Federal Income Tax Travel & Entertainment Expenses

TRAVEL & ENTERTAINMENT EXPENSES (p. 415-433) Code 274(a), (d), (e), (n)
132

An employer-provided benefit is NOT included in employee income if the benefit

would have been deductible as a business expense, and the employee paid for it out
of his/her own pocket.
If the trip is characterized as non-business related then it is treated as
a form of salary + included in the employees gross income

132(d) = if a trip is characterized for tax purposes as business-related the value of the trip is
NOT treated as income to the employee.
RUDOLPH v. US (1962)
- insurance company provided a trip (Dallas TX NY) for a group of its agents + their wives
(paid for by the company)
Rudolph + his wife were among the beneficiaries ($560)
traveled on special trains; housed in a hotel room
whole trip = 1 week
2 day visit
1 morning = devoted to business meeting
rest of time was to travel, sightseeing , entertainment etc.
- IRS assessed its value to them as taxable income
- District court held that the value of the trip was in nature of bonus/reward/compensation
primarily a pleasure trip (i.e., a vacation) costs were personal & NON-deductible.
- Crucial question = whether the purpose of the tip was Related primarily to
business or was rather primarily personal in nature
HELD:
- the petition for writ of cert is dismissed as improvidently granted
- Justice HARLAN writes an opinion defending the result agreeing that the value of the trip
should be treated as income to the employees + observing that there should be NO deduction
under 162(a)
DISSENT:
(Justice DOUGLAS, joined by Justice BLACK)
- income has the connotation of something other than the mere payment of expenses
(p.418)
- evidence shows that from the managements pov the trip was good business to spend money
on a convention for its leading agents
a convention that kept the group together in NYC;
PLUS: in transit gave them ample time for group discussions +education training
- There was nothing dishonest, illegitimate, or unethical about this transaction. No services
were rendered.
- New York City may or may not have been attractive to the agents and their wives. Whether a
person enjoys or dislikes the trip that he makes "with all expenses paid" has no more to do
with whether the expenses paid were compensation "for services" rendered than does his
attitude toward his job
- The wife's expenses are, on this record, also deductible. The Treasury Regulations
state in 1.162-2 (c):
"Where a taxpayer's wife accompanies him on a business trip, expenses attributable to her
travel are not deductible unless it can be adequately shown that the wife's presence on the
trip has a bona fide business purpose. The wife's performance of some incidental service
does not cause her expenses to qualify as deductible business expenses. The same rules
apply to any other members of the taxpayer's family who accompany him on such a trip."

Federal Income Tax Travel & Entertainment Expenses

2
This case arose before 274(m)(3) which in 1994 would expressly deny a deduction
by Rudolphs employer of the travel expenses of the spouses.

Federal Income Tax Travel & Entertainment Expenses

Travel and Entertainment Expenses

I.
General Rule:
1. Is travel ordinary and necessary for that trade or business? (162)
2. 274 weeds out the personal expensesmust keep very detailed records
i. Limits deduction
II.

Special Limits
3. Meals and entertainmentonly get to deduct 50% (logic is that you have to eat anyway)
4. Employeeyour deductions are itemized on schedule A
ii. Hit w/ 2% limitation
iii. Ex: you are an associate in law firm you pay out of pocket for trip to St. Louis, must
itemize to deduct

III.

Travelmust spend the night away from home

5. Reasonableness test: was it reasonable to spend the night away from home
iv. Home refers to tax home (generally where you live)people who dont have tax
homes cant deduct these expenses (people who live in RVs)
v. Has to be less than a year (temporary work)
6. Can deduct fare, lodging, meals (50%), incidental cost
vi. Cant deduct for spouse
7. 162Ordinary and necessary & helps trade or business
8. 274restrictions b/c people were trying to deduct vacations
vii. Requires good, detailed record keeping
viii. Cohan Rule: judge will estimate and let you deduct when you dont have accurate
receipts-Does NOT apply to Travel & Entertainment expenses
ix. 274 Subsections: no deduction unless you keep strict records
1. the amount of such item or expense
2. the time and place of travel, entertainment, amusement, recreation, or
use of the facility or property, or the date and description or the gift
3. the business purpose of the expense or other item, AND
4. the business relationship to the taxpayer or persons entertained, using
the facility or property, or receiving the gift
x. Tax payer commonly forgets to keep records of all of this stuffif get audited and
dont have records you can try to submit a notarized affidavit saying that there are
sufficient records to back up taxpayers receipts
xi. Transportationlocal use of your personal car for business
1. Commuting to and from work is NOT deductibleHowever, if you drive to
different work location than normal, can deduct
2. Two options for deductions
a. Mileage: you keep track of mileage IRS allows you to deduct 50.5
cents per mile
b. Actual Car Costs: you keep detailed diary and receipts for all
mileage, gas, car maintenance, etc. and then you can deduct the
actual cost of maintaining your car (% used for work)must keep
very detailed records (normally provides more tax savings)
xii. Work AssignmentsTemporary or indefinite assignment
1. General Rule: what does it look like at the outset
a. If job is expected to take less then 1 yearokay if it takes more
(still considered temporary)
b. If job is expected to take more then 1 yearIRS says you should
move there (indefinite assignment)
-

Federal Income Tax Travel & Entertainment Expenses

Applicable Code Section: 274

Before 274: If the primary purpose is business expenses are deductible (Rudolph)
274 is a disallowance section, it may make things that are deductible elsewhere, not
deductible.
** It only comes into play if something qualifies as being deductible somewhere
else **
Coverage: meals, entertainment, and travel expenses
Tests:
1. Directly related to business; or
2. Associate with business and directly preceding/following a substantial
business discussion.
Substantiation is required by actual records of expenses, not just testimony
Special Rules exist for:
a. Meals and entertainment expenses limited to 50%
i.
Curbs excessive spending and subsidy to wealthy
ii.
Also limits imbalance caused by allowing the deduction by one party but
not requiring the other to include the cost.
b. Spousal travel expenses are not allowable unless:
i.
Spouse is employee of person claiming deduction;
ii.
Spouse had a bona fide business purpose for going; and
iii.
The additional expenses would otherwise be deductible

Federal Income Tax Travel & Entertainment Expenses

Problems p. 423
1a) A law firm with offices in six cities hold an annual three-day retreat for partners at an exclusive warmweather resort in February. The firm sponsors the following activities: Friday and Saturday night banquets;
Saturday and Sunday golf and tennis tournaments; and Sunday horseback riding. The firms leading partners
believe that the annual meetings enable partners in different offices to become acquainted with one another and
share views about the firm. Attendance at the retreat is encouraged but not required. All expenses are paid by
the firm. Are the expenses deductible?
The expenses are over the top if they were more modest they would be deductible
Similar to Rudolph only one 2-hour meeting over a 72-hour retreat
See 1.274-2(f)(vi); you would be worried that the retreat wouldnt qualify, but generally, you dont
hear about these meetings being disallowed for deduction

1b) The facts are the same as in (a) except that associates are also invited to the retreat and many associates
believe that attendance will further their chances of making partner. Are the associates taxable on the value of
the rooms, meals, and entertainment?

Doesnt help the argument for deduction; even more similar to Rudolph in that this retreat seems more
like compensation than business expense

Intent to generate goodwill alone is not enough; must have a general expectation of deriving some
income or other specific trade or business benefit. Regs. 1.274-2(c)(3).

3a) Lawyer Friedman is a partner in an urban law firm. The law firm buys season tickets for the local
professional baseball teams games. Lawyers at the firm generally give the tickets to clients, or use the tickets to
take clients to the games. About one-fourth of the time, however, the tickets are not claimed by lawyers who
wish to give them to clients or take clients to games. In that case, the tickets are used by the firms partners and
their families and friends. Should the firm be allowed to deduct the entire cost of the season tickets?

There are some games that would qualify if they were doing business at the game or before or following
the game BUT theyre not buying tickets one game at a time

However, you can break it down for games that were used and deduct the % of the cost used for business
expenses

One argument for deducting entire cost is if you can say it is harder to buy single game tickets and
season tickets are the only way to get tickets

3b) The facts are the same as in (a) except that tickets not given to clients or used to take clients to games are
used by associates and their families or friends. Are the associates taxed on the value of the tickets?
No, they can probably claim it as a de minimis fringe benefit

Federal Income Tax Travel & Entertainment Expenses

BUSINESS LUNCHES (p. 423)

MOSS v. COMMISSIONER (7th Cir. 1985) JUDGE POSNER

**pg. 424**

The problem is that many expenses are simultaneously business expenses in the sense that
they conduce to the production of business income and personal expenses in the sense that
they raise personal welfare.
This is plain enough with regard to lunch; most people would eat lunch even if they didn't
work.
Commuting may seem a pure business expense, but is not; it reflects the choice of where to
live, as well as where to work.
Read literally, 262 would make irrelevant whether a business expense is also a personal
expense; so long as it is ordinary and necessary in the taxpayer's business, thus bringing
162(a) into play, an expense is (the statute seems to say) deductible from his income tax.
But the statute has not been read literally.
If a large firm had a monthly lunch to allow partners to get to know associates, the expense of
the meal might well be necessary, and would be allowed by the IRS.
But Moss's firm never had more than eight lawyers (partners and associates), and did not
need a daily lunch to cement relationships among them.
(p. 426)We may assume it was necessary for Moss's firm to meet daily to coordinate the work
of the firm, and also, as the Tax Court found, that lunch was the most convenient time.
But it does not follow that the expense of the lunch was a necessary business
expense.
Although it saved time to combine lunch with work, the meal itself was not an organic
part of the meeting, as in the examples we gave earlier where the business objective, to be
fully achieved, required sharing a meal.
They picked the restaurant they most liked
Not all lawyers attended every lunch meeting
An argument can be made that the price of lunch at the Cafe Angelo included rental of the
space that the lawyers used for what was a meeting as well as a meal.
There was evidence that the firm's conference room was otherwise occupied throughout the
working day
so Moss might be able to claim a part of the price of lunch as an ordinary and
necessary expense for work space. But this is cutting things awfully fine;
in any event Moss made no effort to apportion his lunch expense in this way.

Federal Income Tax Travel & Entertainment Expenses

Questions p. 427
3) In which, if any, of the following circumstances will the lunch be deductible?

a) A lawyer takes her client to lunch to discuss her firms handling of the clients case.
o Yes, and it doesnt have to be a more expensive lunch than usual

b) A client takes her lawyer to lunch to discuss the lawyers firms handling of the clients case.
o Yes, doesnt matter who takes who out to lunch

c) A lawyer takes her client to lunch in order to retain the clients goodwill.
o Maybe, this situation is closer to the line you have an argument if you can prove you are going
to lunch to retain business

d) A partner in a law firm takes an associate to lunch to discuss the associates future with the firm.
o Maybe, if you can say it eases the tension (friction and failures of communication) for a
meeting with an associate to do it over a meal

e) A partner in a law firm takes an associate to lunch to discuss a pending case.

o Maybe, seems better than Moss in that they arent doing it everyday

f) Two partners go to lunch once a week to talk about an ongoing case.

Maybe, but probably not as it sounds closer to Moss situation that Posner didnt

Federal Income Tax Travel & Entertainment Expenses

CHILD CARE EXPENSES (P. 433-437)

Code 21; Code 129

Childcare Expenses
Applicable Code Sections: 21(a)-(d), 129(a)
Before Congressional action: No deduction for childcare, based on it being a necessity
such as clothing, shelter, and food, not a business expense. Disallowed by 262.
21 General rule: credit for childcare expenses
Limits:
a. $3,000 for one kid
b. $6,000 for 2 or more kids
c. Only 35% of qualifying childcare expenses
i.
This percentage declines as AGI increases, but has a floor of 20%.
ii.
Reduction is 1% for every $2,000 that AGI exceeds $15,000
d. Reduced by any amount employer pays for childcare under cafeteria plan
e. Not refundable, no credit
f. Amount of employment related income taken into account cannot exceed:
i.
For individual: individuals earned income for the year, or
ii.
For married person: the lesser of such individuals earned income or the
earned income of their spouse.
Policy: Why a credit over a deduction? Credits favor lower income earners, deductions
favor wealthier. Why low numbers? Politically reasonable considering the amount
people could claim credits for with the cost of childcare.
SMITH v. COMMISSIONER (2d Cir. 1940)
- the smiths (Husband + wife) want the court to apply the but for test
- they propose that but for the nurses the wife coild not leave her child; but for the
freedom so secured, she could pursue her career goals AND but for them there would
be no income and no tax.
- Pg. 434

Federal Income Tax Travel & Entertainment Expenses

COMMUTING EXPENSES (P. 437-452)

Commuting Expenses
Applicable Code Section: 162
Requirements:
1. Reasonable and necessary expenses;
2. Incurred while away from home;
3. In the pursuit of business.
Commutes arent necessarily limited to short distances if they are for the convenience
of the employee (Flowers)
Home is considered where your principal place of business is (Hantzis)
Temporarily away from home if:
a. Away one year or less
b. Taxpayer realistically expects to be away a year or less
c. Taxpayer plans to return in one year or less
Away: only if taxpayer stays overnight
Traveling salesmen: have no home and are never away
Daily Transportation Costs Rev. Ruling 99-7: Deductible when:
a. Travel to temporary job site outside of metro area
b. Work location is temporary and taxpayer has one or more regular work
locations in the same trade or business; or
c. Taxpayers residence is principal place of business and the work location is in
the same trade or business.

COMMISSIONER v. FLOWERS (1945)

This case presents a problem as to the meaning and application of the provision of [the
predecessor of 162(a)(2)] allowing a deduction for income tax purposes of 'traveling
expenses (including the entire amount expended for meals and lodging) while away
from home in the pursuit of a trade or business.'

FACTS: TP is a lawyer in Jackson, Mississippi; he gets promoted but the new job is in Mobile,
Alabama. TP doesnt want to move to Mobile, so company allows him to commute from
Jackson. TP claims a deduction for his commuting expenses.
ANALYSIS: THREE-PRONG TEST FOR ALLOWING DEDUCTION FOR COMMUTING EXPENSES
(PG.
439)
1) reasonable and necessary travelling expenses
2) must be incurred while working away from home
3) must be incurred while in pursuit of business

HOLDING:
no deduction b/c its not a business expense
Although prong 2 is a debatable prong, the court glosses over it
Rather, they focus on prong 3 and say the travel was not while in pursuit of business
Just b/c your employer agreed to let you do it, doesnt mean it is in pursuit of business
seems more like a personal expense

Federal Income Tax Travel & Entertainment Expenses

Basically, they treat him like a commuter and commuting expenses are generally not
deductible (some exclusions in 132)

10

HANTZIS v. COMMISSIONER (1981)

(p. 443)
Facts:
TP was a student at Harvard Law and got a job in NYC. TP tries to deduct the transportation
costs for commuting from Boston to NY and for the costs of renting an apt in NY.
Analysis:
HOLDING: Deduction not allowed
o Not necessary to keep home in Boston and not necessary for her to have two homes in
NY and Boston
Issue: Where is home?
COURT: Home is in NY; no business connection in Boston
BUT TP has no intention to move there or to work there permanently, so why
is home considered NY?
b/c home is where work is if your job is in NY your home is in NY; just b/c
your husband lives in Boston doesnt mean that is your home
Would it have helped if TP had a part-time job in Boston?
o Maybe its not entirely clear
o BOTTOM-LINE: this rule leaves open some questions

Federal Income Tax Travel & Entertainment Expenses

11

Problems p. 451
The usual rationale for disallowing a deduction for commuting expenses is that the TP is expected to move as
near as possible to the job location. If that is done, the expense is trivial. If the TP chooses to live far from the
job, that is regarded as a personal choice. Consider the soundness of that rationale in each of the following
hypos.

a) TP A lives on a farm with her H. She drives each day to town, where she earns $50 per day teaching
school. The distance is thirty miles each way and the cost of driving is $10 per day. There is no public
transportation.
o No deduction
o Is this the right answer under public policy? Yes, you choose where to live and you choose where to
work; so, that determines whether you commute

b) TP B commutes to city from suburbs in a private van paid for by her employer.
o No deduction; should probably be considered income

c) TP C drives to work in LA uses car on rare occasions during the day for work
o No deduction for driving to and from home, but maybe a deduction for driving during the day for
work as long as it is business related

d) TP D drives to work in LA uses the car most days for work

o Probably deductible for work related use b/c you need to use your car at work, but commute
expenses still not deductible

g) TP G is a construction worker who drives to work when no public transportation is available

o No deduction b/c this is a commuter expense

h) TP H is a construction worker who takes a 3 month job 200 miles away

o No deduction similar to Hantzis?