CASE 11

Charitable Contributions

For many years Dr. Charles M. Brown and his wife, Lucy, have been avid fans of State University's football team, the Bobcats. Since 1980 Dr. Brown has purchased season tickets for six seats at all home games of the bobcats, which are played in the same town in which the Browns live. Dr. Brown, who practices through a professional corporation known as Dr. Charles M. Brown, Inc., is a dentist who limits his practice to oral surgery. Most of his patients come by referral from other dentists, and Dr. Brown believes it to be professionally important to maintain good relations with various dentists in the area. He does this by making it his custom to invite each of five or six dentists and their spouses to accompany the Browns to one of the Bobcats' games each season. The other two seats of the season passes are used by Dr. Brown's son and daughter-in-law. Dr. Brown's son, presently a supermarket clerk, played for the Bobcats during the years 1981 through 1983.

For years prior to the current season, Dr. Brown has personally paid the cost of the two seats used by his son and daughter-in-law. This cost, being regarded as nonbusiness, has not been claimed as a deduction. The cost of their other four seats has been paid by the corporation and deducted each year as a valid and adequately documented business expense on the corporation's federal income tax return. As a result of being a long-term purchaser of season tickets and through the influence of his son, Dr. Brown has, since 1984, been able to obtain each year the same block of six seats located at about the 45-yard line.

Effective for the current season, State University announced a new policy on the sale of season tickets as follows: "New purchasers of season tickets for seats between the 30-yard lines are required to have contributed $250 per seat during the current year to the University's Athletic Department. Prior holders of seats between the 30-yard lines are limited to a single block of two seats unless $250 per additional seat is contributed. Required contributions are in addition to the regular purchase price of $70 per season ticket, which applies to all seats in the stadium."

In seeking to purchase his six seats for the current year, Dr. Brown was first told that he would be required to make a contribution of $1,000 before he could purchase the six tickets. After some heated discussion, however, it was agreed that both Dr. Brown and his son could each purchase a block of three seats upon a contribution of $250 each and that the two blocks of seats would be the same six seats Dr. Brown had held in past years.

Checks were written as follows:

On the personal account of Dr. Brown:

$250--University Athletic Department (contribution)

$390--C.M. Brown, Jr. (reimbursement for contribution plus cost of two tickets)

On the personal account of C.M. Brown, Jr.

$250--University Athletic Department (contribution)

$210--University Athletic Department (three tickets)

On the account of Dr. Charles M. Brown, Inc.

$210--University Athletic Department (three tickets)

$ 70--C.M. Brown, Jr. (reimbursement for cost of one ticket)

Dr. Brown made no other contributions to the University in current year. In prior years, Dr. Brown had made the following contribution to the University:

Last year: $200--Athletic Department; $200--Medical School

Two years ago: $300--Athletic Department; $200--Medical School

Three years ago: $ 0--Athletic Department; $400--Medical School

Four years ago: $200--Athletic Department; $300--Medical School

Five years ago: $500--Athletic Department; $ 0--Medical School

Because of extensive investments and a trust established by Mrs. Brown's grandfather, the Browns' taxable income will exceed $200,000 for the current year while the taxable income of the corporation will be in the general range of $80,000 to $100,000 for the current year.

In filing current year's tax returns, the following deductions were claimed:

Form 1040 Form 1120 of

Dr. & Mrs. Brown Dr. C.M. Brown, Inc.

Professional entertainment -- $280

Contributions $500 --

Upon audit, the IRS allowed the corporation a deduction of only $210 for entertainment. Dr. and Mrs. Brown were allowed no deduction for contributions.

If you were a Tax Court judge, how would you rule in this case? Why?