Thus thought Gary J. Sinopoli, Jr. and Melissa M. Sinopoli, et al., T.C. Memo. 2023-105, filed 8/14/23, when he and the als, franchisees of a fitness gym operation, decided to organize C Corps to place the advertising for their fitness gym operation, marking up the advertising costs to funnel cash from the franchised gym operation into the C Corps, gaining an enhanced advertising Section 162 deduction.

Judge Goeke notes IRS didn’t challenge the Forms 1120 from the C Corps.

But the deductions for the payments Gary and the als made to the C Corps crater. “Petitioners instructed [Gym]’s local advertisers to bill the marketing companies, and [Gym] began to pay fees to the marketing companies (marketing fees). The marketing fees were the marketing companies’ only source of income. The marketing companies did not perform marketing or other services for other businesses. They did not report any wage expenses on their corporate returns.” T. C. Memo. 2023-105, at p. 5. Note that, without the C Corp intermediaries,  the overage would have been profit to Gary and the als, passed through from their Sub S that ran the fitness operation, with FICA/FUTA implications.

Deductions disallowed.

So it pays to advertise…if you do advertise.