[Federal Register Volume 62, Number 57 (Tuesday, March 25, 1997)]
[Rules and Regulations]
[Pages 13988-13991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7095]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8715]
RIN 1545-AT98


Substantiation of Business Expenses for Travel, Entertainment, 
Gifts and Listed Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains amendments to temporary regulations 
relating to the requirement that business expenses for travel, 
entertainment, gifts, or listed property be substantiated by 
documentary evidence (such as a receipt). The regulations affect 
persons making or receiving reimbursements for travel, entertainment, 
gifts, or listed property. The text of these temporary regulations also 
serves as the text of the proposed regulations cross-referenced in the 
notice of proposed rulemaking in the Proposed Rules section of this 
issue of the Federal Register.

DATES: These temporary regulations are effective March 25, 1997.
    Applicability: These temporary regulations are applicable to 
expenses paid or incurred after September 30, 1995.

FOR FURTHER INFORMATION CONTACT: Donna M. Crisalli at (202) 622-4920 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
comment pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
For this reason, the collection of information contained in these 
regulations has been reviewed and, pending receipt and evaluation of 
public comments, approved by the Office of Management and Budget (OMB) 
under control number 1545-0771. Responses to this collection of 
information are required for a taxpayer to deduct certain business 
expenses or to substantiate certain reimbursements of business 
expenses.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing the 
burden, please refer to the preamble in the cross-reference notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

Receipt Threshold

    Section 274(d) disallows a trade or business deduction under 
section 162 for any traveling (including meals and lodging), 
entertainment, gift, or listed property expense, unless the taxpayer 
substantiates the elements of the expense by adequate records or by 
sufficient evidence. Under Sec. 1.274-5T(c) of the temporary Income Tax 
Regulations, a taxpayer must maintain two types of records to satisfy 
the ``adequate records'' requirement: (1) a summary of expenses 
(account book, diary, log, statement of expense, trip sheets, or other 
similar record), sometimes called an expense account or expense 
voucher, and (2) documentary evidence (such as receipts or paid bills). 
Together, these records must establish the elements of amount, time, 
place, and business purpose (and for gifts and entertainment, business 
relationship of

[[Page 13989]]

recipient or persons entertained) for each expenditure or use.
    Section 1.274-5T(c)(2)(iii) generally requires that a taxpayer have 
a receipt or other documentary evidence to substantiate (A) any 
expenditure for lodging and (B) any other expenditure of $25 or more. 
In Notice 95-50 (1995-2 C.B. 333), the IRS announced that it would 
raise the receipt threshold of Sec. 1.274-5T(c)(2)(iii)(B) from $25 to 
$75, effective for expenses incurred on or after October 1, 1995. The 
temporary regulations effect this amendment by changing ``$25'' in 
Sec. 1.274-5T(c)(2)(iii)(B) to ``$75.'' This change is applicable to 
both deductions and reimbursement arrangements and is expected to 
reduce the recordkeeping burden on affected taxpayers, including 
individuals and small businesses.

Definition of an ``Adequate Accounting'' to the Employer

    An employee who is reimbursed under a reimbursement or other 
expense allowance arrangement for expenses covered by section 274(d) 
must make an ``adequate accounting'' to the employer for the reimbursed 
expenses. Section 1.274-5T(f)(4) specifies that, as part of an adequate 
accounting, the employee must submit substantiation to the employer 
that satisfies the requirements of Sec. 1.274-5T(c). Notice 95-50 also 
solicited comments on whether changes should be made to the 
substantiation requirements of the adequate accounting rules in 
Sec. 1.274-5T. Comments received related primarily to the adequate 
accounting rules and the substantiation requirements in general.
1. Submission and Retention of Documentary Evidence
    A number of commentators, particularly federal government agencies, 
complained of the administrative burden and cost of storing large 
quantities of paper receipts. Some comments proposed that the employer 
should be allowed to dispose of the documentary evidence after an 
employee has made an adequate accounting, or return the documentary 
evidence to the employee for retention. Other comments suggested that 
submission by an employee of an expense voucher alone, without 
documentary evidence, should be considered an adequate accounting.
    With the increase in the receipt threshold to $75, and the use of 
electronic document transmission and retention (discussed below), the 
necessity for storing large quantities of paper records is 
significantly reduced. Nonetheless, the temporary regulations respond 
to the concerns expressed by these comments by amending Sec. 1.274-
5T(f)(4) to authorize the Commissioner to prescribe rules modifying the 
substantiation requirements for an adequate accounting by an employee 
to an employer. Under the amendment, the Commissioner could publish 
rules defining the circumstances (including the use of specified 
internal controls) under which an employee may make an adequate 
accounting to his employer by submitting an expense account alone, 
without the necessity of submitting documentary evidence (such as 
receipts). This change is expected to reduce the recordkeeping burden 
for employers and employees. These rules would not change the 
substantiation requirements of Sec. 1.274-5T(c) for deductions.
2. Maintenance of Adequate Records in Electronic Form
    Some commentators suggested that taxpayers should be permitted to 
obtain and maintain records substantiating expenses under section 
274(d) in electronic form. The temporary regulations make no change to 
the current regulations, which do not require that the records be in 
paper form. Rev. Proc. 91-59 (1991-2 C.B. 841), provides procedures for 
maintaining tax records in electronic form. Section 3.08 of Rev. Proc. 
91-59 states that the procedures apply to documentation required by 
section 274(d).
3. Types of Records That Constitute Acceptable Documentary Evidence
    Some commentators suggested that credit card charge records should 
be considered acceptable documentary evidence of travel expenses, 
including lodging. They noted, however, that Sec. 1.274-5T(c)(2)(iii) 
requires that documentary evidence of lodging must show separate 
amounts for charges such as lodging, meals, and telephone calls. A 
credit card statement or record of charge, unlike a hotel bill, 
normally will not segregate lodging and other expenses, such as meals 
and entertainment subject to the section 274(n) partial deduction 
disallowance, or personal expenses (such as personal phone calls or 
gift purchases) that may not be deducted. Therefore, such a credit card 
statement or record of charge alone will not constitute acceptable 
documentary evidence of a lodging expense.
    The commentators proposed addressing this problem by using 
statistical sampling, conducted either by the IRS or by taxpayers, to 
establish a breakdown of expenses on hotel bills. One comment suggested 
that sampling could form a basis for a ``safe harbor'' percentage or 
percentages (e.g., by industry or size of company) of hotel bills that 
would be deemed to represent the various types of possible expenses. 
Another comment suggested that the IRS adopt a mechanical test based on 
statistical sampling to make a reasonable allocation of the total hotel 
charge to meals.
    The temporary regulations make no change to the current documentary 
evidence requirements for lodging expenses. Because of the large number 
of expenses that can be charged to hotel bills, and extensive variation 
from traveler to traveler in the types of expenses charged to hotel 
bills, any attempt to establish percentages for allocating hotel bills 
to lodging and other fully deductible business expenses, meals and 
entertainment, and personal expenses is considered impracticable.
    A comment requested that the IRS clarify whether statements 
provided to travelers by airlines in lieu of tickets can constitute 
documentary evidence of travel. The current regulations are 
sufficiently flexible to permit use of a variety of forms of 
documentary evidence.

Other Comments in Response to Notice 95-50

1. Substantiation of Business Purpose
    A commentator suggested that the regulations be revised to permit 
an employee to initially substantiate business purpose to the employer 
orally, for later entry into the expense processing system. The current 
regulations do not preclude an initial oral substantiation of business 
purpose which is reduced to writing no later than the time of the 
employee's final accounting to the employer.
2. Post-Expenditure Verification Procedures
    A comment suggested that the regulations be revised to permit an 
employer to conduct a post-expenditure review of only a statistical 
sampling, as opposed to 100%, of expense vouchers.
    Section 1.274-5T(f)(5)(iii) states that an employee who makes an 
adequate accounting to his employer will not again be required to 
substantiate such expenses, unless the employer's accounting procedures 
are not adequate or it cannot be determined that such procedures are 
adequate. The district director will determine whether the employer's 
accounting procedures are adequate by considering all the facts and 
circumstances, including the employer's use of internal controls. The

[[Page 13990]]

employer's accounting procedures should include a requirement that an 
expense account be verified and approved by a reasonable person other 
than the person incurring the expense. To the extent the employer fails 
to maintain adequate accounting procedures, the district director may 
require the employee to separately substantiate his expense account 
information.
    Section 1.274-5T(f)(5)(iii) cites post-expenditure review of 
employees' expense accounts as an internal control that should normally 
be employed. However, whether the employer's post-expenditure review 
procedures are appropriate is a matter within the discretion of the 
district director, based on a review of all the facts and 
circumstances.
3. De Minimis Exception to Substantiation Requirements
    A comment proposed that employees receiving $1000 or less per year 
in reimbursed expenses be exempted from the requirement to substantiate 
the elements of the expenses, other than business purpose, to the 
employer. In view of the other changes made by the temporary 
regulations that will lessen a taxpayer's recordkeeping burden, such as 
the increase in the receipt threshold, the temporary regulations do not 
incorporate this suggestion.
4. Department of Labor Substantiation Requirements for Plan Trustees
    A comment requested the IRS to coordinate with the Department of 
Labor to establish common substantiation requirements under ERISA for 
travel by multi-employer plan trustees. Modifications to conform the 
substantiation requirements under ERISA to those provided in the 
temporary regulations are outside the scope of the section 274(d) 
regulations.
5. Increase in Limit on Deduction for Gifts
    A comment requested that the $25 limit on the deduction for gifts 
contained in section 274(b) be increased to $75. The IRS has no 
discretion to raise this statutory limit.
6. Use of Full Federal Per Diem Method to Substantiate Travel for 
Deduction Purposes
    A comment suggested that self-employed individuals and unreimbursed 
employees should be entitled to substantiate lodging expenses for 
deduction purposes by means of the ``high-low'' per diem method. Rev. 
Proc. 96-64 (1996-53 I.R.B. 52), permits this substantiation method for 
employee reimbursements only. This suggestion is outside the scope of 
this revision to the temporary regulations.

Special Analyses

    It has been determined that these temporary regulations are not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It is hereby certified that 
these regulations do not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that, by increasing the receipt threshold from $25 to $75, 
these regulations reduce the existing recordkeeping requirements of 
taxpayers, including small entities. The regulations do not otherwise 
significantly alter the reporting or recordkeeping duties of small 
entities. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, these 
temporary regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business.

Drafting Information

    The principal author of these regulations is Donna M. Crisalli, 
Office of the Assistant Chief Counsel (Income Tax and Accounting). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of 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 is amended by adding 
an entry in numerical order to read as follows:

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

    Section 1.274-5T also issued under 26 U.S.C. 274(d). * * *
    Par. 2. An undesignated centerheading is added immediately 
following Sec. 1.280H-1T to read as follows:

Taxable Years Beginning Prior to January 1, 1986


Sec. 1.274-5  [Redesignated as Sec. 1.274-5A]

    Par. 3. Section 1.274-5 is redesignated as Sec. 1.274-5A and added 
immediately following the undesignated centerheading ``Taxable Years 
Beginning Prior to January 1, 1986''.
    Par. 4. Section 1.274-5T is amended by:
    1. Revising the first sentence of paragraph (c)(2)(iii)(B).
    2. Redesignating the text of paragraph (f)(4) as paragraph 
(f)(4)(i).
    3. Adding a paragraph heading for paragraph (f)(4)(i).
    4. Adding paragraphs (f)(4)(ii) and (f)(4)(iii).
    The revisions and additions read as follows:


Sec. 1.274-5T  Substantiation requirements (temporary).

* * * * *
    (c) * * *
    (2) * * *
    (iii) * * *
    (B) Any other expenditure of $75 or more ($25 or more for 
expenditures incurred before October 1, 1995) except, for 
transportation charges, documentary evidence will not be required if 
not readily available, provided, however, that the Commissioner, in his 
discretion, may prescribe rules waiving such requirements in 
circumstances where he determines it is impracticable for such 
documentary evidence to be required. * * *
* * * * *
    (f) * * *
    (4) * * * (i) In general. * * *
    (ii) Procedures for adequate accounting without documentary 
evidence. The Commissioner may, in his discretion, prescribe rules 
under which an employee may make an adequate accounting to his employer 
by submitting an account book, log, diary, etc., alone, without 
submitting documentary evidence.
    (iii) Employer. For purposes of this section, the term employer 
includes an agent of the employer or a third party payor who pays 
amounts to an employee under a reimbursement or other expense allowance 
arrangement.
* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 5. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 6. In Sec. 602.101, paragraph (c) is amended by:
    1. Removing the following entry from the table:

[[Page 13991]]



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                                                             Current OMB
     CFR part or section where identified and described      control No.
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                  *        *        *        *        *                 
1.274-5....................................................    1545-0139
                                                               1545-0771
                                                                        
                  *        *        *        *        *                 
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    2. Adding an entry in numerical order to the table to read as 
follows:

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                                                             Current OMB
     CFR part or section where identified and described      control No.
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                  *        *        *        *        *                 
1.274-5A...................................................    1545-0139
                                                               1545-0771
                                                                        
                  *        *        *        *        *                 
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: February 14, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-7095 Filed 3-24-97; 8:45 am]
BILLING CODE 4830-01-U