1991 U.S. Tax Ct. LEXIS 105">*117 The fact that there were some exceptions to this practice does not change our conclusion. "Business, like everything else, can only be conducted upon prophecies, and prophecies 97 T.C. 613">*620 are never infallible. * * * 'Necessary' in this connection only means necessary, if reasonable expectation proves well grounded." Levitt & Sons, Inc. v. Commissioner, 142 F.2d 795">142 F.2d 795, 142 F.2d 795">798 (2d Cir. 1944), revg. a Memorandum Opinion of this Court. In the case of the one exception made for a deputy registrar in Butler County, it was clear that the reason why Mr. Morrical stopped making contributions was that the location at which he operated did a relatively small volume of business, and payment of the 10-percent contribution would have made Mr. Morrical's operation unprofitable. That was not true with respect to petitioner's operation, and both the State and the Butler County Democratic Party organizations were well aware of the volume of petitioner's transactions as a deputy registrar.

Respondent's primary argument is that petitioner's payments, whether required or not, were "political contributions," and that political contributions are not deductible under any circumstances. Respondent1991 U.S. Tax Ct. LEXIS 105">*118 relies solely on section 24 ³ for the proposition that political contributions are not deductible. Respondent cites no other authority. Section 24 provides for a 50-percent tax credit for political contributions up to $ 100. This credit is allowed irrespective of whether the contribution is business related. Neither the language of section 24 nor the regulations thereunder prohibit deduction under section 162 of payments to a political party. We find nothing in section 24 indicating that it was in any way intended to preclude deductions for expenditures which would otherwise be deductible under section 162.

1991 U.S. Tax Ct. LEXIS 105">*119 Petitioners argue that the payments were in accordance with a contractual obligation to the Butler County Democratic Party to pay 10 percent of bureau receipts as a condition precedent to appointment and renewal of petitioner's contract as deputy registrar. Petitioners contend that the payments consequently could not have been political contributions since "By their nature, political contributions are voluntary and, once made, are never the source of future 97 T.C. 613">*621 receipts by a contributor." Petitioners do not cite any authority for this proposition.

We perceive nothing within the definition of the term "contribution" that requires that a payment must be made without an expectation of deriving a present or future financial benefit in order to be a "contribution." Describing a contribution as "political" does nothing to preclude an expectation of financial gain. Section 24 defines a "political contribution" as "a contribution or gift of money to" (emphasis added) certain political organizations including State and local political parties. The Ohio and Butler County Democratic Parties fall within the organizations enumerated. There are clear instances in the Internal Revenue Code1991 U.S. Tax Ct. LEXIS 105">*120 where the term "contribution" is used to describe payments made with an obvious business purpose and for which deductions are allowable. See, for example, section 404, which provides deductions for "contributions" by employers pursuant to certain stock bonus, pension, profit sharing, and other deferred compensation plans. See also section 106, the title of which describes payments by employers to employee accident and health plans as "contributions." Thus, we do not believe that petitioner's payments constitute something other than political contributions simply because he made them with the expectation of deriving financial gain.

We have found no statutory provision that specifically precludes deductibility under section 162 for political contributions made directly to a political party. However, our search for an answer to the question of whether political contributions can be deducted under section 162 has revealed at least four categories of politically related expenditures that are not deductible as business expenses under section 162. These four categories are: Expenditures for political influence in securing government contracts; expenditures related to the acquisition1991 U.S. Tax Ct. LEXIS 105">*121 of public office; expenditures for general lobbying and campaigning; and certain expenditures inuring to the benefit of a political party or candidate. Based on our analysis of these four categories, we find that petitioner's payments to the Butler County Democratic Party may not be deducted as ordinary and necessary business expenses.

97 T.C. 613">*622 Expenditures for Political Influence in Acquiring Public Contracts.

It has long been established that "Payments made as the mere purchase price of political influence to obtain or hold public contracts cannot soundly be recognized as constituting 'ordinary and necessary expenses' of business operations, within the meaning of, and subject to income tax deduction under, [the predecessor of section 162(a)]." Rugel v. Commissioner, 127 F.2d 393">127 F.2d 393, 127 F.2d 393">395 (8th Cir. 1942); see Harden Mortgage Loan Co. v. Commissioner, 137 F.2d 282">137 F.2d 282, 137 F.2d 282">283 (10th Cir. 1943). This is true even though the person paid was not a government official. In both Rugel and Harden, as in the instant case, the taxpayers paid nongovernment officials to obtain concessions or contracts from State government. In Harden, the taxpayer paid1991 U.S. Tax Ct. LEXIS 105">*122 government officials as well.

The taxpayer in 127 F.2d 393">Rugel v. Commissioner, supra, was in the business of selling revenue stamps used by States in taxing packaged liquor. In 1934, Missouri contracted to purchase revenue stamps from the taxpayer's firm. In the following year, the taxpayer learned that the State was buying some of its stamps from a competitor at a higher price. The State supervisor of liquor control had directed that orders for part of its revenue stamps be given to the competing firm.

A representative of the taxpayer's competitor, in order to secure the contract, had agreed to split his commissions on the contract with a precinct captain who was connected with the political boss of the city in which the State liquor supervisor resided. The taxpayer subsequently struck a deal with the same precinct captain, agreeing to pay him half of all commissions received on the sale of revenue stamps to Missouri in return for switching the rest of the State's business back to him. It was these payments that the taxpayer attempted to deduct and the disallowance of which the court sustained.

As in Rugel, petitioner in the instant case paid a percentage1991 U.S. Tax Ct. LEXIS 105">*123 of his receipts in return for the payee's political influence in getting him a financially lucrative position. Being appointed deputy registrar was tantamount to being awarded a concession with respect to driver and vehicle license renewals in a given geographical area. Petitioner's 97 T.C. 613">*623 contract with the registrar of motor vehicles came up for renewal each year. The payments to the Butler County Democratic Party were the purchase price of the party's political influence to obtain and hold petitioner's position with the State of Ohio.

Expenditures to Attain Public Office.

The seminal case on this issue is McDonald v. Commissioner, 323 U.S. 57">323 U.S. 57, 89 L. Ed. 68">89 L. Ed. 68, 65 S. Ct. 96">65 S. Ct. 96 (1944). In McDonald, the taxpayer was appointed to serve an unexpired term as a state court judge, with the understanding that he would stand for reelection in the upcoming elections for the full term of 10 years. To obtain the support of his party he had to pay an "assessment" to the party, as did all candidates for office, which was based on the total prospective salary to be received while in office. The "assessment" ($ 8,000) was to be used for the support of the entire ticket. The taxpayer paid an additional1991 U.S. Tax Ct. LEXIS 105">*124 $ 5,017.27 for his own campaign expenses. Respondent disallowed the deductions for these amounts and was ultimately upheld by the Supreme Court.

The Supreme Court stated several reasons for disallowing the claimed expenses. First, the expenses were incurred in becoming a judge rather than being a judge. Second, allowance of a deduction for such "assessments" would require the allowance of deductions for officials who paid such "assessments" out of party allegiance mixed or unmixed with a lively sense of future favors. Finally, to the extent that deductibility would be determined on a political party's policy of charging "assessments" to prospective or incumbent officeholders, deductibility would be controlled by the internal arrangements of a particular political party in disregard of the statutory restriction confining deductible expenses solely to outlays in the efforts or services from which the income flows. 323 U.S. 57">McDonald v. Commissioner, supra at 61; Estate of Rockefeller v. Commissioner, 762 F.2d 264">762 F.2d 264, 762 F.2d 264">266 (2d Cir. 1985), affg. 83 T.C. 368">83 T.C. 368 (1984); see Diggs v. Commissioner, 715 F.2d 245">715 F.2d 245 (6th Cir. 1983),1991 U.S. Tax Ct. LEXIS 105">*125 affg. in part and revg. in part 76 T.C. 888">76 T.C. 888 (1981); Nichols v. Commissioner, 511 F.2d 618">511 F.2d 618 (5th Cir. 1975), affg. 60 T.C. 236">60 T.C. 236 (1973).

The taxpayer's payment of the assessment in McDonald was no more voluntary, nor made with a lesser expectation 97 T.C. 613">*624 of future receipts than petitioner's payment of the Butler County Democratic Party assessments. As in McDonald, a commitment to make the payments was a prerequisite to the party's recommendation. Petitioner paid the assessments, as did the taxpayer in McDonald, for the support of his political party in acquiring public office. Petitioner's contract was subject to renewal each year. In other words, the payments were made pursuant to petitioner's commitment to make them for the purpose of acquiring the position of deputy registrar and obtaining reappointment in each subsequent year.

The fact that payments were made after petitioner was an incumbent deputy registrar makes no difference to our conclusion. As stated in McDonald:

To draw a distinction between outlays for reelection and those for election -- to allow the former and disallow the latter -- is unsupportable1991 U.S. Tax Ct. LEXIS 105">*126 in reason. It is even more unsupportable in public policy to derive from what Congress has thus far enacted a handicap against candidates challenging existing officeholders. And so we cannot recognize petitioner's claim on the score that he was a candidate for reelection. [McDonald v. Commissioner, 323 U.S. 57">323 U.S. at 63-64. Fn. ref. omitted.]

The fact that petitioner's office was not an elected position does not sufficiently distinguish the instant case from McDonald to make petitioner's expenses deductible. In Estate of Rockefeller v. Commissioner, 83 T.C. 373-374, we disallowed deduction of expenses paid in connection with confirmation of the taxpayer's nomination to the office of Vice President of the United States. The reason supporting our decision was that the taxpayer's expenses were incurred in attaining congressional confirmation of his nomination, not in executing the functions of that office. 83 T.C. 368">83 T.C. 374.

Expenditures for General Lobbying and Campaigning.

Section 162(e) generally allows deductions for business expenses paid or incurred in connection with appearances before or communications with1991 U.S. Tax Ct. LEXIS 105">*127 legislative bodies with respect to legislation or proposed legislation related to a taxpayer's business. ⁴ This section was enacted in response 97 T.C. 613">*625 to the Supreme Court's opinion in Cammarano v. United States, 358 U.S. 498">358 U.S. 498, 3 L. Ed. 2d 462">3 L. Ed. 2d 462, 79 S. Ct. 524">79 S. Ct. 524 (1959), which had disallowed deductions for such expenses on the basis of long-standing regulations which the Court found in themselves constituted an expression of sharply defined national policy. 358 U.S. 498">358 U.S. at 508. ⁵ Section 162(e)(2) makes clear, however, that Congress did not wish to allow deductions for "contributions" which would be used for political campaigns for public office or attempts to influence the general public with respect to legislative matters, decisions, or referendums, regardless of business purpose. Sec. 162(e)(2); see Southern Pacific Transportation Co. v. Commissioner, 90 T.C. 771">90 T.C. 771, 90 T.C. 771">780-781 (1988).

1991 U.S. Tax Ct. LEXIS 105">*128 It is the use to which expenditures are put that is relevant under section 162(e) and the accompanying regulations. For example, section 1.162-20(c)(3), Income Tax Regs., prohibits deduction of dues to a labor union or trade association to the extent they are used in connection with attempts to influence the public with respect to legislation or for participation in any political campaign. The motive or expectations of the payor are not relevant to the deductibility of such payments.

Petitioner's payments to the Butler County Democratic Party, one-third of which were forwarded to the Ohio Democratic Party, were used to fund the activities of both 97 T.C. 613">*626 organizations. By petitioner's own testimony the Butler County Democratic Party engaged in typical campaign activities, such as posting signs and encouraging people to vote. Petitioner, as an active member of that organization, participated in those activities. In light of the fundamental purpose and traditional activities of State and local political parties, it is beyond question that petitioner's payments were used to fund the party's "attempt to influence the general public, or segments thereof, with respect to legislative matters, 1991 U.S. Tax Ct. LEXIS 105">*129 elections, or referendums" and the sponsoring of "'grassroot' campaigns." Sec. 1.162-20(c)(4), Income Tax Regs. Petitioners have presented no evidence of any party activities that do not fall within the scope of the regulatory language. Petitioner's payments were political contributions. The fact that petitioner made the payments in the expectation that they would result in his acquiring and retaining a profitable position through the political influence of the payee does not require a different conclusion. "Expenses incurred in payment to an officeholder's political party are not deductible." Diggs v. Commissioner, 715 F.2d 245">715 F.2d at 251.

Certain Expenditures Inuring to Benefit of a Political Party or Candidate.

Section 276 disallows certain indirect contributions to political parties.

SEC. 276. CERTAIN INDIRECT CONTRIBUTIONS TO POLITICAL PARTIES.

(a) Disallowance of Deductions. -- No deduction otherwise allowable under this chapter shall be allowed for any amount paid or incurred for --

(1) advertising in a convention program of a political party, or in any other publication if any part of the proceeds of such publication directly or indirectly inures1991 U.S. Tax Ct. LEXIS 105">*130 (or is intended to inure) to or for the use of a political party or a political candidate,

(2) admission to any dinner or program, if any part of the proceeds of such dinner or program directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate, or

(3) admission to an inaugural ball, inaugural gala, inaugural parade, or inaugural concert, or to any similar event which is identified with a political party or a political candidate.

(b) Definitions. -- For purposes of this section --

(1) Political Party. -- The term "political party" means --

(2) Proceeds inuring to or for the use of political candidates. -- Proceeds shall be treated as inuring to or for the use of a political candidate only if --

The specific transactions which section 276 addresses do not literally include the payments which petitioner made directly to the Butler County Democratic Party. Consequently, section 276 is not strictly applicable. However, allowing petitioner to deduct his payments to the Butler County Democratic Party would be allowing him to do directly what section 276 otherwise prohibits him from doing indirectly.

The legislative history of section 276 demonstrates that its enactment was intended to close the last loophole for allowing deduction of contributions to political organizations as ordinary and necessary business expenses. The Senate report1991 U.S. Tax Ct. LEXIS 105">*132 states:

In the case of payments for admissions to dinners or programs held for the purpose of raising funds for a political party or candidate, it appears unlikely that a deduction is available under present law even though the expense is incurred by a business * * *.

Moreover, since direct political contributions are not deductible under present law to individuals not engaged in business, your committee believes that it is undesirable to permit a business to take a trade or business expense deduction with respect to any of these amounts which usually in practice represent ways of making indirect political contributions or costs of participating in political activities. [S. Rept. 1010, 89th Cong., 2d Sess. (1966), 1966-1 C.B. 476, 504-505.]

In sum, review of these four categories of nondeductible expenses establishes that whether a payment to a political party was a practical necessity in order to attain or retain a financially lucrative public office is not dispositive of the issue of whether it is a nondeductible "political contribution." The presence of an immediate or future financial benefit does not remove a payment from the realm of nondeductible political contributions.

The foregoing analysis indicates that the historical basis for not allowing section 162 deductions for political contributions and campaign expenses is, to at least a certain extent, based on public policy considerations. 1991 U.S. Tax Ct. LEXIS 105">*134 See Nichols v. Commissioner, 511 F.2d 618">511 F.2d at 620; Carey v. Commissioner, 56 T.C. 477">56 T.C. 477, 56 T.C. 477">480-483 (1971), affd. 460 F.2d 1259">460 F.2d 1259 (4th Cir. 1972). With respect to public policy, petitioners point out that section 1.162-1(a), Income Tax Regs., states: "A deduction for an expense paid or incurred after December 30, 1969, which would otherwise be allowable under section 162 shall not be denied on the grounds that allowance of such deduction would frustrate a sharply defined public policy." This provision in the regulations contains no specific qualification. However, the quoted provision of the regulations is immediately followed by the citation "See section 162(c), (f), and (g) and the regulations thereunder." Subsections (c), (f), and (g) were enacted in 1969 to specifically disallow certain fines, bribes, kickbacks, and illegal payments that had previously been disallowed on public policy grounds. Tax Reform Act of 1969, Pub. L. 91-172, sec. 902(a) and (b), 83 Stat. 487, 710-711. Those subsections have no bearing on the deductibility of legal political contributions. ⁷ The legislative history behind the enactment of these 97 T.C. 613">*629 subsections1991 U.S. Tax Ct. LEXIS 105">*135 indicates that Congress did not intend the enactment of subsections (c), (f), and (g) of section 162 to supplant all consideration of public policy with respect to expenditures related to political activity.⁸ Indeed, any other conclusion would disrupt the previously observed legislative scheme and congressional objective of disallowing deductions for political contributions whether they were made directly or indirectly. In light of the aforementioned precedents and the existing statutory scheme, we believe that any deduction for political contributions under section 162 is dependent upon the enactment by Congress of a specific provision allowing such deduction. See Estate of Rockefeller v. Commissioner, 83 T.C. 368">83 T.C. 368, 83 T.C. 368">378 (1984), affd. 762 F.2d 264">762 F.2d 264 (2d Cir. 1985); Carey v. Commissioner, 56 T.C. 477">56 T.C. 483. Accordingly, we hold for respondent on this issue.

1991 U.S. Tax Ct. LEXIS 105">*136 The next issue for decision is whether petitioners received unreported income of $ 4,135 during 1984. Respondent's determination is presumed correct and petitioners bear the burden of proving otherwise. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933); Rule 142(a). Petitioners have presented no evidence to refute respondent's determination. Consequently, we hold for respondent on this issue.

The next issue for decision is whether petitioners are liable for the additions to tax under section 6653(a)(1) and (2) for negligence or intentional disregard of rules and regulations for the years 1983 and 1984. Section 6653(a)(1) imposes a 5-percent addition to tax if any part of an underpayment of tax is due to negligence or intentional disregard of the rules and regulations. Section 6653(a)(2) provides for a separate addition to tax equal to 50 percent of the interest payable on the portion of the underpayment attributable to negligence or intentional disregard of the 97 T.C. 613">*630 rules and regulations. For purposes of this section, negligence has been defined as the "failure to do what a reasonable and ordinarily prudent person would do under the circumstances." Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985).1991 U.S. Tax Ct. LEXIS 105">*137 Respondent's determination of negligence is presumed correct and petitioners bear the burden of proving otherwise. Hall v. Commissioner, 729 F.2d 632">729 F.2d 632, 729 F.2d 632">635 (9th Cir. 1984), affg. a Memorandum Opinion of this Court; Bixby v. Commissioner, 58 T.C. 757">58 T.C. 757, 58 T.C. 757">791-792 (1972).

With respect to the deficiencies arising from the payments to the Butler County Democratic Party in both the 1983 and 1984 taxable years, we find that those deficiencies were not the result of petitioners' negligence. Respondent did not argue that the payments were not ordinary, and there was ample evidence in the record that a reasonable person could have considered them to be appropriate and helpful as well. The evidence established that it was generally understood that failure to make the payments would result in termination or lapse of an individual's appointment. We have found no cases directly on point with respect to petitioners' situation, and we have rejected respondent's only legal argument based on section 24. Petitioners did not attempt to deduct their political contributions which were not related to bureau receipts. On the basis of the record, we are satisfied1991 U.S. Tax Ct. LEXIS 105">*138 that petitioners' underpayments which result from the nondeductibility of their payments to the Butler County Democratic Party were not due to negligence or intentional disregard of the rules and regulations. Wofford v. Commissioner, 5 T.C. 1152">5 T.C. 1152, 5 T.C. 1152">1166-1167 (1945). On the other hand, petitioners failed to present any evidence regarding negligence with respect to the adjustment for unreported income for 1984. Consequently, petitioners have failed to prove that the 1984 deficiency was not due to negligence. Therefore, we sustain respondent's determination of the section 6653(a)(1) addition to tax for 1984. Petitioners are also liable for the section 6653(a)(2) addition to tax with respect to the portion of the 1984 deficiency arising from the unreported income adjustment.

The final issue for decision is whether petitioners are liable for the additions to tax under section 6661 for 97 T.C. 613">*631 substantial understatement of income tax liability for 1984, 1985, and 1986. Section 6661 imposes an addition to tax in an amount equal to 25 percent of the amount of any underpayment attributable to a substantial understatement of income tax. Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498 (1988).1991 U.S. Tax Ct. LEXIS 105">*139 The amount of the understatement is equal to the excess of the amount of tax required to be shown on the return for the tax year less the amount of the tax shown on the return. Woods v. Commissioner, 91 T.C. 88">91 T.C. 88, 91 T.C. 88">94 (1988). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return, or $ 5,000. Sec. 6661(b)(1). The deficiencies that we uphold for 1984, 1985, and 1986, qualify as substantial understatements as defined in section 6661(b). There is no substantial authority that supports petitioners' position. See sec. 6661(b)(2)(B). Therefore, petitioners are liable for the section 6661 addition to tax unless some or all of the addition to tax should have been waived by respondent. ⁹

1991 U.S. Tax Ct. LEXIS 105">*140 Congress made respondent's waiver a discretionary act. We should give due deference to respondent's discretion. We have held, however, that this Court has the authority to review respondent's failure to grant a waiver pursuant to section 6661(c). The appropriate standard of review is whether respondent has abused his discretion. Mailman v. Commissioner, 91 T.C. 1079">91 T.C. 1079, 91 T.C. 1079">1083 (1988).

The sum total of respondent's arguments for disallowance of deductions for amounts paid by petitioner to the Butler County Democratic Party is that (1) the payments were not required in order to obtain and retain petitioner's position as deputy registrar, and (2) that political contributions are always nondeductible. Respondent's legal argument for nondeductibility of political contributions was based solely on his analysis of section 24. Both positions have been found to be without merit. Had petitioners been presented with respondent's arguments at the time of making the returns in issue, they would have been reasonable in rejecting them. Determining the deductibility of expenditures 97 T.C. 613">*632 of this nature has historically proven to be a difficult task. See 511 F.2d 618">Nichols v. Commissioner, supra;1991 U.S. Tax Ct. LEXIS 105">*141 762 F.2d 264">Estate of Rockefeller v. Commissioner, supra; 56 T.C. 477">Carey v. Commissioner, supra.We have found no cases that are on all fours with the instant case. Respondent's briefs cite only one case, Brizell v. Commissioner, 93 T.C. 151">93 T.C. 151 (1989), in support of his position. Brizell has been of no assistance in resolving the principal issue presented in the instant case. We conclude that respondent abused his discretion in refusing to waive the addition to tax under section 6661. Accordingly, petitioners are not liable for such addition.

Decisions will be entered under Rule 155.