Masonry Magazine September 1963 Page. 17
Questions and Answers
FOR THE BUSINESSMAN
Travel, Entertainment, and Gift Expenses
The purpose of this Revenue Ruling is to answer a series of questions relating to the provisions of the income tax regulations promugated under section 274 (except for subsection (d) thereof) of the Internal Revenue Code of 1954, added by the Revenue Act of 1962. Each question is designed to present, in relatively simple terms, a point of law of general interest to taxpayers, and individual questions should be read in the context of other questions and answers which follow or precede.
INTRODUCTORY
Question: How does the new law affect the old law?
Answer: The new rules are in addition to the requirements of the old law which are still in effect. Therefore an expense for entertainment, travel or gifts will be deductible if it must (1) be "ordinary and necessary" in carrying on your trade or business within the meaning of prior law, and (2) meet the requirements of the new rules under section 274.
Question: Do the new record keeping requirements that were published in December, 1962 apply in this area?
Answer: Yes. An explanation of these record keeping rules was provided in Revenue Procedure 63-4, I.R.B. 1963-4 P. 24.
Question: When are these new rules effective?
Answer: These new rules became effective on January 1, 1963. However, the Internal Revenue (1) has extended the original 90-day transitional period (announced in Revenue Procedure 63-3, I.R.B. No 1963-4), for conforming accounting systems and procedures to the new requirements to July 31, 1963, and (2) will resolve reasonable doubts in favor of taxpayers when there has been a good faith effort to apply the new substantive requirements with respect to travel and entertainment expenses incurred from January 1, to July 31, 1963.
ENTERTAINMENT EXPENSES
General
Question: What must a taxpayer be able to show in order to deduct an entertainment expense under these new rules?
Answer: He must show that the amount of the expense for which he is claiming a deduction was: (1) "directly related to the active conduct of business (see questions 33 to 40), or (2) "associated" with the active conduct of his business and that the entertainment occurred directly before or after a substantial and bona fide business discussion (see questions 21 to 25), or (3) covered by one of several exceptions to the new rules (see questions 5 and 6).
Exceptions
Question: What are the exceptions to the new rules?
Answer: There are nine exceptions to these new rules. They are business meals, food and beverages for employees, expenses treated as compensation, reimbursed expenses of employees and independent contractors, recreational expenses for employees, employee or stockholder business meetings, meetings of business leagues, items available to the public, and entertainment sold to customers.
Question: What is the significance of these nine exceptions?
Answer: Expenses covered by these exceptions are not subject to the new restrictions on tax deductions for entertainment expenses. They are deductible if they qualify as ordinary and necessary business expenses, as under prior law. However, the new record keeping rules apply to most of these expenses.
Entertainment Defined
Question: What is "entertainment"?
Answer: Entertainment includes any activity generally considered to constitute entertainment, amusement, or recreation, whether or not the activity might also be characterized as advertising or public relations. Generally, this would cover entertaining guests at such places as night clubs, theaters, sporting events, and on yachts or on hunting, fishing, vacation and similar trips.
Question: Does the term "entertainment" under the statute also include expenses which satisfy a personal, living, or family need?
Answer: Yes, it may. For example, it includes any expense for meals purchased for a business customer. However, for special rules applying to certain expenses for meals or beverages, see questions 15 to 20.
Question: If an employer pays supper money and special transportation home of employees who work overtime, will these costs be considered entertainment expenses?
Answer: The term "entertainment" does not include all expenses which satisfy a personal, living or family need. The supper money and such special transportation is not generally considered entertainment.
Question: If an employer furnishes a car to his employee primarily for use in the active conduct of trade or business, but the employee uses it for routine personal trips, such as driving to the grocery store and commuting to work, would this personal use be considered entertainment?
Answer: No.
Question: If an employer furnishes the use of a hotel suite or an automobile to his employee who is on vacation, will this be considered entertainment of his employee?
Answer: Yes.
Question: Is the cost of furnishing an apartment at a vacation resort to a customer to encourage his goodwill treated as entertainment under the new rules?
Answer: Yes.