[Federal Register Volume 59, Number 241 (Friday, December 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30877]


[[Page Unknown]]

[Federal Register: December 16, 1994]


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DEPARTMENT OF THE TREASURY
26 CFR Part 1

[IA-17-94; EE-36-94]
RIN 1545-AS74

 

Payment by Employer of Expenses for Club Dues, Meals and 
Entertainment, and Spousal Travel

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to 
reimbursements and other expense allowance arrangements under section 
62(c) of the Internal Revenue Code of 1986 (Code), working condition 
fringe benefits under section 132(d) of the Code, and expenses for club 
dues, spousal travel, and business meals and entertainment that are 
disallowed as a deduction to the employer under section 274(a)(3), 
(m)(3), and (n)(1) of the Code. The proposed regulations reflect 
changes to the law made by sections 13209, 13210, and 13272 of the 
Omnibus Budget Reconciliation Act of 1993, 107 Stat. 469 (1993) (OBRA). 
The persons affected by the proposed regulations are persons who 
provide or receive the use of club membership dues, spousal travel 
expenses, or business meals and entertainment.

DATES: Written comments and requests for a public hearing must be 
received by March 24, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (IA-17-94), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered to: 
CC:DOM:CORP:T:R (IA-17-94), room 5228, Internal Revenue Building, 1111 
Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:
Concerning regulations under sections 62 and 132, David N. Pardys, 
(202) 622-6040; concerning regulations under section 274, John T. 
Sapienza, Jr., (202) 622-4920; and concerning submissions, Christina 
Vasquez, (202) 622-7190, (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations under sections 62(c), 132(d), and 274 of the Internal 
Revenue Code (Code) to reflect changes made to section 274 of the Code 
by sections 13209, 13210, and 13272 of OBRA (107 Stat. 469, 542). These 
provisions amended section 274 of the Code by limiting the deductible 
portion of meal and entertainment expenses to 50 percent, by 
eliminating the deduction for club dues, and by restricting the 
deduction for spousal travel. The amendments to the regulations under 
sections 62 and 132 of the Code concern the income tax consequences to 
employees when their employer's (or third party payor's) deduction is 
disallowed by the amendments to section 274 of the Code. Proposed rules 
relating to the definition of club for purposes of the dues deduction 
disallowance under section 274(a)(3) of the Code were published in the 
Federal Register on August 12, 1994 on page 41414.

Explanation of Provisions

    Section 61(a)(1) of the Code states that, except as otherwise 
provided, gross income includes compensation for services, including 
fees, commissions, fringe benefits, and similar items. In addition, if 
an employer reimburses an employee for expenses paid by the employee in 
connection with the performance of services as an employee, the amount 
reimbursed generally is includible in the employee's gross income.
    Section 62(a)(2) of the Code allows an employee to deduct employer 
reimbursements for expenses paid by the employee in connection with the 
performance of services as an employee from gross income to arrive at 
adjusted gross income when the amounts are paid under a reimbursement 
or other expenses allowance arrangement with his or her employer. 
Section 62(c) of the Code provides that, for purposes of section 
62(a)(2)(A), an arrangement will not be treated as a reimbursement or 
other expense allowance arrangement if: (1) the arrangement does not 
require the employee to substantiate the expense; or (2) the 
arrangement provides the employee the right to retain any amount in 
excess of the substantiated amount.
    Section 132 of the Code provides that certain fringe benefits 
provided by an employee to an employee may be excluded from the 
employee's gross income. An employer-provided membership in any club 
organized for business, pleasure, recreation, or other social purposes 
is a fringe benefit includable in gross income unless otherwise 
specifically excluded. Similarly, an employer's payment of travel 
expenses with respect to a spouse, dependent, or other individual 
accompanying an employee on business is a fringe benefit includable in 
gross income unless otherwise specifically excluded. See Sec. 1.61-
21(a) of the Income Tax Regulations. Section 1.132-5 of the regulations 
permits exclusion of employer-provided membership in a club, or an 
employer's payment of travel expenses with respect to a spouse, 
dependent, or other individual, accompanying an employee on business as 
a working condition fringe benefit, provided that the payments for 
these items would be deductible by the employee under sections 162 or 
167 of the Code.
    OBRA amended section 274 of the Code to disallow a deduction for 
(1) 50% of business meal and entertainment expenses; (2) amounts paid 
or incurred for membership in any club organized for business, 
pleasure, recreation, or other social purpose; and (3) amounts paid or 
incurred with respect to a spouse, dependent, or other individual 
accompanying the taxpayer (or an officer or employee of the taxpayer) 
on business travel, unless the accompanying individual is an employee 
of the taxpayer, the travel of the accompanying individual is for a 
bona fide business purpose, and the travel expenses would otherwise be 
deductible by the accompanying individual.
    The legislative history to OBRA indicates that Congress did not 
intend that the business meal and entertainment expenses disallowance 
provided by section 274(n) of the Code should result in income to 
employees. ``The committee believes that denial of some part of the 
deduction is appropriate as a proxy for income inclusion of the 
consumption element of the meal or entertainment.'' H.R. Rep. No. 111, 
103d Cong., 1st Sess. 645 (1993). Thus, consistent with Congressional 
intent as evidenced by the legislative history, these proposed 
regulations amend the regulations under section 62 of the Code to the 
extent necessary to provide that a reimbursement or advance for 
business meal and entertainment expenses will not be considered wages 
subject to withholding and employment taxes under Sec. 1.62-2 of the 
regulations, notwithstanding the deduction disallowance to the employer 
of 50 percent of that amount.
    The proposed regulations also amend the regulations under section 
132 of the Code to provide that denial of a deduction to the employer 
for the employer's payment of an employee's membership in a club, or 
for the employer's payment of travel expenses of a spouse, dependent, 
or other individual accompanying an employee on business travel, does 
not provide those items from qualifying as working condition fringe 
benefits. These amounts may qualify as a working condition fringe 
benefit to the extent that (1) the employer has not treated such 
amounts as compensation under section 274(e)(2) of the Code; (2) the 
amounts would be deductible under section 162 (without regard to 
sections 274(a) and 274(M)(3)); and (3) the employee substantiates the 
expenses within the meaning of section 274.
    An employer may choose to exercise the option of avoiding any 
section 274 disallowance at the employer level by characterizing 
employer-provided club membership dues or payment of travel expenses 
with respect to a spouse, dependent, or other individual accompanying 
an employee on business travel as compensation. Section 274(e)(2). If 
the employer makes this election, the amount of such expenditure is 
fully includable in gross income by the employee as compensation. The 
proposed regulations under section 132 of the Code do not provide the 
employee with any exclusion from gross income in this situation because 
the section 274 disallowance applies to the employee.
    The proposed regulations also modify Sec. 1.274-2(f)(2)(iii) of the 
regulations to include spousal travel described in section 274(m)(3) of 
the Code among the expenses deductible by the employer when treated as 
compensation pursuant to section 274(e)(2). To the extent that the 
employer treats all or parts of club dues as compensation to the 
employee, the employer is permitted a deduction under section 162(a) of 
the Code pursuant to section 274(e)(2). The Department of the Treasury 
and the IRS believe that items described in section 274(a)(3) and 
(m)(3) of the Code should be treated similarly. Therefore, the proposed 
regulations modify Sec. 1.274-2(f)(2)(iii) of the regulations to 
achieve this consistent treatment.
    Clerical changes have been made to Sec. Sec. 1.274-2(c)(6) and 
1.274-2(f)(2)(i) of the regulations to alert the reader to the fact 
that these provisions apply only to transactions before January 1, 
1987. Both paragraphs pertain to a former version of section 274(e)(1) 
of the Code that was repealed by section 142(a)(2)(A) of the Tax Reform 
Act of 1986.

Special Analyses

    It has been determined that these proposed regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 
6) do not apply to these regulations, and, therefore, an initial 
Regulatory Flexibility Analysis is not required. Pursuant to section 
7805(f) of the Internal Revenue Code, these regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Public Hearing

    Before adopting these proposed regulations as final regulations, 
consideration will be given to any written comments that are submitted 
(preferably a signed original and eight (8) copies) to the Internal 
Revenue Service. All comments will be available for public inspection 
and copying in their entirety.
    A public hearing has been scheduled for Friday, April 14, 1995, 10 
a.m. in the IRS Auditorium, Seventh Floor, 7400 Corridor, Internal 
Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Because 
of access restrictions, visitors will not be admitted beyond the 
building lobby more than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons who wish to present oral comments at the hearing must 
submit written comments and an outline of the topics to be discussed 
and the time to be devoted to each topic by March 24, 1995.
    A period of 10 minutes will be allotted to each person or team for 
making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are David N. 
Pardys, Office of the Associate Chief Counsel (Employee Benefits and 
Exempt Organizations), and John T. Sapienza, Jr., Office of the 
Assistant Chief Counsel (Income Tax and Accounting), IRS. However, 
personnel from other offices of the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805  * * *

    Par. 2. Section 1.62-2 is amended by adding a second sentence to 
paragraph (h)(1) as follows:


Sec. 1.62-2  Reimbursements and other expense allowance arrangements.

* * * * *
    (h) Withholding and payment of employment taxes--(1) When excluded 
from wages. * * * If an arrangement provides advances, allowances, or 
reimbursements for meal and entertainment expenses and a portion of the 
payment is treated as paid under a nonaccountable plan under paragraphs 
(d)(2) of this section due solely to section 274(n), then 
notwithstanding paragraph (h)(2)(i) of this section, these 
nondeductible amounts are not treated as wages and are not subject to 
withholding and payment of employment taxes.
* * * * *
    Par. 3. Section 1.132-5 is amended by adding paragraphs (s) and (t) 
to read as follows:


Sec. 1.132-5  Working condition fringes.

* * * * *
    (s) Application of section 274(a)(3). (1) If an employer's 
deduction under section 162(a) for dues paid or incurred for membership 
in any club organized for business, pleasure, recreation, or other 
social purpose, is disallowed by section 274(a)(3), the amount, if any, 
of an employee's working condition fringe benefit relating to an 
employer-provided membership in the club is determined without regard 
to the application of section 274(a) to the employee. To be excludible 
as a working condition fringe benefit, however, the amount must 
otherwise qualify for deduction by the employee under section 162(a). 
If an employer characterizes as compensation under section 274(e)(2) 
the amount paid for or incurred for membership in any club organized 
for business, pleasure, recreation, or other social purpose, then the 
expense is deductible by the employer as compensation and no amount may 
be excluded from the employee's gross income as a working condition 
fringe benefit.
    (2) Examples. These examples illustrate this paragraph (s):

    Example 1. Assume that Company X provides Employee B with a 
country club membership valued at $20,000 which X does not treat as 
compensation under section 274(e)(2). B substantiates, within the 
meaning of paragraph (c) of this section, that the club was used 40 
percent for business purposes. The business use of the club (40 
percent) will be considered a working condition fringe benefit, 
notwithstanding that the employer's deduction for the dues allocable 
to the business use is disallowed by section 274(a)(3). Therefore, B 
may exclude from gross income $8,000 (40 percent of the club dues, 
which reflects B's business use). B must include $12,000 in gross 
income as a fringe benefit (60 percent of the value of the club 
dues, which reflects B's personal use). X may deduct as compensation 
the value of the club dues which reflects B's personal use provided 
the amount satisfied the other requirements for a salary or 
compensation deduction under section 162.
    Example 2. Assume the same facts as Example 1 except that 
Company X treats the $20,000 which it pays for Employee B's club 
dues as compensation under section 274(e)(2). B can substantiate, 
within the meaning of paragraph (c) of this section, that the club 
was used 40 percent for business purposes. The business use of the 
club (40 percent), however, will not be considered a working 
condition fringe benefit because the section 274(a)(3) disallowance 
will apply to B. Therefore, B must include $20,000 (the entire of 
the club membership) in gross income.

    (t) Application of section 274(m)(3). If an employer's deduction 
under section 162(a) for amounts paid or incurred for the travel 
expenses of a spouse, dependent, or other individual accompanying an 
employee is disallowed by section 274(m)(3), the amount, if any, of the 
employee's working condition fringe benefit relating to the employer-
provided travel is determined without regard to the application of 
section 274(m)(3). To be excludible as a working condition fringe 
benefit, however, the amount must otherwise qualify for deduction by 
the employee under section 162(a). The amount will qualify for 
deduction and for exclusion as a working condition fringe benefit if it 
can be adequately shown that the spouse's, dependent's, or other 
accompanying individual's presence on the employee's business trip has 
a bona fide business purpose and if the employee substantiates the 
travel within the meaning of paragraph (c) of this section. If the 
travel does not qualify as a working condition fringe benefit, the 
employee must include in gross income as a fringe benefit the value of 
the employer's payment of travel expenses with respect to a spouse, 
dependent, or other individual accompanying the employee on business 
travel. See Secs. 1.61-21(a)(4) and 1.162-2(c). If an employer 
characterizes as compensation under section 274(e)(2) the amount paid 
for or incurred for the travel expenses of a spouse, dependent, or 
other individual accompanying an employee, then the expense is 
deductible by the employer as compensation and no amount may be 
excluded from the employee's gross income as a working condition fringe 
benefit.
    Par. 4. Section 1.274-2 is amended as follows:
    1. The second sentence of paragraph (c)(6) is added.
    2. The paragraph heading for (f)(2)(i) is revised.
    3. The paragraph heading and introductory language of paragraph 
(f)(2)(iii) is revised.
    The revised and added provisions read as follows:


Sec. 1.274-2  Disallowance of deductions for certain expenses for 
entertainment, amusement, or recreation.

* * * * *
    (c) * * *
    (6) * * * This paragraph (c)(6) applies to club dues paid or 
incurred before January 1, 1987.
* * * * *
    (f) * * *
    (2) * * *
    (i) Business meals and similar expenditures paid or incurred before 
January 1, 1987.* * *
* * * * *
    (iii) Certain entertainment and travel expenses treated as 
compensation. Any expenditure by a taxpayer for entertainment (or for 
use of a facility in connection therewith) or for travel described in 
section 274(m)(3), if an employee is the recipient of the entertainment 
or travel, is not subject to the limitations on allowability of 
deductions provided for in paragraphs (a) through (e) of this section 
to the extent that the expenditure is treated by the taxpayer--
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-30877 Filed 12-15-94; 8:45 am]
BILLING CODE 4830-01-4-M