IRS Refuses to Bless Position that Contributions to Charity Made Contingent on Employee Contributions to PAC Created a Deduction

Politics is in the air in the election year of 2016, and the IRS was asked to rule on an attempt by an employer to “incentivize” employees to contribute to a political action committee established by the employer and funded by employees of the organization and its subsidiaries.  In LTR 201616002 the IRS ruled that this structure did not give rise to a deductible payment by the employer.

The memorandum describes the PAC and its reason for being as follows:

Taxpayer, a corporation, is prohibited by the Federal Election Campaign Act (FECA) from contributing to federal election campaigns. 52 U.S.C. § 30118(a); 11 CFR § 114.2(b). Consistent with the FECA, Taxpayer established PAC, which is funded by employees of Taxpayer and its subsidiaries. PAC is a political organization exempt from taxation under section 527 of the Code. PAC's purpose, as stated in its charter, is to “disburse funds to candidates” for public office. The candidates are chosen by PAC’s * * *.

The employer wanted to incentivize its employees to contribute to the PAC, and so came up with the following system:

To incentivize employee contributions of at least Amount1 but not more than Amount2 to PAC, Taxpayer matches each of these contributions with a contribution in the name of the employee to one or more charities selected by the employee.

The employer’s argument was that this would be a deductible ordinary and necessary business expense under IRC §162 and, since it was paid to the charity and not a political organization, it would not run afoul of the prohibition on the deduction of contributions for political purposes under IRC §162(e)(1)(B) which provides:

(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—

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

The employer therefore asked the IRS to approve this structure, asking for a private letter ruling.

However the IRS did not accede to that request.  Rather the agency took the position that these payments to charity were “in connection with” the proscribed political conduct described in IRC §162(e)(1)(B).

The ruling concludes:

Here, the contributions to PAC and Taxpayer's matching contributions are inextricably linked. The contributions to PAC are a prerequisite for Taxpayer's matching contributions. Moreover, Taxpayer's matching contributions are intended to incentivize contributions of Amount1 or more to PAC. Applying section 162(e)(1)(B), the regulations, and case law, we conclude that Taxpayer's matching contributions are “in connection with” a political campaign on behalf of a candidate for public office, and are not deductible under section 162.