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Corporate Parent’s Payment of Services Not Deductible Under IRC §162


9/24/15

Synopsis
In a heavily redacted IRS memorandum, Internal Revenue Memorandum 20153101F, the IRS held that the costs for services performed on behalf of a joint venture are not deductible business expenses under IRC §162. Instead, those costs are contributions to the joint venture’s capital. Business expenses meet the ordinary and necessary expense requirements under IRC §162 if they are likely connected to the business of the taxpayer claiming the deduction. As a general matter, a corporation may not deduct expenses paid on behalf of a related corporation.

The key factor in the memo was that a corporate parent paid for services performed on behalf of its joint venture. The IRS quoted several key cases to support the proposition that expenses for the operation of a subsidiary’s business not providing a proximate and direct benefit to the taxpayer are not deductible and do not satisfy the requirements of section 162. See Young & Rubicam 410 F.2d at 1238-39. The IRS concluded that the expenses for the services provided to the joint venture should be treated as a contribution of capital to the joint venture by the taxpayer. Further, a constructive payment of the expenses by the joint venture is entitled to a deduction.

Contact
For more information, please contact Richard Shevak, Director, at richard.shevak@cohnreznick.com or at 862-245-5029.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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