[Federal Register Volume 77, Number 80 (Wednesday, April 25, 2012)]
[Proposed Rules]
[Pages 24657-24660]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9885]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-137589-07]
RIN 1545-BH60


Local Lodging Expenses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
deductibility of expenses for lodging when not traveling away from home 
(local lodging). The regulations affect taxpayers who pay or incur 
expenses for local lodging.

DATES: Comments or a request for a public hearing must be received by 
July 24, 2012.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-137589-07), room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
137589-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-137589-07).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
R. Matthew Kelley, (202) 622-7900; concerning submission of comments or 
a request for a hearing, Funmi Taylor, (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to 26 CFR part 1 
relating to the deduction of local lodging expenses.
    Section 1.262-1 of the Income Tax Regulations generally disallows a 
deduction for local lodging expenses. The proposed regulations allow 
taxpayers to deduct local lodging expenses as ordinary and necessary 
business expenses in appropriate circumstances.

Business Expenses Generally

    Section 162(a) of the Internal Revenue Code (Code) allows a 
deduction for all of the ordinary and necessary expenses paid or 
incurred during the taxable year in carrying on any trade or business. 
Whether an expense is ordinary and necessary is a question of fact. In 
general, a trade or business expense is ordinary if it is normal, 
usual, or customary in the taxpayer's type of business. An expense is 
necessary if it is appropriate and helpful for the development of the 
taxpayer's business. See Commissioner v. Heininger, 320 U.S. 467, 475 
(1943). An expense that serves primarily to furnish the taxpayer with a 
social or personal benefit, and is only secondarily related to 
business, is not a necessary business expense under section 162(a).

Employee Expenses

    An expense that an employee must bear as a condition of employment 
may be a deductible employee business expense. See Sibla v. 
Commissioner, 611 F.2d 1260 (9th Cir. 1980), acq. (1985-2 CB viii) 
(contributions to firemen's mess required as a condition of employment 
are deductible business expenses). However, expenses that primarily are 
for the employee's personal benefit or convenience are not deductible 
employee business expenses. See Commissioner v. Flowers, 326 U.S. 465 
(1946) (a taxpayer's expenses for lodging near his principal work 
location, to avoid a long commute to and from his primary residence, 
were nondeductible personal expenses incurred solely because of the 
taxpayer's decision to maintain his primary residence far from his work 
location).

Deductible Employee Expenses

    The tax consequences to an employee who is reimbursed by an 
employer for an expense, or who receives property or services resulting 
from an employer's payment of an expense, depend on whether the expense 
is one that would have been deductible if paid directly by the 
employee.
    For example, if an employee pays an expense and an employer 
reimburses the employee under a reimbursement or other expense 
allowance arrangement, the reimbursement is not includible in the 
employee's income if it is made under an accountable plan. A 
reimbursement is treated as made under an accountable plan only if it 
is made for an expense that would be deductible by the employee under 
sections 161 through 199. See sections 62(a)(2)(A) and 62(c).
    Similarly, if an employer provides property or services to an 
employee in the course of business, the value of the benefit to the 
employee is excludable from the employee's income if the benefit 
constitutes a working condition fringe under section 132(a)(3). A 
working condition fringe is defined as

[[Page 24658]]

property or services provided to an employee to the extent that, if the 
employee paid for the property or services, the payment would be 
allowable as a deduction to the employee under section 162 or 167.

Nondeductible Personal Expenses

    Section 262(a) provides that, except as otherwise provided in 
Chapter 1 of the Code, no deduction is allowed for personal, living, or 
family expenses.
    Section 1.262-1(b)(5) provides, as examples of personal, living, 
and family expenses, that the costs of a taxpayer's meals incurred when 
not traveling away from home (local meals) are generally nondeductible 
personal expenses. Local meal expenses may be deducted, however, if 
they otherwise qualify as ordinary and necessary business expenses 
under section 162 or as expenses for the production of income under 
section 212. In contrast, lodging expenses incurred when not traveling 
away from home (local lodging) are nondeductible personal expenses. 
Thus, local lodging expenses that would otherwise qualify as trade or 
business expenses under section 162 or as production of income expenses 
under section 212 are not deductible under the current general rule.

Local Lodging Expenses

    The cost of local lodging that a taxpayer pays or incurs primarily 
for the taxpayer's convenience or personal benefit is not an ordinary 
and necessary expense of a business or income-producing activity. 
Similarly, the cost of local lodging provided to an employee by an 
employer for the employee's convenience or personal benefit would not 
be deductible by the employee if the employee paid the cost directly. 
Therefore, the value of the lodging under those circumstances is not 
excludible from the gross income of an employee as a working condition 
fringe under section 132(a)(3), and reimbursement for the cost of the 
lodging under those circumstances is not a payment under an accountable 
plan under Sec.  1.62-2(c). Consequently, unless excludible on another 
basis, the value of the lodging or the amount of reimbursement under 
those circumstances is includible in the employee's income under 
section 61 as compensation for services. See Sec. Sec.  1.61-21(a)(3), 
1.62-2, and 1.132-1.
    The cost of local lodging is for the convenience or personal 
benefit of an employee (or other recipient) if, for example, the 
lodging is provided to the employee (1) as additional compensation, 
such as to provide a weekend at a luxury hotel or resort; (2) to enable 
the employee to avoid a long-distance commute (Commissioner v. 
Flowers); (3) because the employee is required to work overtime (Coombs 
v. Commissioner, 608 F.2d 1269, 1273 (9th Cir. 1979)); (4) as housing 
for a recently relocated employee while the employee searches for 
permanent housing; or (5) for the employee's indefinite personal use 
(International Artists, Ltd, v. Commissioner, 55 T.C. 94 (1970)). An 
employer may deduct the costs the employer incurs in providing the 
lodging in each of these cases under section 162(a) as compensation for 
services. See Sec. Sec.  1.162-7(a) and 1.162-25T. However, because the 
primary purpose of the lodging is to provide the employee with a 
personal benefit, if the employee pays the cost of the lodging 
directly, the employee may not deduct the expense as an ordinary and 
necessary business expense under section 162(a). Therefore, a cash 
reimbursement of the cost is not excludible from the employee's gross 
income under section 62(c) and the value of the lodging is not 
excludible from the employee's gross income under section 132(d) as a 
working condition fringe.
    Expenditures for local lodging may qualify as deductible ordinary 
and necessary expenses under appropriate circumstances if all other 
requirements of section 162 are met. For example, an employer may 
require its employees to stay at a local hotel for the bona fide 
purpose of facilitating training or team building directly connected 
with the employer's trade or business. Similarly, a professional sports 
team may require its employees (players and coaches) to stay at a local 
hotel the night before a home game to ensure physical preparedness and 
allow for last minute training. Under these circumstances, the cost of 
the lodging is primarily for the business purposes of the employer and 
not to provide a personal benefit to the employees. The cost of the 
lodging would be deductible by an employee under section 162 if the 
employee paid the cost directly, and thus the value of the lodging may 
be excluded from the employee's gross income as a working condition 
fringe if other requirements are satisfied. Similarly, a payment from 
the employer reimbursing the employee for the cost of the lodging may 
be excluded from the employee's gross income as a payment under an 
accountable plan if all the requirements of an accountable plan are 
met.
    Notice 2007-47 (2007-1 CB 1393) (see Sec.  601.601(d)(2) of this 
chapter) advises taxpayers that the IRS and the Treasury Department 
intend to amend the treatment of the costs of a taxpayer's local 
lodging under Sec.  1.262-1(b)(5). The notice provides that, pending 
issuance of additional published guidance, the IRS will not apply Sec.  
1.262-1(b)(5) to expenses for local lodging of an employee that an 
employer provides to the employee or requires the employee to obtain, 
if: (1) The lodging is provided on a temporary basis; (2) the lodging 
is necessary for the employee to participate in or be available for a 
bona fide business meeting or function of the employer; and (3) the 
expenses are otherwise deductible by the employee, or would be 
deductible if paid by the employee, under section 162(a).

Explanation of Provisions

    These regulations propose to amend the regulations under sections 
162 and 262. The proposed regulations under section 162 provide that 
expenses paid or incurred for local lodging may be deductible as 
ordinary and necessary expenses of a taxpayer's trade or business, 
including the trade or business of being an employee. The proposed 
regulations provide a safe harbor for certain local lodging at a 
business meeting, conference, or other activity or function. Other 
local lodging expenses may be deductible as business expenses depending 
on the facts and circumstances.
    The proposed regulations under section 262 provide that a 
taxpayer's costs incurred for local lodging are personal expenses 
unless the expenses are deductible under section 162. Comments are 
specifically requested on whether the section 262 regulations should be 
amended to provide that local lodging expenses are not personal 
expenses if they are deductible under section 212.
    The proposed regulations also amend the regulations under section 
262 to remove references to section 217 that are obsolete. Section 217 
was amended by the Revenue Reconciliation Act of 1993, Public Law 103-
66 (107 Stat. 417). Under the amendments, lodging when not traveling 
away from home and meals are not deductible as moving expenses.

Effective/Applicability Date

    The regulations are proposed to apply to expenses paid or incurred 
on or after the date these regulations are published as final 
regulations in the Federal Register. However, until these regulations 
are published as final regulations in the Federal Register, taxpayers 
may apply the proposed regulations to expenses paid or incurred in 
taxable years for which the period of limitation on credit or refund 
under section 6511 has not expired.

[[Page 24659]]

Effect on Other Documents

    Notice 2007-47 is obsoleted as of April 25, 2012.

Special Analyses

    This notice of proposed rulemaking is not a significant regulatory 
action as defined in Executive Order 12866, as supplemented by 
Executive Order 13563. Therefore, a regulatory assessment is not 
required. It also has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations and, because the regulations do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, this notice of proposed rulemaking has been submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ``Addresses'' 
heading. The Treasury Department and the IRS invite comments on all 
aspects of the proposed rules. All comments will be available for 
public inspection and copying. A public hearing may be scheduled if 
requested in writing by any person who timely submits comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the public hearing will be published in the Federal Register.

Drafting Information

    The principal author of these regulations is R. Matthew Kelley of 
the Office of Associate 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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be 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 1.162-31 is added to read as follows:


Sec.  1.162-31  Expenses paid or incurred for lodging when not 
traveling away from home.

    (a) In general. Expenses paid or incurred for lodging when not 
traveling away from home (local lodging) generally are personal, 
living, or family expenses that are nondeductible under section 262(a). 
Under certain circumstances, however, expenses for local lodging may be 
deductible under section 162(a) as ordinary and necessary expenses paid 
or incurred in connection with carrying on a taxpayer's trade or 
business, including a trade or business as an employee. Whether local 
lodging expenses are paid or incurred in carrying on a taxpayer's trade 
or business is determined under all the facts and circumstances. One 
factor is whether the taxpayer incurs the expense because of a bona 
fide condition or requirement of employment imposed by the taxpayer's 
employer. Expenses paid or incurred for local lodging that is lavish or 
extravagant under the circumstances or that primarily provides an 
individual with a social or personal benefit are not incurred in 
carrying on a taxpayer's trade or business.
    (b) Safe harbor for local lodging at business meetings and 
conferences. An individual's expenses for local lodging will be treated 
as ordinary and necessary business expenses if--
    (1) The lodging is necessary for the individual to participate 
fully in or be available for a bona fide business meeting, conference, 
training activity, or other business function;
    (2) The lodging is for a period that does not exceed five calendar 
days and does not recur more frequently than once per calendar quarter;
    (3) If the individual is an employee, the employee's employer 
requires the employee to remain at the activity or function overnight; 
and
    (4) The lodging is not lavish or extravagant under the 
circumstances and does not provide any significant element of personal 
pleasure, recreation, or benefit.
    (c) Examples. The provisions of this section are illustrated by the 
following examples. In each example the employer and the employees meet 
all other requirements (such as substantiation) for deductibility of 
the expense and for exclusion from income as a working condition fringe 
or payment under an accountable plan.

    Example 1.  (i) Employer conducts training for its employees at 
a hotel near Employer's main office. The training is directly 
connected with Employer's trade or business. Some employees 
attending the training are traveling away from home and some 
employees are not traveling away from home. Employer requires all 
employees attending the training to remain at the hotel overnight 
for the bona fide purpose of facilitating the training. Employer 
pays the costs of the lodging at the hotel directly to the hotel and 
does not treat the value as compensation to the employees.
    (ii) Employer has a noncompensatory business purpose for paying 
the lodging expenses. Employer is not paying the expenses primarily 
to provide a social or personal benefit to the employees. If the 
employees who are not traveling away from home had paid for their 
own lodging, the expenses would have been deductible under section 
162(a) as ordinary and necessary business expenses of the employees. 
Therefore, the value of the lodging is excluded from the employees' 
income as a working condition fringe under section 132(a) and (d).
    (iii) Employer may deduct the lodging expenses, including 
lodging for employees who are not traveling away from home, as 
ordinary and necessary business expenses under section 162(a).
    Example 2.  (i) The facts are the same as in Example 1, except 
that the employees pay the cost of their lodging at the hotel 
directly to the hotel, Employer reimburses the employees for the 
cost of the lodging, and Employer does not treat the reimbursement 
as compensation to the employees.
    (ii) Employer is reimbursing the lodging expenses for a 
noncompensatory business purpose and not primarily to provide a 
social or personal benefit to the employees. The employees incur the 
expenses in performing services for the employer. If Employer had 
not reimbursed the employees who are not traveling away from home 
for the cost of the lodging, the expenses would have been deductible 
under section 162(a) as ordinary and necessary business expenses of 
the employees. Therefore, the reimbursements to the employees are 
made under an accountable plan and are excluded from the employees' 
gross income.
    (iii) Employer may deduct the lodging expense reimbursements, 
including reimbursements for employees who are not traveling away 
from home, as ordinary and necessary business expenses under section 
162(a).
    Example 3.  (i) Employer is a professional sports team. Employer 
requires its employees (players and coaches) to stay at a local 
hotel the night before a home game to conduct last minute training 
and ensure the physical preparedness of the players. Employer pays 
the lodging expenses directly to the hotel and does not treat the 
value as compensation to the employees.
    (ii) Employer has a noncompensatory business purpose for paying 
the lodging expenses. Employer is not paying the lodging expenses 
primarily to provide a social or personal benefit to the employees. 
If the employees had paid for their own lodging, the expenses would 
have been deductible by the employees under section 162(a) as 
ordinary and necessary business expenses.

[[Page 24660]]

Therefore, the value of the lodging is excluded from the employees' 
income as a working condition fringe.
    (iii) Employer may deduct the expenses for lodging the players 
and coaches at the hotel as ordinary and necessary business expenses 
under section 162(a).
    Example 4.  (i) Employer hires Employee, who currently resides 
500 miles from Employer's business premises. Employer pays for 
temporary lodging for Employee near Employer's business premises 
while Employee searches for a residence.
    (ii) Employer is paying the temporary lodging expense primarily 
to provide a personal benefit to Employee by providing housing while 
Employee searches for a residence. Employer incurs the expense only 
as additional compensation and not for a noncompensatory business 
purpose. If Employee paid the temporary lodging expense, the expense 
would not be an ordinary and necessary employee business expense 
under section 162(a) because the lodging primarily provides a 
personal benefit to Employee. Therefore, the value of the lodging is 
includible in Employee's gross income as additional compensation.
    (iii) Employer may deduct the lodging expenses as ordinary and 
necessary business expenses under section 162(a) and Sec.  1.162-
25T.
    Example 5. (i) Employee normally travels two hours each way 
between her home and her office. Employee is working on a project 
that requires Employee to work late hours. In order to maximize 
Employee's availability to work on the project, Employer provides 
Employee with lodging at a hotel near the office.
    (ii) Employer is paying the temporary lodging expense primarily 
to provide a personal benefit to Employee by relieving her of the 
daily commute to her residence. Employer incurs the expense only as 
additional compensation and not for a noncompensatory business 
purpose. If Employee paid the temporary lodging expense, the expense 
would not be an ordinary and necessary business expense under 
section 162(a) because the lodging primarily provides a personal 
benefit to Employee. Therefore, the value of the lodging is 
includible in Employee's gross income as additional compensation.
    (iii) Employer may deduct the lodging expenses as ordinary and 
necessary business expenses under section 162(a) and Sec.  1.162-
25T.
    Example 6. (i) Employer requires an employee to be ``on duty'' 
each night to respond quickly to emergencies that may occur outside 
of normal working hours. Employees who work daytime hours each serve 
a ``duty shift'' once each month in addition to their normal work 
schedule. Emergencies that require the duty shift employee to 
respond occur regularly. Employer has no sleeping facilities on its 
business premises and pays for a hotel room nearby where the duty 
shift employee stays until called to respond to an emergency.
    (ii) Employer has a noncompensatory business purpose for paying 
the lodging expenses. Employer is not providing the lodging to duty 
shift employees primarily to provide a social or personal benefit to 
the employees. If the employees had paid for their lodging, the 
expenses would have been deductible by the employees under section 
162(a) as ordinary and necessary business expenses. Therefore, the 
value of the lodging is excluded from the employees' income as a 
working condition fringe.
    (iii) Employer may deduct the lodging expenses as ordinary and 
necessary business expenses under section 162(a).
    (d) Effective/applicability date. This section applies to 
expenses paid or incurred on or after the date these regulations are 
published as final regulations in the Federal Register. However, 
until these proposed regulations are published as final regulations 
in the Federal Register, taxpayers may apply the proposed 
regulations to local lodging expenses that are paid or incurred in 
taxable years for which the period of limitation on credit or refund 
under section 6511 has not expired.

    Par. 3. In Sec.  1.262-1, paragraph (b)(5) is amended to read as 
follows:


Sec.  1.262-1  Personal, living, and family expenses.

* * * * *
    (b) * * *
    (5) Expenses incurred in traveling away from home (which include 
transportation expenses, meals, and lodging) and any other 
transportation expenses are not deductible unless they qualify as 
expenses deductible under section 162 (relating to trade or business 
expenses), section 170 (relating to charitable contributions), section 
212 (relating to expenses for production of income), section 213 
(relating to medical expenses), or section 217 (relating to moving 
expenses), and the regulations under those sections. The taxpayer's 
costs of commuting to his place of business or employment are personal 
expenses and do not qualify as deductible expenses. For expenses paid 
or incurred before the date these regulations are published as final 
regulations in the Federal Register, a taxpayer's expenses for lodging 
when not traveling away from home (local lodging) are nondeductible 
personal expenses. For expenses paid or incurred on or after the date 
these regulations are published as final regulations in the Federal 
Register, a taxpayer's expenses for local lodging are personal expenses 
and are not deductible unless they qualify as deductible expenses under 
section 162. However, until these regulations are published as final 
regulations in the Federal Register, taxpayers may deduct local lodging 
expenses that qualify under section 162 and are paid or incurred in 
taxable years for which the period of limitation on credit or refund 
under section 6511 has not expired. Except as permitted under section 
162 or 212, the costs of a taxpayer's meals not incurred in traveling 
away from home are nondeductible personal expenses.
* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-9885 Filed 4-24-12; 8:45 am]
BILLING CODE 4830-01-P