Rev. Rul. 74-318

Advice has been requested as to the proper treatment of amounts received by a taxpayer, under the facts and circumstances described below.

N is a corporation engaged in the manufacture and sale of automobiles. N's franchised automobile dealers (dealers) are members of a separate corporation (taxpayer) which was organized as a nonprofit membership corporation under the laws of the state within which it operates. The taxpayer uses the cash receipts and disbursements method of accounting.

The taxpayer's charter specifically provides that the objects and purposes of the taxpayer are (1) to promote social and educational activities between its members; (2) to exchange ideas and methods in respect to the promotion of the members' products through advertising of various kinds and through various mediums; (3) to improve business conditions in the general area where its members sell their products and services; (4) to promote goodwill and acceptance for its members' products; and (5) to promote the common business interest of its members with respect thereto by group advertising and other legitimate means and methods deemed desirable.

The taxpayer's charter also provides that the taxpayer is prohibited from engaging in any business of a kind ordinarily carried on for a profit. Any income it receives must be applied to its not-for-profit purposes and may not inure to the benefit of any of its members or to any individual.

Membership in the taxpayer is limited to the franchised dealers of N. Each dealer signs an authorization for N to add 1x dollars to the invoice price for each automobile delivered by N to the dealer. N forwards the 1x dollars it receives, with respect to each car delivered by N to a dealer, to the taxpayer. The corporate by-laws specifically provide that the taxpayer may use the dealers' remittances of 1x dollars per automobile for advertising, promotion and other not-for-profit purposes of the corporation. In the event of dissolution the by-laws provide that all of the funds received by the taxpayer would be expended for its stated purposes. In addition to the 1x dollars received from the dealers through N with respect to each car delivered to the dealers by N, the taxpayer periodically receives amounts of money from N.

The affairs of the taxpayer are conducted by a board of directors which has authority to conduct, manage, and control all of the taxpayer's affairs, policies, and business. The board has the power to do any and all things necessary and expedient for the welfare of the organization, such as, for example, the hiring and firing of employees and the fixing of their compensation.

The taxpayer's primary activity is related to advertising campaigns. All advertising is developed by an advertising agency which makes the contracts with various news media and which does all the work preparing the advertising copy and planning promotional activities. The agency sends representatives to meetings of the taxpayer's advertising committee. The committee chooses from the selection of advertising materials presented by the agency and decides on the amount to be expended and the period over which the advertising campaign will extend.

In addition to its advertising activities, the taxpayer operates a car-locator service, which entails the contacting of various dealers to locate cars equipped with specific accessories that other dealers desire. The taxpayer charges a fee for each car located. The taxpayer's expenses in providing this service exceed the fees received for such service.

The taxpayer also conducts a salesmen incentive program whereby it purchases and presents United States Savings Bonds to qualifying salesmen.

In addition, the taxpayer established a fund so that if the taxpayer's receipts from N are curtailed as, for example, in the event of a strike by N's employees, the taxpayer's cash balance would not be unduly depleted. The amount in the fund was invested in certificates of deposits that bore interest. The interest income on the certificates of deposit was included in the taxpayer's gross income.

The specific question to be resolved is whether amounts received by the taxpayer from N's dealers and from N are includible in gross income.

Section 61 of the Internal Revenue Code of 1954 provides that gross income means all income from whatever source derived.

In the instant case the taxpayer receives funds for advertising, promotion, and other purposes (car-locator service, salesman incentive program) and in its sole discretion determines how much, in what manner, and to whom such funds are to be disbursed so as to serve the best interest of its member dealers and N. The fact that the car-locator service operated at a deficit demonstrates that the taxpayer's board of directors could in its broad discretion control the use of the funds received as it deemed necessary.

Accordingly, amounts received by the taxpayer from the dealers and N are includible in the taxpayer's gross income. The taxpayer is entitled to all allowable deductions, including amounts paid in advertising N's product, subject to the provisions of section 277 of the Code (relating to deductions by membership organizations from transactions with its members).

In view of the foregoing, the acquiescence in the case of Broadcast Measurement Bureau, Inc., 16 T.C. 988 (1951), acq., 1951-2 C.B. 2, is withdrawn and nonacquiescence is substituted therefor. See page 4, this bulletin. In addition, the Service will not follow Ford Dealers Advertising Fund, 55 T.C. 761 (1971), nonacquiescence, page 5, this bulletin, in which a contrary result was reached on similar facts, notwithstanding its affirmation per curiam by the United States Court of Appeals, 456 F. 2d 255 (5th Cir. 1972).

Rev. Rul. 58-209, 1958-1 C.B. 19, is hereby superseded.