Under certain circumstances this should be deductible as the contribution to a church allowed by the Board in Poinsett Mills' Appeal (see page 1144).

If benefits running to the corporation can be identified with gifts such as those mentioned in the foregoing ruling, the deductions should be allowed as "necessary" expenses.

In Messenger Publishing Co.'s Appeal [2 B. T. A. 30 (A)] the Commissioner disallowed a credit allowed to a customer which was unusual and in excess of the regular discount on the ground that it was a gift. The Board overruled the Commissioner.

A contribution by a corporation to a hospital construction fund was disallowed as a deduction because the employees of the corporation will pay the same rates as other patients and the hospital will be available to the general public. Therefore it was held there was no direct benefit accruing to the corporation. (C. B. III-1, 293; I. T. 1980.)

Another case in which the motive was the same as in the foregoing cases is Anniston City Land Co.'s Appeal [2 B. T. A. 526 (A)]. The Commissioner was consistent in disallowing the deduction. The Board however apparently found the flow of benefit to be more direct than in other cases and overruled the Commissioner. The taxpayer contributed $3,430 to a Chamber of Commerce fund to get an Army Post to the City of Anniston. The president of the land company testified that the gift was made: "For the direct and immediate and positive benefit it would be to us in the sale of our lands."

The Board said:

DECISION. The success of the Land Company depended upon the demand for the lots and acreage tracts which it was offering for sale. It owned practically all the land between the camp site and the developed portion of the city. The location of the camp inevitably increased the demand for land with a resultant increase in sales. It is difficult to imagine an expenditure which would have stimulated demand as did this contribution. Such a contribution has, in a direct sense, a reasonable relation to the taxpayer's business.

DONATIONS BY AGRICULTURAL CORPORATIONS TO FAIRS, ETC.—

RULING. A corporation engaged in agricultural business cannot be allowed to make a deduction from gross income on account of donations to fairs, churches and associations, such donations being made for the purpose of obtaining and preserving the goodwill of the farmers who raise crops for it, since the amounts so expended are clearly in the nature of gratuities and are not necessary expenses of operation and main

tenance, as there is no such consideration in this case as is contemplated in T. D. 2090. (Letter from Acting Commissioner of Internal Revenue, June 25, 1914.)

If followed literally, this decision would deprive some corporations of the right to claim advertising as an allowable deduction. Many public service corporations advertise to retain customers' goodwill as well as to seek new business.

GIFTS OF MERCHANDISE.-Probably every retailer is requested to make gifts to charitable and religious organizations. Usually the solicitor is a good customer and the donation is made. The author has never heard it seriously contended that gifts of this nature were other than expenses of doing business, as, of course, they are; and they should be so treated in preparing income tax returns. The Treasury in a certain case ruled that they are not allowable deductions. Corporations, as a rule, do not make payments representing "mere gratuities," but expect and receive some consideration for expenditures of a quasi-charitable nature.

"TREATING MONEY" AN EXPENSE, NOT A GIFT.

REGULATION. So-called "spending or treating money" actually advanced by corporations to their traveling salesmen, to be used by them as a part of the expense incident to selling the product of such corporations, is an allowable deduction in a return of income by such corporation. The deduction of such expenditures is conditioned upon a satisfactory showing that all the allowance claimed as a deduction was actually expended for and was an ordinary and usual expense incurred in selling the product or merchandise of the corporation. (Reg. 33, 1918, Art. 133; T. D. 2090, December 14, 1914.)

PART IV

SPECIAL CLASSES OF TAXPAYERS

Until the earnings of corporations have been distributed without undue delay as dividends and, consequently, have become subject to the surtax rates in the hands of the individual stockholders, the intention of the law has not been fully carried out.1

Section 220 of the law is designed to prevent the use of the corporate form to evade the purpose of the law.

LAW. Section 220. (a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall (except as provided in subdivision (d) of this section) be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.

The law proposes to impose a penalty, therefore proof of intent to evade the surtax is necessary. The burden of such proof is on the Treasury, unless otherwise provided."

The 50 per cent penalty rate in the 1926 law is not retroactive. However, the rate under the 1924 law was the same."

REGULATION. ... If a domestic or foreign corporation is so formed or availed on or after January 1, 1925, it is subject to a tax at the [Former Procedure] See Income Tax Procedure, 1926, pages 1609

1611.

1

2 See section 220 (b), quoted on page 1151, where the burden of proof is shifted to the taxpayer in the case of holding or investment companies. [Former Procedure] See Income Tax Procedure, 1926, page 1613.