Snark Hunting Not Deductible

Originally Published on forbes.com on January 4th,2012

______________________________________

Hunting of the Snark.

Are the costs of an ________, led by a corporate president/shareholder, to recover the remains of an _______ prominent in the history of the corporation deductible on the corporate return? 

Suppose your company had made the airplane that Amelia Earhart was flying when she disappeared.  Would it not be a fantastic advertising coup to find and  display it in the company museum ?  And if the company is associated with a family then should not the search involve the president and major stockholder and his family ?  Would that not make the recovery more meaningful ?  What can I say ? The story embedded in LAFA 20115002F has the makings of a novel, but it requires more imagination than a mere tax blogger can bring to it.  LAFA stands for legal advice from field attorneys.  It is the type of document that prior to the Freedom of Information Act would have not been released.  Now hard core tax junkies get to read things like this with the identifying information stripped out.  Here is an excerpt:

In fiscal year _______ , *** t, *** u, and several family members travelled to *** c after hearing rumors that the *** q  had been located in a different area than previously suspected. The _______ found and positively identified the ____ and investigated the possibility of ______, returning it to the _____, and displaying it in the company ______. Expenses were incurred for travel, ______rental, _______, _______, security, public relations, and related items. Filming costs totaled approximately $_______ and travel costs were calculated at approximately $ _________. Some $_______ was paid to experts at *** ai for a study on recovering and transporting the ________. The company eventually decided not to remove the ________ a ________was erected at the site.

Who are ***t and ***u ? What company ? Who are the experts at ***ai ?  Where did they originally think ***q was and where did it turn out to be ? Why is it so hard to transport *** q ?  And the most compelling question of all ?  What is ***q ?  Even the fact that the mysterious object is designated with “q” adds to the romance.  “Q” is, of course, the hypothetical text that is the common source along with the Gospel of Mark of the Gospels of Matthew and Luke.  There is also the possibility that “Q” is the product of German imagination in the form of scholarship, but that does not lessen the romance. It may just be a coincidence that it was the letter selected to designate a mysterious object that is hard to locate, but do not rule out the possibility that there are many former New Testament scholars employed by the IRS.  Being able to read documents that are written in Greek by people whose native language was Aramaic with many of the important commentaries being written in German might be just the thing for regulation writers.

“I said it in Hebrew — I said it in Dutch — I said it in German and Greek: But I wholly forgot (and it vexes me much)That English is what you speak!”

At any rate, the Amelia Earhart airplane was the best I could do and it is not that good, so I decided that ***q must be a snark.

“He remarked to me then,” said that mildest of men, “ ‘If your Snark be a Snark, that is right: Fetch it home by all means — you may serve it with greens, And it’s handy for striking a light

The mundane question was whether the snark hunting was deductible or not.  “Company” made a pretty compelling case:

The taxpayer states that the original and [Redacted Text][Redacted Text] are “company icons holding particular significance to [the company], company employees and the surrounding community” and are “vital elements of [the company's]culture” that “enhance and create opportunities for [the company] to tell its story and promote the company.” The [Redacted Text] was mentioned in the company’s [Redacted Text] “public report” but, as the company is [Redacted Text], the extent to which this report is distributed is not clear. 

The IRS is not buying the company’s argument:

In our opinion, the expenditures at issue are not deductible by the taxpayer as they are not ordinary and necessary expenses of the taxpayer’s trade or business. In order for an expenditure to be deductible as advertising, the taxpayer has the burden of proving a proximate relationship between the expenditure and the corporation’s business, that the activity “was reasonably calculated to call public attention to its business in some manner that might reasonably be expected to produce some patronage benefit,” and that the expenditure was reasonable in amount compared to the reasonably expected benefits.

Admittedly, it is not for the Service to decide whether a taxpayer’s expenditure is the best possible use of the company’s funds, only whether it was ordinary and necessary in pursuit of the business. Expenditures for advertising are deductible whether or not the advertising is effective; they are even deductible if the advertising completely misfires and has disastrous results for the company’s sales and reputation. The deduction depends primarily on whether the expenditure, at the time it was authorized, “might reasonably be expected to produce some patronage benefit.” On the other hand, the expenditure cannot have merely a remote or tangential connection with promoting the company; and the expense must be reasonable in amount compared to the reasonably expected benefits. Extravagant expenditures from which a reasonable person could expect only minimal benefits are not deductible.

The fact that the snark does not appear to have been hiding near the South Pole or some other unpleasant place appears to have been a factor: 

Furthermore, the elements of personal pleasure cannot be ignored. Although we do not doubt that the *** al [Redacted Text] had some historic element, the photographs and descriptions of the [Redacted Text], as provided to the Service by the taxpayer, indicate that the president of the company, his mother, and other relatives enjoyed many recreational amenities on this [Redacted Text], including diving, sailing, swimming, and other diversions.

 The attorney indicated that whether to go after the president of the company to charge him with a deemed dividend was a matter of Service priorities:

Of course, consistent with the expense not being deductible on the corporate return, that part of the cost of the [Redacted Text] which is a personal benefit to the president of the company is income to him not reported on his return. It is at the discretion of the Compliance Division, however, whether an examination of the president’s individual return should be opened and an adjustment proposed; this decision involves matters regarding the allocation of IRS time and resources that are beyond the scope of Counsel’s knowledge and authority.

Of course when you hunt snarks there are worse things than an IRS audit that can happen to you as the Baker found:

In the midst of the word he was trying to say,In the midst of his laughter and glee,He had softly and suddenly vanished away — For the Snark was a Boojum, you see.