Masonry Magazine October 1963 Page. 11
Question: Are there situations where the conduct business is considered not to be the principal character aspect of the combined business and entertainment?
Answer: Yes. This would be true where the entertainment takes place on hunting or fishing trips or on yachts and other pleasure boats unless the taxpayer is able to establish otherwise.
Question: Are there any other situations where entertainment generally is not considered to be directly related?
Answer: Yes. Entertainment occurring in circumstances where there is little or no possibility of engaging in the active conduct of business generally is not considered directly related. Examples of such circumstances are (a) meetings at night clubs, theaters, sporting events, or essentially social gatherings such as cocktail parties, and (b) situations where the taxpayer meets with a group which includes persons other than business associates, at places such as cocktail lounges, country clubs, golf clubs and athletic clubs, or at vacation resorts. However, a taxpayer may overcome this presumption by establishing for example that he did engage in substantial business discussion during the entertainment.
Near Business Setting
Question: Is it always necessary to meet the tests forth in question No. 33 for entertainment to be considered "directly related"?
Answer: No. Those tests are the general rule. However, special provisions treat certain entertainment as "directly related" to business if it occurs in a "clear business setting." For example, entertainment that takes place in a "hospitality room" at a convention where business goodwill is created through the display or discussion of business products will qualify as occurring in a clear business setting.
Question: Would entertainment of business and civic leaders at the opening of a new hotel or theatrical production be considered in a clear business setting if the purpose of the taxpayer is to obtain business publicity rather than create or maintain the goodwill of the persons entertained?
Answer: Yes. Generally, entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between the taxpayer and the persons entertained will be considered "directly related."
Question: If a restaurant owner were to provide occasional free dinners to customers who had patronized his restaurant, would such dinners be considered in a clear business setting?
Answer: Yes. Entertainment which has the principal effect of price rebates in connection with the sale of the taxpayer's products generally will be considered "directly related."
Lavish or Extravagant
Question: Are there limitations on deductions for entertainment expenditures which are lavish or extravagant?
Answer: Yes. To the extent the expenditure is lavish or extravagant, it is not allowable as a deduction.
Question: Will entertainment expenses be subject to disallowance on grounds of being lavish or extravagant merely because they exceed a fixed dollar amount or are incurred at deluxe restaurants, hotels, night clubs and resort establishments?