Opinion ID: 554937
Heading Depth: 2
Heading Rank: 4

Heading: Advertising Fund

Text: 40 Section 162 of the Code allows a current deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. Where the genuineness of those expenses is challenged, the taxpayer bears the burden of proving that the form of the transactions giving rise to those expenses accurately reflects their substance. Welch v. Helvering, 290 U.S. 111, 113-15, 54 S.Ct. 8, 8-10, 78 L.Ed. 212 (1933). 41 The distribution agreement required the partnership to advance Orion $4 million, purportedly for advertising expenses. The partnership satisfied the requirement at closing by paying $1.65 million in cash and by borrowing $2.35 million from Chemical Bank (marketing loan). 42 The tax court disallowed the advertising fund as a currently deductible business expense, concluding that Orion rather than the partnership incurred the advertising expenses. As found by the tax court, Orion had complete control over the funds once they had been provided by the partnership and that Orion independently made the decisions regarding the use of the funds for advertising. 43 Specifically, the evidence established that all invoices were submitted to either Orion or Warner, Orion and/or Warner made payment from a special checking account with Chemical Bank, and Warner's employees had authority to sign checks drawn from that account. Warner reimbursed itself for amounts it paid for advertising by writing checks on this special account. 44 The tax court characterized the advertising fund as an attempt to transform a capital investment into a current deduction. T.C. Memo. at 26. As such, the tax court concluded that the cash portion of the payment represented a capital contribution and should be added to the partnership's depreciable basis. 45 Additionally, the tax court declined to include the marketing loan in the basis, finding that the loan did not represent bona fide debt. This conclusion was based on the tax court's finding that Orion and/or Warner Bros. had effectively guaranteed the partnership's purported debt obligation under the marketing loan to Chemical Bank. 46 Based upon the foregoing findings, which the record clearly supports, the tax court properly determined that the advertising advance did not constitute a currently deductible business expense but rather a capital contribution. We find no error.