Internal Revenue Service
Revenue Ruling
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smRev. Rul. 54-27
1954-1 C.B. 44
Caution: Obsoleted by Rev. Rul. 82-127
IRS Headnote
"Kickback" payments made to induce employees or agents to promote purchases by their employers or principals from the taxpayers making the payments, under certain conditions, are not allowable deductions for Federal income tax purposes when made by taxpayers subject to the Federal Trade Commission Act, as amended, or the Packers and Stockyards Act, 1921, as amended.
Full Text
Rev. Rul. 54-27
Advice is requested relative to the deductibility under section 23(a)(1)(A) of the Internal Revenue Code of "kickback" payments made by a taxpayer to employees and purchasing agents of his customers to induce the employees and purchasing agents to promote purchases by their employers or principals from the taxpayer making the payments.
Section 23(a)(1)(A) of the Internal Revenue Code provides that in computing net income there shall be allowed as deductions:
(a) EXPENSES.--
(1) TRADE OR BUSINESS EXPENSES.--
(A) IN GENERAL.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.
In I. T. 4096, C. B. 1952-2, 91, it is held that payments made by a surgeon on a split-fee basis to other physicians who refer patients to him are deductible under section 23(a)(1)(A) of the Code, supra, provided they are normal, usual, and customary in the profession and in the community; are appropriate and helpful in obtaining business; and do not frustrate sharply defined National or State policies evidenced by a governmental declaration proscribing particular types of conduct.
Under section 5 of the Federal Trade Commission Act, as amended, 38 Stat. 717, which provides in part that unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce are unlawful, the Federal Trade Commission is empowered and directed to prevent persons, partnerships, or corporations, except certain of those subject to other regulatory acts, including those subject to the Packers and Stockyards Act, 1921, from using unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce.
Sections 202 and 312 of the Packers and Stockyards Act, 1921, as amended, 42 Stat. 159, make it unlawful, among other things, for any person subject to the Act to engage in or use any unfair, unjustly discriminatory, or deceptive practice or device in commerce. Sections 203 and 312 of the Act authorize the Secretary of Agriculture, after notice and hearing, to issue orders requiring any such person to cease and desist from engaging in or using any such practice or device.
The Federal Trade Commission has informed the Internal Revenue Service that it is the position of the Commission that under certain conditions the practice by sellers subject to the provisions of the Federal Trade Commission Act, as amended, of paying money or making gifts to employees or agents of customers or prospective customers, or to employees or agents of competitors' customers or prospective customers, is an unfair method of competition in violation of section 5 of the Federal Trade Commission Act, as amended. The conditions are (1) that such payments or gifts be made to induce the employees or agents to promote purchases by their employers or principals from the sellers making the payments or gifts, or to induce the employees or agents to influence their employers or principals to refrain from purchasing from competitors of the sellers making the payments or gifts; and (2) that the payments or gifts be made without the knowledge or consent of the employers or principals of the employees or agents.
The Department of Agriculture has informed the Internal Revenue Service that it is the position of that Department that such practice by persons who are subject to the Packers and Stockyards Act, 1921, as amended, is in violation of the provisions of sections 202 and 312 of such Act if the payments (1) are not ordinary and customary in the industry, (2) are made without the knowledge and consent of the customer, or (3) are made to employees of only certain of the seller's customers.
In view of the foregoing it is held that "kickback" payments made by taxpayers who are subject to the Federal Trade Commission Act, as amended, to employees or purchasing agents of their customers or prospective customers are not deductible, for Federal income tax purposes, unless the following conditions are met: The payments (1) must be normal, usual, and customary in the industry and in the community, (2) must be appropriate and helpful in obtaining business, and (3) must be made with the knowledge and consent of the customer or prospective customer. In the case of taxpayers subject to the Packers and Stockyards Act, 1921, as amended, in addition to the conditions set forth above, such payments must be made without unjust discrimination between the taxpayer's customers.