Marquis v. Comm'r of Internal Revenue

• Decision Date: 29 March 1968
• Docket Number: Docket No. 3298-66.
• Citation: Marquis v. Comm'r of Internal Revenue, 49 T.C. 695 (T.C. 1968)
• Parties: SARAH MARQUIS, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

49 T.C. 695

SARAH MARQUIS, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 3298-66.

Tax Court of the United States.

Filed March 29, 1968.

Isidore R. Tucker, For the petitioner.

Gerald Backer, for the respondent.

Petitioner, a travel agent, regularly transacted a large portion of her business with clients which were exempt as charitable organizations under sec. 170.At the end of each year, she made payments to them keyed to the amount, character, and profitability of such business.Held, under all the circumstances, such payments were not charitable contributions and, therefore, the limitation of sec. 162(b) did not preclude deductibility in full as business expenses.TANNENWALD, Judge:

Respondent determined deficiencies in the Federal income tax of petitioner for the taxable years 1962 and 1963 in the respective amounts of $2,512.45 and $986.31.The sole issue for consideration is whether certain cash payments made by petitioner to customers who qualified as charitable organizations under section 170(c)¹ were deductible as business expenses without regard to the limitation contained in section 162(b).

FINDINGS OF FACT

Some of the facts have been stipulated.Those facts and the exhibits attached thereto are incorporated herein by this reference.

PetitionerSarah Marquis resided in and had business offices located in New York, N.Y., at the time the petition herein was filed.Her individual Federal income tax returns for the calendar years 1962 and 1963 were filed with the district directors of internal revenue in Newark, N.J., and New York, N.Y., respectively.

Since 1935, petitioner has conducted an unincorporated travel agency business in her own name.Such business entails the making of travel bookings for various organizational and individual clients, in exchange for which services petitioner receives commissions and fees based on total bookings.Since 1963 and for a period of 15 years prior thereto, petitioner's clientele has consisted largely of church organizations, religious groups, and other charitable and educational groups (hereinafter referred to as charitable clients).During 1962 and 1963, approximately 57 percent of petitioner's total billings resulted from organizational trips sponsored by some 30 clients of this type.The remainder were business firms and individuals, some of whom were referred to petitioner by her charitable clients.Such charitable clients accounted for total billings of $1,427,163.96 in 1962 and $1,473,534.12 in 1963.

For the most part, petitioner carried on all business with charitable clients by herself— either by direct meeting or over the telephone.Rather than promote such business via the use of salesmen (as her competitors did), she chose to solicit their patronage by means of annual cash payments which were geared to the amount of business which had been and/or was expected to be given to her agency by the particular client.Petitioner had found traditional commercial advertising ineffective with regard to charitable clients because their institutional journals or publications usually refrained from taking such advertising.

As a regular practice over a long period, including the taxable years involved herein, petitioner would, toward the close of each year, decide which organizations were to receive cash payments and the amount to be paid to each.In making such determination, she would consider various factors, including (1) the type and amount of business received from a particular client, (2) the nature of the recipient (i.e., group, conference, referral source), (3) the profitability of the business received, and (4) the prospects for continued patronage by the recipient.Checks drawn on petitioner's business account would be sent to each recipient, usually with an enclosed message to the effect such payments were ‘in lieu of a salesman's visit’ and that petitioner appreciated the particular customer's patronage.²

Petitioner had reason to believe that some of her charitable clients would have ceased doing business with her if she had not continued to make such payments.On the other hand, petitioner occasionally lost some or all of the business of organizations to which she made payments.If she felt that there was still a chance of regaining such business, she would continue— at least for a while— making the payments.Once a particular client actually switched over to a competing travel agent, however, payments would stop.Organizations which did only a very small amount of business with petitioner typically received no payments.

With one minor exception, where petitioner's client was the national organization with which her local church was affiliated, charitable clients included religious organizations of denominations different than her own.Aside from the business relationship, petitioner did not involve herself in the activities of her charitable clients.

During 1962, petitioner made cash disbursements totaling $7,570 to 31 of her charitable clients.During 1963, petitioner made similar disbursements totaling $7,360 to 29 of such clients.On her individual income tax returns for 1962 and 1963, petitioner claimed Schedule C deductions for ‘Promotion’ in the amounts of $7,570 and $7,360, respectively.Respondent disallowed the claimed promotion deductions in their entirety for both years, but did allow portions of such expenses as charitable contributions— in the amounts of $2,281.61 and $5,734.04, respectively.

Separate and apart from such payments, petitioner made contributions to her own church and other charitable organizations (i.e., other than her charitable clients) in the respective amounts of $11,207 and $11,245 for 1962 and 1963.³Such contributions were made from her personal bank account and were reported as itemized individual deductions on petitioner's income tax returns for the years involved.

Schedule C of petitioner's tax returns for 1962 and 1963 reflects the following information:

+----------------------------------------------+
                ¦                     ¦1962       ¦¦1963       ¦
                +---------------------+-----------++-----------¦
                ¦Receipts             ¦$169,949.81¦¦$184,932.90¦
                +---------------------+-----------++-----------¦
                ¦Business expenses 1  ¦149,720.82 ¦¦145,712.27 ¦
                +---------------------+-----------++-----------¦
                ¦Net profit           ¦22,228.99  ¦¦39,220.63  ¦
                +---------------------+-----------++-----------¦
                ¦                     ¦           ¦¦           ¦
                +---------------------+-----------++-----------¦
                ¦                     ¦           ¦¦           ¦
                +----------------------------------------------+
                

 1962 1963  
                Advertising               $1,578.45 $817.57
                Promotion                 7,570.00  7,360.00
                Promotion tours           2,615.27  1,588.22
                Entertainment of clients  570.27    459.41
                

OPINION

The decision in this case turns upon a determination as to the scope of the limitation contained in section 162(b).⁴Petitioner contends that her cash payments to charitable clients were part and parcel of her travel agency business and therefore did not constitute contributions or gifts deductible only under section 170, with the result that the limitation does not apply.Respondent counters with the assertion that the legislative history of section 162(b) and its predecessor sections, his own regulations, and a prior decision of this Court in Wm. T. Stover Co., 27 T.C. 434(1956), require that, in order to escape such limitations, payment must be made in exchange for a binding obligation on the part of the recipient.On all the facts and circumstances herein, we agree with the petitioner.

The genesis of section 162(b) is found in the area of contributions to charitable organizations by corporations.Prior to 1935, corporations were not permitted a deduction for charitable contributions as such.A deduction was allowed only if the test of an ordinary and necessary business expense was met.In this context, the courts evinced a lenient attitude in finding that the particular contributions had a business significance, merely requiring proof of ‘a benefit flowing directly to the corporation as an incident to its business.’SeeWillcuts v. Minnesota Tribune Co., 103 F.2d 947, 952(C.A. 8, 1939), and cases therein cited.It was enough if the court was satisfied that the contribution would not have been made ‘but for’ the existence of a business relationship.

In 1935, the income tax law was amended to limit deductions for charitable contributions by corporations to 5 percent of taxable income; no change was made in the subdivision allowing deductions for business expenses, seemingly because Congress thought that the specific 5-percent provision would control.When it appeared that the law needed clarification in this regard, it was recommended that ‘no deduction shall be allowed to corporations * * * (as a business expense) for any contribution * * * with respect to which a deduction is allowed * * * (as a charitable contribution).’SeeReport of Subcommittee of Ways and Means Committee, 75th Cong., 3d Sess., p. 48(Jan. 14, 1938), appearing in Seidman's Legislative History of Federal Income Tax Laws, 1938-1961, pp. 10, 11.This recommendation of the subcommittee was adopted by the full committee at the time of the enactment of section 23(a)(2) of the Revenue Act of 1938(ch. 289,52 Stat. 447), with the following comment, heavily relied upon by respondent:

The limitations of section 23(a)(2) apply only to payments which are contributions or gifts.A deduction is not to be disallowed under section 23(a)(2) of the bill merely because the recipient of amounts received from the corporation is a so-called charitable organization within the meaning of section 23(q), as, for example, in the case of a payment by a mining company to a local hospital in consideration of an obligation assumed by the hospital to provide hospital services and facilities for the employees of the company.

SeeH. Rept.No. 1860, 75th...