Tax Research Case 2
I. FACTS: Rick Beam has been an independent sales representative for various textile manufacturers for many years. His products consist of soft goods such as tablecloths, curtains, and drapes. Rick’s customers are clothing store chains, department stores, and smaller specialty stores. The employees of these companies who are responsible for purchasing merchandise are known as the buyers. These companies generally prohibit their buyers from accepting gifts form sales representatives. Each year Rick gives cash gifts (never more than $25) to most of the buyers who are his customers. Rick says “this is one of the ways that I maintain my ...view middle of the document...
A kick back is described as a payment meant for the “referral of a client, patient, or customer.”
B. According to Treas. Reg. §162-18(b)(1) any illegal bribes or kickbacks are not deductible. These types of illegal payments are described as those that would cause the suspension or termination of business license or disallow engaging in the trade of business activities. Treas. Reg.§162-18(b)(3) states that for it to be a state law it must be a law that has and is enforced. It will not be state law if it has never been enforced or the only ones charged were infamous or violations were extraordinarily flagrant. Caution: The Treasury has not yet amended Reg.§ 1.162-18 to reflect changes made by P.L. 100-647, P.L. 99-514, P.L. 99-272, P.L. 98-573, P.L. 97-248 No rulings were found.
C. Bondy, Arthur (1991), TC Memo 1991-545, PH TCM ¶91545, 62 CCH TCM 1126 is a memorandum decision made on the decision of gifts as a deductible business expense. Mr. Bondy is an independent sales representative for a textile manufacturer and made a deduction for gifts to his buyers of $25 or less each, even though the employers of the buyers did not allow these gifts. The IRS claimed these deductions were not allowable and unsubstantiated. Section 162(a) allows for claims for deductions that are ordinary and necessary for the business or trade and have a direct connection to the business or trade. The court found that the payments to the buyers were directly connected to the business and fit the description of ordinary and necessary expenses. It was also found that just because the policy of the employers does not permit the receiving of gifts, it does not make the gift an illegal payment. Since they were deemed legal, and did not fit the description of an illegal bribe or illegal kickback, they should be allowable as a deduction. It was also found that the logs kept by the petitioner support his account of payments in the manner and amounts he claimed. A decision was entered for the petitioner and no under payments was “due to negligence or an intentional disregard of the rules and regulations.” The petitioner was a resident of Woodstock, Connecticut.