Notice 89-91: allocation of charitable contributions under Section 864

Tax Executive, The, Nov-Dec, 1989

Notice 89-91: Allocation of Charitable Contributions under Section 864(e)

On November 9, 1989, Tax Executive Institute submitted the following comments to IRS Commissioner Fred T. Goldberg, concerning Notice 89-91, in which the Internal Revenue Service announced its intention to amend the regulations under section 864(e) to require the allocation and apportionment of charitable contributions across the corporate group. TEI's comments were prepared under the aegis of the International Tax Committee (whose chair is Bernard J. Jerlstrom).

This letter discusses Notice 89-91 which was issued by the Internal Revenue Service on August 1, 1989. The notice outlined changes the IRS intends to make to the temporary (T.D. 8228) and proposed (INTL-952-86) regulations under sections 861 and 864(e) of the Internal Revenue Code, which were issued on September 9, 1988.

General Comments

On February 14 and April 13, 1989, TEI submitted comments on the temporary and proposed regulations under sections 861 and 864 of the Code (T.D. 8228 and INTL-952-86, issued September 8, 1988). We are pleased that several suggestions proposed by the Institute (and others) will be incorporated into the final regulations. Specifically, we commend the IRS for concluding that the potentially Hydra-headed attribution rule proposed in Temp. Reg. [section] 1.861-11T(d)(6) should be modified. Using the attribution rules set forth in Treas. Reg. [section] 1.1563(d) (as announced in Notice 89-91), rather than those in section 318, is a much more workable, less burdensome approach.

The announced change suggested in Temp. Reg. [section] 1.861-12T(j), Example 1 -- clarifying that general and administrative expenses may be specifically traced to income generated by specific assets (rather than grouping such expenses with assets without directly identifiable yields) -- is also a good one. We continue to believe, however, that there are situations where general and administrative expenses may be specifically traced to income that is the product of multiple category assets and seek confirmation that such an interpretation is acceptable.

TEI also welcomes the announcement that any rule requiring the apportionment of rent in certain leasing transactions will apply only to leases executed after such a rule is published. Although we continue to oppose treating rent as interest expense, we believe that a prospective-only application of such a rule is necessary not only as a matter of basic fairness, but also to avoid frustrating the economic expectations of the parties who enter into lease transactions prior to the promulgation of the final regulations.

Allocation of Charitable Contributions

These salutary changes notwithstanding, the Institute has reservations about the proposed allocation and apportionment of charitable contributions across the corporate group (as set forth in Notice 89-91). Temp. Reg. [section] 1.861-14T sets forth special rules for allocating and apportioning expenses other than interest under section 864(e)(6) of the Code. Subsection (e) of that regulation describes those expenses that are subject to allocation and apportionment. In general, such expenses do not include any expense that is directly allocable to specific income-producing activities and property of the member of the affiliated group that incurred the expense. The rules generally apply to expenses of supportive functions (such as general and administrative expenses), research and development expenses, stewardship expenses, and certain generalized legal and accounting expenses.

In Notice 89-91, the IRS announced its intent to modify Temp. Reg. [section] 1.861-14T(e) to include the deduction for charitable contributions provided under section 170 of the Code within the scope of the allocation rules. Averring that such deductions are not definitely related to a class of gross income, the notice requires taxpayers to allocate and apportion their charitable contributions on an affiliated group basis. TEI believes that the proposed modification is ill-advised and should be withdrawn.

The Treasury regulations in effect since 1977 provide that the deduction for charitable contributions shall "generally" be considered as not definitely related to a class of gross income and thus shall be allocated based on consolidated gross income. See Treas. Reg. [section] [section] 1.861-8(e)(9)(iv); 1.861-8(g), Example (18)(iv).(1) Notice 89-91 would eliminate the word "generally" from the regulations.

TEI believes that the use of the world "generally" in the regulations properly implies that it is appropriate in certain circumstances to trace the deduction to one or more classes of gross income. We also believe that deductions for contributions related only to U.S. or foreign operations should be allocated to those operations rather than apportioned on a single-taxpayer basis. Such contributions primarily benefit only the community in which the affiliate operates. For example, corporate contributions to victims of the San Francisco earthquake or Hurricane Hugo aid only those locales, not worldwide operations. Similarly, ongoing contributions of foodstuffs to needy inner-city communities (e.g., through groups such as Second Harvest) or of computer equipment to school districts benefits the donees' community -- not the donor's worldwide operations.