IRS written determination 201437004

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201437004
Release Date: 9/12/2014
Index Number: 162.00-00, 170.00-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B01
PLR-107043-14
Date:
May 30, 2014
Legend
Taxpayer=--------------------------------------------------------------------
Foundation=---------------------------------------------
State=-----------
Member 1=-------------------------------------
Member 2=----------------------------------------------------
Facility 1=-------------------------------------------
Facility 2=----------------------------------------
Facility 3=----------------------------------------------------------
Certificate=-----------------------------------
Commissioner=--------------------------------------
Services=----------------------------------------------------
Condition 1=--------------------------------------------------------------------------------------
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Condition 2=--------------------------------------------------------------------------------------
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Condition 3=--------------------------------------------------------------------------------------
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a=----
b=----
c=----
d=----
e=----
f=------------
g=------------
h=------------

PLR-107043-14
2
Dear ---------------:
This responds to your letter dated February 7, 2014, requesting rulings on behalf of
Taxpayer. Taxpayer requests a ruling on the proper treatment of certain payments
made to charitable organizations under §§ 162 and 170 of the Internal Revenue Code.
RULINGS REQUESTED
(1) Taxpayer’s payments, which are required by law to be made to charitable
organizations, including payments made to Foundation, are not deductible under
§ 170.
(2) Thesepayments are deductible ordinary and necessary business expenses under
§ 162(a).
FACTS
Taxpayer is a State Limited Liability Company treated as a partnership for federal
income tax purposes. Taxpayer began operating in 2010 as a joint venture between
Member 1 and Member 2. Member 1 is a nonprofit corporation exempt from taxation
under § 501(c)(3) and owns a% of Taxpayer. Member 2 is a professional corporation
that owns the remaining b%. Taxpayer offers Services at three facilities: Facility 1,
Facility 2, and Facility 3.
In State, owners and sponsors of identified facilities like that of Taxpayer are required to
obtain a Certificate from the Commissioner. The Commissioner is authorized to impose
three conditions on the recipient of a Certificate in order for the recipient to continue to
operate: (1) Condition 1; (2) Condition 2; and (3) Condition 3. When a service
provider’s Certificate is subject to Condition 3, the provider may satisfy its conditions
with direct payments to organizations approved by Department to receive and distribute
contributions satisfying Certificate conditions.
Taxpayer is subject to Condition 1 and Condition 3. Together, the combined value of
satisfying both conditions for Facility 1 must equal at least c% of gross revenue derived
from operating specific equipment at that Facility covered by the Certificate. For Facility
2, the combined value must equal at least d%, and for Facility 3, the combined value
must equal at least e%. Taxpayer’s annual shortfall between the required percentage
and its actual services provided to satisfy the conditions varies from year to year. To
make up for the shortfall and satisfy the conditions placed on its Certificate, Taxpayer
makes cash contributions to qualified §501(c)(3) organizations. For 2010, Taxpayer
paid $f in qualifying cash contributions; for 2011, it paid $g; and for 2012, it paid $h. The

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majority of these cash contributions were paid to Foundation, a non-stock, not-for-profit
corporation that is also the parent of Member 1.
LAW AND ANALYSIS
Section 170(a) of the Code provides, subject to certain limitations, a deduction for
contributions and gifts to or for the use of organizations described in § 170(c), payment
of which is made within the taxable year.
A contribution for purposes of § 170 of the Code is a voluntary transfer of money or
property that is made without receipt or expectation of financial or economic benefit
commensurate with the amount of the transfer. Transfers of propertythat bear a direct
relationship to the taxpayer’s trade or business and that are made with a reasonable
expectation of financial return commensurate with the amount of the transfer may
constitute allowable deductions under § 162 as trade or business expenses. See
§ 1.170A-1(c)(5) of the Income Tax Regulations and H.R. Rep. No. 1337, 83 Cong., 2d
Sess. A44 (1954).
Section 162(a) of the Code allows a deduction for all the ordinary and necessary
expenses of carrying on a trade or business. See also§ 1.162-1(a) of the Income Tax
Regulations. Section 162(b) provides that a deduction will not be permitted under §
162(a) for a contribution or gift that would be allowed as a charitable deduction were it
not for the limitations of § 170.
Section 1.162-15(a)(2) of the regulations states that the limitation provided in § 162(b)
of the Code applies to payments which are, in fact, contributions or gifts to organizations
described in § 170 of the Code.
Rev. Rul. 72-314, 1972-1 C.B. 44, provides that whether payments to a charitable
organization are deductible pursuant to § 170 or pursuant to § 162 depends upon
whether the 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 alsoRev. Rul.
77-124, 1977-1 C.B. 39, and Rev. Rul. 63-73, 1963-1 C.B. 35.
Taxpayer’s contributions, which it makes to satisfy the conditions of its Certificate under
the law of State, are not deductible under § 170(a). The payments are not voluntary,
nor are they completely gratuitous. As a provider of Services in State, Taxpayer is
subject to the regulatory authorityof the Commissioner, and must satisfy the conditions
of its Certificate to continue to operate. The payments are no more than c% of
Taxpayer’s gross revenue, and are made annually in order to comply with rules of the
governmental entity regulating Taxpayer’s right to conduct its business operations in
State. Failure to make those payments could jeopardize Taxpayer’s continued business
operations in State. The payments therefore bear a direct relationship to the taxpayer’s

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business and are made with a reasonable expectation of financial return commensurate
with the amount spent.
Accordingly, we conclude that the contributions are ordinary and necessary business
expenses that are deductible under § 162.
CONCLUSIONS
(1) Taxpayer’s payments, which are required by law to be made to charitable
organizations, including payments made to Foundation, are not deductible under
§ 170.
(2) These payments are deductible ordinary and necessary business expenses under §
162(a).
Except as expressly provided herein, no opinionis expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.
A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

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The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.
Sincerely,
Lewis K. Brickates
Chief, Branch 1
Office of Associate Chief Counsel
(Income Tax & Accounting)