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Travel, Meals and Entertainment Travel, Meals and Entertainment

This is a disaster area. No one seems satisfied - not the public, not This is a disaster area. No one seems satisfied - not the public, not the IRS, not practitioners.

Many of these deductions especially benefit the wealthy. n Treasury has estimated that ½ Many of these deductions especially benefit the wealthy. n Treasury has estimated that ½ of all baseball tickets and 1/3 of all hockey tickets are bought by businesses.

What are ways to approach this problem of expenses on the business/personal borderline? n What are ways to approach this problem of expenses on the business/personal borderline? n n Require substantiation? Allow no deduction? Specify amounts for specific meetings? Allow a percentage?

Complication – taxpayer joins in the merriment. Complication – taxpayer joins in the merriment.

Complication - Business guests are often also personal friends. Complication - Business guests are often also personal friends.

Complication - the taxpayer can control type and level of entertainment. Complication - the taxpayer can control type and level of entertainment.

Complication - we can expect back scratching reciprocity. Complication - we can expect back scratching reciprocity.

The deduction for meals, travel, and entertainment reduces income. Without, it taxable income would The deduction for meals, travel, and entertainment reduces income. Without, it taxable income would be larger.

In Rudolph, the Court required the amounts the company paid for the trip to In Rudolph, the Court required the amounts the company paid for the trip to be included in the insurance agent’s income and did not allow the agents to deduct the costs as a business expense.

Rudolph n n n What was the basis for the court’s decision? Why did Rudolph n n n What was the basis for the court’s decision? Why did the company offer the NY trip? What facts would have strengthened the business expense argument?

What if Rudolph thought of this as primarily pleasure, not business. n n Would What if Rudolph thought of this as primarily pleasure, not business. n n Would he have preferred cash? What about after-tax? Why might the employer prefer the trip? That is, what purpose did the trip serve for the employer?

Sec. 274 now governs, and sec. 274(n) requires a haircut. It allows a deduction Sec. 274 now governs, and sec. 274(n) requires a haircut. It allows a deduction for only 50% of meal and entertainment expenses.

If, however, the employee is reimbursed, the employer takes the deduction subject to the If, however, the employee is reimbursed, the employer takes the deduction subject to the 50% haircut. n n See sec. 62(c) and 274(e)(3). The reimbursement arrangement must be substantiated under an “accountable plan. ”

Sec. 274(d) requires substantiation of these expenses. Sec. 274(d) requires substantiation of these expenses.

Note that sec. 274(k) denies a deduction for meal expenses that are “lavish or Note that sec. 274(k) denies a deduction for meal expenses that are “lavish or extravagant under the circumstances. ”

Sec. 274(a)(1)(A) provides two bases for deducting “an activity which is of the type Sec. 274(a)(1)(A) provides two bases for deducting “an activity which is of the type generally considered to constitute entertainment, amusement or recreation. ” n n n Activity is “directly related, ” or “associated with” “the active conduct of the taxpayer’s trade or business. ”

Bittker: The regulations make an effort – valiant and comic, in about equal parts Bittker: The regulations make an effort – valiant and comic, in about equal parts – to give meaning to such terms as ‘directly related to, associated with, active conduct, directly preceding and following, etc. ”

The regulations explain that entertainment is interpreted in light of the taxpayer’s trade or The regulations explain that entertainment is interpreted in light of the taxpayer’s trade or business. n Compare sports tickets for a sports writer to sports tickets for a corporate executive.

“Directly related” expenses under reg. sec. 1. 274 -2(c): n n Requires more than “Directly related” expenses under reg. sec. 1. 274 -2(c): n n Requires more than a general expectation of deriving some income or other specific trade or business benefit from person being entertained. Good will is not a specific benefit Taxpayer must “actively engage in a business meeting, negotiation, discussion, or other bona fide business transaction Principal character or aspect of the combined business and entertainment must be active conduct of a trade or business

Associated expenses under reg. sec. 1. 274(d) n n n Entertainment must directly precede Associated expenses under reg. sec. 1. 274(d) n n n Entertainment must directly precede or follow a substantial and bona fide business discussion. Principal character or aspect of the combined entertainment and business activity must be the active conduct of a trade or business. But “it is not necessary that more time be devoted to business than entertainment to meet this requirement. ”

The amount of these expenses that can be deducted will depend in part on The amount of these expenses that can be deducted will depend in part on whether or not the taxpayer is an employee. See Handout.

In Moss, members of a law firm had lunch together daily at a restaurant. In Moss, members of a law firm had lunch together daily at a restaurant.

Reaction to decision: n n n After this decision, they moved the lunches in Reaction to decision: n n n After this decision, they moved the lunches in -house, having the chef at Café Angelo cater daily lunches in their law office. Somehow the conference room became available. How would that fact change analysis?

Let’s look at sec. 162(a) again. n n Does sec. 162(a) apply to both Let’s look at sec. 162(a) again. n n Does sec. 162(a) apply to both employees and self-employed? Does it ever include travel? Does it ever include meals? How is sec. 162(a)(2) different?

What does away from home mean? n n Phrase suggests geographical meaning Has been What does away from home mean? n n Phrase suggests geographical meaning Has been given a temporal meaning – overnight or peri 0 d requiring sleep or rest.

What is the result for a traveling salesman who left home early in morning What is the result for a traveling salesman who left home early in morning and made daily trips of 150 -175 miles and returned home for dinner and to sleep each night?

Imagine two LA lawyers deciding whether to take a CLE course on recent developments Imagine two LA lawyers deciding whether to take a CLE course on recent developments in their field in LA several evenings or in Palm Springs on a Saturday.

Imagine a lawyer living in Orange County who works in downtown LA Imagine a lawyer living in Orange County who works in downtown LA

What if the OC lawyer flies to SF for a business trip from John What if the OC lawyer flies to SF for a business trip from John Wayne airport?

What was Mr. Flowers story? What was Mr. Flowers story?

According to the IRS, a taxpayer’s tax home is generally his or her principal According to the IRS, a taxpayer’s tax home is generally his or her principal place of business.

Special rules apply if a taxpayer is employed for a temporary period (no more Special rules apply if a taxpayer is employed for a temporary period (no more than one year).

A taxpayer’s tax home encompasses the entire general area or vicinity of the taxpayer’s A taxpayer’s tax home encompasses the entire general area or vicinity of the taxpayer’s principal place of business.

A taxpayer is not away from home with respect to travel between the taxpayer’s A taxpayer is not away from home with respect to travel between the taxpayer’s residence and principal place of business.

Example: n Taxpayer with residence in Missouri employed as an airline pilot based in Example: n Taxpayer with residence in Missouri employed as an airline pilot based in Minneapolis.

A taxpayer with two or more business or employment locations must determine which of A taxpayer with two or more business or employment locations must determine which of the locations is the principal place of business. Factors include n n Amount of time spent at each location. Degree and importance of business activity at each location. Relative proportion of income from each location. Note that income is only one factor.

The costs of meals and lodging at or near the minor business or employment The costs of meals and lodging at or near the minor business or employment location away from principal location are deductible, if the sleep or rest rule is met.

Taxpayer is considered away from home even if the taxpayer maintains a permanent residence Taxpayer is considered away from home even if the taxpayer maintains a permanent residence near the minor business location. n n Deduction is limited to portion of living expenses attributable to presence in performance of business duties. It is as if the taxpayer sometimes converted the house into a hotel.

Example: Surgeon employed by government in DC with house in DC and also medical Example: Surgeon employed by government in DC with house in DC and also medical practice in Chicago.

Costs between two business locations are generally deductible. n But there is a special Costs between two business locations are generally deductible. n But there is a special home office rule: If the residence is the minor place of business, taxpayers generally can deduct neither travel expenses between the residence and the principal place of business nor meal and lodging expenses while at the residence.

Taxpayers are never away from home if the taxpayer does not have a fixed Taxpayers are never away from home if the taxpayer does not have a fixed and permanent residence. This rule can be a problem for salespeople, actors, etc.

What were the facts in Hantzis? What were the facts in Hantzis?

See business expense practice exam. See business expense practice exam.