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Company’s matching contributions to employee PAC aren’t deductible

PLR 201616002

A private letter ruling (PLR) concludes that a corporation’s contributions to an employee political action committee (PAC) charity match program aren’t deductible as ordinary and necessary business expenses under Code Sec. 162. The corporation’s contributions are made “in connection with” a political campaign and thus are nondeductible under Code Sec. 162(e)(1)(B).

Background. Under Code Sec. 162(e)(1)(B), amounts paid or incurred in connection with participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office are not deductible as a trade or business expense under Code Sec. 162. Reg. § 1.162-20(c) further states that, while certain types of expenses with respect to legislative matters may be deductible, other expenses, including those “for political campaign purposes,” are not deductible from gross income.

Facts. Taxpayer, a corporation, is prohibited by the Federal Election Campaign Act (FECA) from contributing to federal election campaigns. Consistent with the FECA, Taxpayer established PAC, which is funded by employees of Taxpayer and its subsidiaries. The PAC is a political organization exempt from taxation under Code Sec. 527, and its purpose, as stated in its charter, is to “disburse funds to candidates” for public office.

To incentivize employee PAC contributions of at least Amount 1 but not more than Amount 2, Taxpayer matches each of these contributions with a contribution in the name of the employee to one or more charities selected by the employee.

Taxpayer asked IRS to rule that it may deduct its matching contributions as ordinary and necessary business expenses under Code Sec. 162.

No deduction. The PLR points out that the contributions to PAC and Taxpayer’s matching contributions are inextricably linked, as employee contributions to PAC are a prerequisite for Taxpayer’s matching contributions. Moreover, Taxpayer’s matching contributions are intended to incentivize contributions of Amount 1 or more to PAC. Applying Code Sec. 162(e)(1)(B), the regs, and case law (which generally have read the phrase “in connection with” broadly when it appears in the Code), the PLR concludes that Taxpayer’s matching contributions are made “in connection with” a political campaign on behalf of a candidate for public office, and thus are not deductible under Code Sec. 162.

References: For expenses of participation in political campaigns, see FTC 2d/FIN ¶  L-2420  ; United States Tax Reporter ¶  1624.395  ; TaxDesk ¶  306,015  ; TG ¶  16476  .