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    Internal Revenue Service
 Revenue Ruling

Rev. Rul. 72-314

1972-1 C.B. 44

Sec. 162
 Sec. 170

IRS Headnote

Amounts paid by a stock brokerage corporation to a charitable organization
described in section 170(c)(2) of the Code are deductible as a business
expense under section 162(a) since the payments are business related and
could commensurately further its business. 

Full Text

Rev. Rul. 72-314 

Advice has been requested whether, under the circumstances described below,
amounts paid to a charitable organization described in section 170(c)(2) of
the Internal Revenue Code of 1954 are deductible under section 162(a) of
the Code as an ordinary and necessary business expense. 

The taxpayer corporation is engaged in a stock brokerage business. In order
to promote business in the particular neighborhood in which its office is
located, and in order to compete successfully with other brokerage firms
located in more established financial neighborhoods of the city, the
taxpayer, as an inducement to its customers, paid an amount equal to 6
percent of all brokerage commissions received by it to a charitable
organization described in section 170(c)(2) of the Code whose purpose was
to reduce neighborhood tensions and combat community deterioration in the
neighborhood in which the taxpayer's office was located. 

The taxpayer emphasized in its advertisements to its customers and
potential customers that the described payments made by it to the
charitable organization would enable the customers to benefit the
organization and, thus, the community, without incurring additional
expenses. The taxpayer advised the organization of the procedure used in
soliciting business and that it would pay the organization the amount
mentioned above for the privilege of being able to advertise that such
procedure was in effect. The charitable organization agreed to this
procedure. It was the reasonable expectation of the taxpayer that the
outlined procedure of payments to the described organization would direct
new business to the taxpayer as well as retain the business of its existing

Section 170 of the Code provides, in effect, that there shall be allowed as
a deduction any contribution or gift to, or for the use of, an organization
described in subsection (c), payment of which is made within the taxable

Section 170(b)(2) of the Code provides that in the case of a corporation
the total deduction under subsection 170(a) of the Code for any taxable
year shall not exceed 5 percent of the taxpayer's taxable income computed
without regard to certain deductions. 

Section 162(a) of the Code provides that all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade
or business shall be allowed as a deduction. 

Section 162(b) of the Code provides that no deduction shall be allowed
under subsection (a) for any contribution or gift which would be allowed as
a deduction under section 170 of the Code were it not for the limitations
set forth in such section. 

Section 1.162-15(a)(2) of the Income Tax Regulations states that the
limitation provided in section 162(b) applies only to payments which are,
in fact, contributions or gifts to organizations described in section 170
of the Code. See also Revenue Ruling 63-73, C.B. 1963-1, 35. 

Whether payments of the nature described in the instant case are
"contributions or gifts," within the meaning of section 170 of the Code, or
are deductible as ordinary and necessary business expenses under section
162 of the Code depends upon whether such payments are completely
gratuitous or whether they bear a direct relationship to the taxpayer's
business and are made with a reasonable expectation of a financial return
commensurate with the amount of the payment. See section 1.162-15(b) of the

In the instant case, since the payments in question are related to the
taxpayer's business and could reasonably be expected to commensurately
further such business financially, such payments are deductible as ordinary
and necessary business expenses under section 162(a) of the Code.