Rick Beam Tax Research Paper

Tax Research Case 2

September 30,2013

I. FACTS: Rick Beam has been an independent sales representative for various textile manufacturers for many years. His products consist of soft goods such as tablecloths, curtains, and drapes. Rick’s customers are clothing store chains, department stores, and smaller specialty stores. The employees of these companies who are responsible for purchasing merchandise are known as the buyers. These companies generally prohibit their buyers from accepting gifts form sales representatives. Each year Rick gives cash gifts (never more than $25) to most of the buyers who are his customers. Rick says “this is one of the ways that I maintain my relationship with my buyers.” He maintains adequate substantiation of the gifts. The IRS has disallowed the deduction of these gifts based on §162(c)(2).

II. ISSUE: The issue in this case is whether these gifts Mr. Beam gave to the buyers are of an illegal nature such as illegal bribes or kickbacks. If these are not found to be illegal are they still allowable as a business deduction.

III. RULE OF LAW:

A. IRC §162 deals with business and travel expenses and states that all allowable deductions for business expenses are “ordinary and necessary expenses” that have been incurred or related to the operation of business within the calendar year. It is up to the Secretary to determine if the expenses in question are “ordinary and necessary” and not illegal in nature. Ordinary and necessary are defined as having to deal with the business and operations in a direct manner, but do not have to be detrimental to the business. Not only does it address the business expense, but also whether or not the expense is illegal in some manner. If the payment is considered to be an illegal bribe, illegal kickback or any other form of illegal payment under any United States law or enforced state law, it will not be allowable. A kick back is described as a payment meant for the “referral...