Rev. Rul. 58-209

Advice has been requested whether a corporation, which is primarily organized and operated for the purpose of advertising and promoting the sale of a particular make of automobile, is taxable on any unexpended funds (representing the excess of contributions collected over expenditures) remaining at the end of the taxable year under the circumstances described below.

The corporation is a nonprofit membership corporation organized under the "General Not for Profit Corporation Act" of the state within which it operates. Membership in the corporation in question is restricted to dealers who hold franchises for the sale of a certain make of automobile in a designated area. The corporation was organized for the purpose of uniting such dealers in that area and promoting the sale of automobiles, parts and services by financing general advertising campaigns from funds paid in by dealer-members. The amounts of these payments are based on the number of automobiles purchased from the manufacturer by each member.

The articles of incorporation provide that the purposes for which the corporation is organized are (1) to improve business conditions in the general area with respect to the sale in that area of passenger cars, commercial cars and/or trucks and automotive equipment handled by members of the corporation, whether new or used; (2) to promote public interest in the products offered for sale by the members of the corporation through the use of advertising, exhibitions and other means of all types; (3) to compile and distribute information regarding effective methods of carrying on the businesses of the members of the corporation; (4) to hold conferences of members for the purpose of exchanging ideas with respect to the operation and management of the members' businesses; (5) to foster good relations between the members and the members of the public; and (6) to engage in such other nonprofit activities as are incidental or related to the foregoing purposes.

The articles of incorporation also provide that the corporation shall not engage in any business of a kind ordinarily carried on for profit; the corporation shall not enter into any transaction, carry on any activity, or engage in any business for pecuniary profit; and any income received by the corporation shall be applied exclusively to the not-for-profit purposes and objects of the corporation and no part thereof shall ever inure to the benefit of any private member or individual. In connection with and to further its objects and purposes, the corporation shall have and may exercise all of the powers and authority now or hereafter granted to and vested in not-for-profit corporations organized and existing under the "General Not for Profit Corporation Act" of the state. The corporation may have one or more offices within and without the state and may promote its objects and purposes, and exercise its powers, subject to all applicable laws, within and without the state, to the extent from time to time determined by its board of directors. Upon the termination or dissolution of the corporation, any surplus of property and assets remaining after all of the debts and obligations of the corporation have been paid and satisfied shall not, either directly or indirectly, inure to the benefit of any private member of the corporation or individual, but all such property and assets shall be expended in their entirety for the not-for-profit purposes set forth in the articles of incorporation.

The dealer agreement provides that in the event of termination of the written contract of franchise of a dealer-member to sell products or services of the manufacturer, membership in the fund shall automatically cease and terminate. No member shall be entitled to a refund of any part of his contributions under any circumstances, including the circumstances of termination of such contract.

Examination of the stated purposes of the corporation discloses that with the possible exception of stated purpose (2), which relates to advertising in a broad sense, the other stated purposes relate to the general business welfare of the organization which embrace activities of a nonadvertising nature rather than advertising as such. For example, stated purpose (1) permits the organization to improve business conditions by means other than advertising and stated purpose (5) encompasses the broad field of public relations which could include nonadvertising activities such as contributions to public charities. Of significance is the fact that the corporation is authorized to utilize the payments made by its members in the furtherance of its business welfare activities, which precludes a finding that the payments constitute a trust fund for advertising, as such, or that the corporation receives the payments burdened with an obligation to expend them solely for advertising. Since the payments received by the corporation may be expended for purposes other than advertising and general administrative expenses incidental thereto, it follows that the corporation, which has contractually undertaken to perform advertising and other services for the dealer-members, must include such payments in its income.

The instant case is distinguishable from the decision of The Seven-Up Company v. Commissioner, 14 T. C. 965 (1950 acquiescence C. B. 1950-2, 4. There The Tax Court of the United States found that amounts received by the petitioner, from bottlers who contributed to a national advertising fund, were burdened with the obligation to expend such funds for national advertising; that such amounts constituted a trust fund which the company administered as agent, and that such amounts were not income to the company. The court stated on page 977, as follows:

While the petitioner had the right to receive the bottlers' contributions under its agreement with them, all of the facts and circumstances surrounding the transaction clearly indicate that it was the intention of all of the parties concerned that these contributions were to be used to acquire national advertising for the 7-Up bottled beverage and for that purpose only, and that the petitioner was to be a conduit for passing on the funds contributed to the advertising agency which was to arrange for and supply the national advertising.

The court found that a trust existed with respect to the contributions in that case and that the petitioner acted as the conduit, agent, or custodian thereof. Therefore, the petitioner was not taxed on the excess contributions because it did not receive the bottlers' contributions as its own property, but received the contributions burdened with the offsetting obligation to use them for national advertising only.

In the instant case, the corporation is permitted to obtain not only national advertising for the dealer-members, but is also permitted to engage in other activities which promote the general business welfare of the dealer-members. The Corporation is authorized to expend the payments received from the dealer-members in furtherance of these general corporate activities. Such factors preclude a finding that a trust for advertising exists or that the corporation receives the payments burdened with the obligation to expend them solely for advertising. The same result follows with respect to dealers in other than automotive products or services under similar circumstances. The limitations surrounding the contribution in the Seven-Up Company case do not exist in the instant case.

The Seven-Up Company case will be followed only in those cases where the factual pattern is similar, that is, where the facts show that the organization is a mere conduit for the expenditure of a fund established for a specific purpose. For example, where the dealers in products or services, whether automotive or otherwise, acting in concert, vest in their selected representative the authority to contract solely for advertising in their behalf, contributions to a fund managed by the representative, as agent, custodian, or conduit are not taxable income to the representative. This result would follow whether the members of the group are informally organized, are members of a more formal unincorporated association, or are members of a non-profit corporation.

Accordingly, amounts received by a corporation composed of dealers in similar or related products or services in a designated area, which is organized and operated for the primary purpose of promoting the sale of such products or services by financing general advertising campaigns, constitute gross income under section 61 of the Internal Revenue Code of 1954, where the corporation can also use the amounts received for purposes other than advertising and administrative expenses incident thereto. Such corporation is taxable on any unexpended funds (representing the excess of amounts collected over expenditures) remaining at the end of its taxable year. The amounts paid to the corporation by the dealer-members constitute deductible business expenses under section 162 of the Code.