticket sales emphasize that the concert is sponsored by, and is for the benefit of M Charity.

  Notwithstanding the fact that taxpayers who acquire tickets to the concert may think they are making a charitable contribution to or for the benefit of M Charity, no part of the payments made is deductible as a charitable contribution for Federal income tax purposes. Since the payments approximate the established admission charge for similar events, there is no gift. The result would be the same even if the advertising materials promoting ticket sales stated that amounts paid for tickets are “tax deductible” and tickets to the concert were purchased in reliance upon such statements. Acquisition of tickets or other privileges by a taxpayer in reliance upon statements made by a charitable organization that the amounts paid are deductible does not convert an otherwise nondeductible payment into a deductible charitable contribution.

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Example 2:

 The facts are the same as in Example 1, except that the M Charity desires to use the concert as an occasion for the solicitation of gifts. It indicates that fact in its advertising material promoting the event, and fixes the payments solicited in connection with each class of admission at $30 for orchestra circle seats and $15 for balcony seats. The advertising and the tickets clearly reflect the fact that the established admission charges for comparable performances by the symphony orchestra are $10 for orchestra circle seats and $5 for balcony seats, and that only the excess of the solicited amounts paid in connection with admission to the concert over the established prices is a contribution to M.

  Under these circumstances a taxpayer who makes a payment of $60 and receives two orchestra circle seat tickets can show that his payment exceeds the established admission charge for similar tickets to comparable performances of the symphony orchestra by $40. The circumstances also confirm that that amount of the payment was solicited as, and intended to be, a gift to M Charity. The $40, therefore, is deductible as a charitable contribution.

Example 3:

  A taxpayer pays $5 for a balcony ticket to the concert described in Example 1. This taxpayer had no intention of using the ticket when he acquired it and he did not, in fact, attend the concert.

  No part of the taxpayer’s $5 payment to the M Charity is deductible as a charitable contribution. The mere fact that the ticket to the concert was not used does not entitle the taxpayer to any greater right to a deduction than if he did use it. The same result would follow if the taxpayer had made a gift of the ticket to another individual. If the taxpayer desired to support M, but did not intend to use the ticket to the concert, he could have made a qualifying charitable contribution by making a $5 payment to M and refusing to accept the ticket to the concert.

Example 4:

  A receives a brochure soliciting contributions for the support of the M Charity. The brochure states: “As a grateful token of appreciation for your help, the M Charity will send to you your choice of one of the several articles listed below, depending upon the amount of your donation.” The remainder of the brochure is devoted to a catalog-type listing of articles of merchandise with the suggested amount of donation necessary to receive each particular article. There is no evidence of any significant difference between the suggested donation and the fair market value of any such article. The brochure contains the further notation that all donations to M Charity are tax deductible.

  Payments of the suggested amounts solicited by M Charity are not deductible as a charitable contribution. Under the circumstances, the amounts solicited as “donations” are simply the purchase prices of the articles listed in the brochure.

Example 5:

  A taxpayer paid $5 for a ticket which entitled him to a chance to win a new automobile. The raffle was conducted to raise funds for the X Charity. Although the payment for the ticket was solicited as a “contribution” to the X Charity and designated as such on the face of the ticket, no part of the payment is deductible as a charitable contribution. Amounts paid for chances to participate in raffles, lotteries, or similar drawings or to participate in puzzle or other contests for valuable prizes are not gifts in such circumstances, and therefore, do not qualify as deductible charitable contributions.

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Example 6:

  A women’s club, which serves principally as an auxiliary of the X Charity, holds monthly membership luncheon meetings. Following the luncheon and any entertainment that may have been arranged, the members transact any membership business which may be required. Attendance of the luncheon meetings is promoted through the advance sale of tickets. Typical of the form of the tickets is the following:

  While the ticket does not specifically state that the amount is tax deductible, the characterization of the $5.50 price of the ticket as a “donation” is highly misleading in that it is done in a context which suggests that the price of the ticket is a charitable contribution and, therefore, tax deductible. On the facts recited, no part of the payment is deductible, since there is no showing that any part of the price of the ticket is in fact a gift of an amount in excess of the fair market value of the luncheon and entertainment.

Example 7:

  In support of its summer festival program of 10 free public concerts, the M Symphony, a charitable organization, mails out brochures soliciting contributions from its patrons. The brochure recites the purposes and activities of the organization, and as an inducement to contributors states that:

“A contribution of $20 entitles the donor to festival membership for the season and free admission to the premiere showing of the motion picture * * * starring * * * and * * *.”

Cocktails - 7:00 P.M. Curtain - 8:15 P.M.

This special premiere performance is not open to the public.

* * *

  “Your contribution will benefit an important community function; it also entitles you to choice reserved seats for all summer festival concerts and events.”

   The envelope furnished for mailing in payments contains the following:

  “Enclosed is my tax-deductible membership contribution to the M Symphony summer concert program in the amount of $- . Send me - tickets to the May 1 premiere performance. I do not desire to attend the special premiere performance for festival members, but I am enclosing my contribution.”

 A taxpayer mails in a payment of $20, indicating on the envelope form that he desires a ticket to the premiere showing of the film.

  No part of the payment is deductible as a charitable contribution. Payment of the $20 entitles an individual not only to the privilege of attending the cocktail party and the premiere showing of the film, but also the privilege of choice reserved seats for the summer festival concerts. Under the circumstances, no part of the payment qualifies as a gift, since there is no showing that the payment exceeds the fair market value of the privileges involved. Even if a “contributor” indicates he does not desire to attend the cocktail party and premiere showing of the film, it would still be incorrect for the organization to characterize the $20 payment as a deductible charitable contribution, since under these circumstances the fair market value of the privilege of having choice reserved seats for attending the concerts would, in all likelihood, exceed the amount of the payment. However, if the taxpayer wishes to support the M Symphony, and advises the organization that he does not desire the ticket to the premiere and does not want seats reserved for him, the amount contributed to M is deductible as a charitable contribution.

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Example 8:

  In order to raise funds, W Charity plans a theater party consisting of admission to a premiere showing of a motion picture and an after-theater buffet. The advertising material and tickets to the theater party designate $5 as an admission charge and $10 as a gift to W Charity. The established admission charge for premiere showings of motion pictures in the locality is $5.

  Notwithstanding W’ s representations respecting the amount designated as a gift, the specified $10 does not qualify as a deductible charitable contribution because W’s allocation fails to take into account the value of admission to the buffet dinner.

Example 9:

  The X Charity sponsors a fund-raising bazaar, the articles offered for sale at the bazaar having been contributed to X by persons desiring to support X’s charitable programs. The prices for the articles sold at the bazaar are set by a committee of X with a view to charging the full fair market value of the articles.

  A taxpayer who purchases articles at the bazaar is not entitled to a charitable contribution deduction for any portion of the amount paid to X for such articles. This is true even though the articles sold at the bazaar are acquired and sold without cost to X and the total proceeds of the sale of the articles are used by X exclusively for charitable purposes.

Example 10:

  The members of the M Charity undertake a program of selling Christmas cards to raise funds for the organization’s activities. The cards are purchased at wholesale prices and are resold at prices comparable to the prices at which similar cards are sold by regular retail outlets. On the receipts furnished to its customers, the difference between the amount received from the customer and the wholesale cost of the cards to the organization is designated by the organization as a tax-deductible charitable contribution.

  The organization is in error in designating this difference as a tax-deductible charitable contribution. The amount paid by customers in excess of the wholesale cost of the cards to the organization is not a gift to the organization, but instead is part of the purchase price or the fair market value of the cards at the retail level.

Example 11:

  In support of the annual fund-raising drive of the X Charity, a local department store agrees to award a transistor radio to each person who contributes $50 or more to the charity. The retail value of the radio is $15. B receives one of the transistor radios as a result of his contribution of $100 to X. Only $85 of B’ s payment to X qualifies as a deductible charitable contribution. In determining the portion of the payment to a charitable organization which is deductible as a charitable contribution in these circumstances, the fair market value of any consideration received for the payment from any source must be subtracted from the total payment.

Example 12:

  To assist the Y Charity in the promotion of a Halloween Ball to raise funds for Y’ s activities, several individuals in the community agree to pay the entire costs of the event, including the costs of the orchestra, publicity, rental of the ballroom, refreshments, and any other necessary expenses. Various civic organizations and clubs agree to undertake the sale of tickets for the dance. The publicity and solicitations for the sale of the tickets emphasize the fact that the entire cost of the ball is being borne by anonymous patrons of Y and by the other community groups, and that the entire gross receipts from the sale of the tickets, therefore, will go to Y Charity. The price of the tickets, however, is set at the fair market value of admission to the event.

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  No part of the amount paid for admission to the dance is a gift. Therefore, no part is deductible as a charitable contribution. The fact that the event is conducted entirely without cost to Y Charity and that the full amount of the admission charge goes directly to Y for its uses has no bearing on the deductibility of the amounts paid for admission, but does have a bearing on the deductibility of the amounts paid by the anonymous patrons of the event. The test is not the cost of the event to Y, but the fair market value of the consideration received by the purchaser of the ticket or other privileges for his payment.

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Rev. Rul. 55-192, 1955-1 C.B. 294

  That portion of membership dues earmarked for distribution to qualified charities, and paid by individual members to the treasurer of a social club, acting also as a duly constituted collecting agent for certain charitable organizations of the type set forth in section 23(o) of the Internal Revenue Code of 1939, is deductible as a contribution by the donor members in computing their taxable net income in the manner and to the extent provided by section 23(o) of the 1939 Code.

  Advice has been requested whether amounts paid as membership dues to a social club and distributed to qualified charities under the circumstances set forth below would constitute allowable deductions to the members within the meaning of section 23(o) of the Internal Revenue Code of 1939.

  The rules of the instant club provide that each member shall pay dues of 100x dollars annually. Of this amount 30 x dollars is in payment of two tickets to a dinner-dance and 70 x dollars constitutes a direct contribution by the member to organizations, contributions to which are deductible under the provisions of section 23(o) of the Code. Checks in payment of dues are made payable to the treasurer of the club, who has been authorized both by the club and the donee organization to act as agent to receive members’ contributions for such purposes.

  Section 23(o) of the Code provides, in part, that in computing taxable net income there shall be allowed as deductions in the case of an individual “contributions or gifts payment of which is made within the taxable year to or for the use of * * * a corporation, trust, or community chest, fund or foundation * * * organized and operated exclusively for religious, charitable, scientific or educational purposes * * *.”

  Section 39.23(o)-1 of Regulations 118 provides that a deduction is allowable under section 23(o) of the Code only with respect to contributions or gifts which are actually paid during the taxable year, regardless of when pledged and regardless of the method of accounting employed by the taxpayer in keeping his books or records.

  Contributions made by members of the social club under the foregoing arrangement and paid over to organizations which are of the type set out in section 23(o) of the Code constitute allowable deductions to the members in computing their taxable net income in the manner and to the extent provided by that section. Contributions received by the treasurer who is also acting as agent of such donee organizations, will be deductible by the donors at the time such contributions are paid to him. However, if the treasurer has not been designated by the organization involved to act as its agent, he is considered to be the agent of the contributor. Accordingly, in that case such contributions are deductible only in the taxable year in which they are actually transferred to the donee organization.

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