[Federal Register Volume 77, Number 148 (Wednesday, August 1, 2012)]
[Proposed Rules]
[Pages 45520-45523]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18691]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-101812-07]
RIN 1545-BI83
Reimbursed Entertainment Expenses
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations explaining the
exception to the deduction limitations on certain expenditures paid or
incurred under reimbursement or other expense allowance arrangements.
These proposed regulations affect taxpayers that pay or receive
advances, allowances, or reimbursements under reimbursement or other
expense allowance arrangements. These proposed regulations clarify the
rules for these arrangements.
DATES: Comments or a request for a public hearing must be received by
October 30, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-101812-07), 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-
101812-07), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov (IRS REG-101812-07).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Patrick Clinton, (202) 622-4930 ; concerning submissions of comments
and/or requests for a public hearing, Oluwafunmilayo (Funmi) Taylor,
(202) 622-7180 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) explaining the exception to the section
274(a) and (n) deduction limitations on certain expenditures paid or
incurred under reimbursement or other expense allowance arrangements.
The proposed regulations clarify the definition of reimbursement or
other expense allowance arrangements for purposes of section 274(a) and
(n) and how the deduction limitations apply to reimbursement
arrangements between three parties, as addressed in Transport Labor
Contract/Leasing, Inc. v. Commissioner, 461 F.3d 1030 (8th Cir. 2006),
rev'g 123 T.C. 154 (2004) (TLC), and Rev. Rul. 2008-23 (2008-18 I.R.B.
852).
Section 274(a)(1) limits deductions for certain expenses for
entertainment, amusement, or recreation activities and for facilities
used in connection with entertainment, amusement, or recreation
activities. Section 274(n)(1) generally limits the amount allowable as
a deduction for any expense for food, beverages, entertainment
activities, or entertainment facilities to 50 percent of the amount
otherwise allowable. However, the limitations of sections 274(a)(1) and
274(n)(1) do not apply to an expense described in section 274(e)(3).
In general, section 274(e)(3) excepts from the limitations of
section 274(a) expenses a taxpayer pays or incurs in performing
services for another person under a reimbursement or other expense
allowance arrangement with the other person. The exception applies if
the taxpayer is an employee performing services for an employer and the
employer does not treat the reimbursement for the expenses as
compensation and wages to the taxpayer (section 274(e)(3)(A)). In that
case, the employee is not treated as having additional compensation and
has no deduction for the expense. The employer bears and deducts the
expense and is subject to the deduction limitations. See Sec. 1.274-
2(f)(2)(iv)(b) of the Income Tax Regulations.
If the employer treats the reimbursement as compensation and wages,
the employee may be able to deduct the expense as an employee business
expense. The employee bears the expense and is subject to the deduction
limitations. Section 1.274-2(f)(2)(iv)(b)(1). The employer deducts an
expense for compensation, which is not subject to the deduction
limitations under section 274. Section 1.274-2(f)(2)(iv)(b)(2); see
also section 162.
The section 274(e)(3) exception also applies if the taxpayer
performs services for a person other than an employer and the taxpayer
accounts (substantiates, as required by section 274(d)) to that person.
Section 274(e)(3)(B). Therefore, in a reimbursement or other expense
allowance arrangement in which a client or customer reimburses the
expenses of an independent contractor, the deduction limitations do not
apply to the independent contractor to the extent the independent
contractor accounts to the client by substantiating the expenses as
required by section 274(d). If the independent contractor is
[[Page 45521]]
subject to the deduction limitations, the limitations do not apply to
the client. See Sec. 1.274-2(f)(2)(iv)(a).
TLC applied these rules to a reimbursement arrangement involving
three parties in the trucking industry. In some cases, truck drivers
are paid wages and a per diem meals allowance by a company that leases
the drivers to a client trucking company. The client trucking company
pays the leasing company for the driver's expenses plus an additional
fee, and the parties deduct their respective expenses. Under section
274(e)(3), if the parties have a reimbursement or other expense
allowance arrangement, the section 274(n) limitation applies to only
one party.
TLC was a leasing company that paid truck drivers a per diem
allowance that it did not treat as compensation. TLC billed the client
leasing the drivers for the drivers' wages and per diem allowances, and
the client paid TLC. The Tax Court applied the section 274(n)
limitation to TLC as the drivers' common law employer subject to
section 274(e)(3)(A).
The Eighth Circuit stated that the Tax Court should have considered
the section 274(e)(3)(B) exception between TLC and the client. TLC was
providing services to its clients under a reimbursement or other
expense allowance arrangement and accounted to the client. Therefore,
TLC qualified for the exception in section 274(e)(3)(B) and the
incidence of the section 274(n) limitation was on the client that bore
the per diem expense.
Rev. Rul. 2008-23 acquiesces in the result in TLC and similarly
holds that the party that ultimately bears the expense in a three-party
reimbursement arrangement is subject to the section 274(n) limitation.
The revenue ruling clarifies that a party's status as a common law
employer is not relevant to the section 274(n) analysis, which the
Eighth Circuit's opinion could be read to imply.
Rev. Rul. 2008-23 clarifies another issue raised by the TLC
opinion. To define the term reimbursement or other expense allowance
arrangement for purposes of section 274(e)(3), the Eighth Circuit
looked to Sec. 1.274-2(f)(2)(iv)(a), which provides that the term
reimbursement or other expense allowance arrangement in section
274(e)(3) has the same meaning as in section 62(2)(A) (dealing with
employee business expenses, later renumbered 62(a)(2)(A)), but without
regard to whether the taxpayer is an employee of the person for whom
the taxpayer provides services. Thus, TLC defined reimbursement or
other expense allowance arrangement for purposes of section 274(e)(3)
by reference to section 62(a)(2)(A) and the regulations at Sec. 1.62-
2, which provide the rules for the employee reimbursement arrangements
called accountable plans. The TLC court's definition is inaccurate to
the extent it relies on the accountable plan rules, which cover
employee reimbursement arrangements only, in determining the existence
of a reimbursement or other expense allowance arrangement for purposes
of identifying who bears the expense under section 274(e)(3)(B).
Rev. Rul. 2008-23 clarifies that the Sec. 1.274-2(f)(2)(iv)(a)
reference to section 62(2)(A) predates the enactment of section 62(c),
which addresses certain arrangements not treated as reimbursement
arrangements, and the accountable plan regulations, which govern
employer-employee reimbursement arrangements and their employment tax
consequences. Therefore, Rev. Rul. 2008-23 holds that the section
274(e)(3) exception may apply to an expense reimbursement arrangement
without regard to whether it is an accountable plan.
Explanation of Provisions
1. Definition of Reimbursement or Other Expense Allowance Arrangement
The focus of the accountable plan rules under section 62(c) and the
applicable regulations is the taxability of reimbursements and
allowances paid to employees and their treatment for employment tax
purposes. The purpose of the rules under section 274(e)(3) is to
provide an exception to the section 274(a) and (n) deduction
limitations. Given these different purposes, the proposed regulations
amend Sec. 1.274-2(f)(2)(iv)(a) to provide an express definition of
reimbursement or other expense allowance arrangement for purposes of
section 274(e)(3) independent of the definition in section 62(c).
Under the proposed regulations, a reimbursement or other expense
allowance arrangement involving employees is an arrangement under which
an employee receives an advance, allowance, or reimbursement from a
payor (the employer, its agent, or a third party) for expenses the
employee pays or incurs in performing services as an employee. A
reimbursement or other expense allowance arrangement involving persons
that are not employees is an arrangement under which an independent
contractor receives an advance, allowance, or reimbursement from a
client or customer for expenses the independent contractor pays or
incurs in performing services if either (1) a written agreement between
the parties expressly provides that the client or customer will
reimburse the independent contractor for expenses that are subject to
the deduction limitations, or (2) a written agreement between the
parties expressly identifies the party that is subject to the
limitations under Sec. 1.274-2(a)--(e) and section 274(n). Specific
comments are requested on the definition of reimbursement or other
expense allowance arrangement and on alternative definitions or
approaches that would ensure that the deduction limitations apply to
one of the parties to an expense reimbursement arrangement.
2. Two-Party Reimbursement Arrangements
The proposed regulations clarify that the rules for applying the
exceptions to the section 274(a) and (n) deduction limitations apply to
reimbursement or other expense allowance arrangements with employees,
whether or not a payor is an employer. Under the proposed regulations,
a payor includes an employer, an agent of the employer, or a third
party. For example, either an independent contractor or a client or
customer may be a payor of a reimbursement arrangement. Thus, any party
that reimburses an employee is a payor and bears the expense if the
payment is not treated as compensation and wages to the employee.
In the case of a reimbursement or other expense allowance
arrangement between an independent contractor and a client or customer
that includes an agreement expressly providing that the client or
customer will reimburse the independent contractor for expenses that
are subject to the deduction limitations, the deduction limitations do
not apply to an independent contractor that accounts to the client
within the meaning of section 274(d) and the associated regulations,
but they do apply to the independent contractor and not to the client
if the independent contractor fails to account to the client.
Alternatively, the parties may enter into an express agreement
identifying the party that is subject to the deduction limitations.
3. Multiple-Party Reimbursement Arrangements
The proposed regulations include an example illustrating how the
rules apply to multiple-party reimbursement arrangements. Multiple-
party reimbursement arrangements are separately analyzed as a series of
two-party reimbursement arrangements. Thus, for example, an arrangement
in
[[Page 45522]]
which (1) an employee pays or incurs an expense subject to limitation,
(2) the employee is reimbursed for that expense by another party (the
initial payor), and (3) a third party reimburses the initial payor's
payment to the employee, is analyzed as two two-party reimbursement
arrangements: one arrangement between the employee and the initial
payor, and another arrangement between the initial payor and the third
party. Examples illustrate that the limitations apply to the party that
receives an accounting and that ultimately bears the expense.
Effective/Applicability Date
The regulations are proposed to apply to expenses paid or incurred
in taxable years beginning on or after the date these regulations are
published as final regulations in the Federal Register. However,
taxpayers may apply these regulations for taxable years beginning
before the date these regulations are published as final regulations in
the Federal Register for which the period of limitations under section
6511 has not expired.
Special Analyses
It has been determined that 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 IRS and Treasury Department request comments on all
aspects of the proposed rules. All comments will be available at
www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the hearing will be
published in the Federal Register.
Drafting Information
The principal authors of these proposed regulations are Jeffrey T.
Rodrick and Patrick Clinton of the Office of Associate Chief Counsel
(Income Tax & 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 Amendment 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 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Section 1.274-2 also issued
under 26 U.S.C. 274(o). * * *
Par. 2. Section 1.274-2 is amended by revising paragraph (f)(2)(iv)
to read as follows:
Sec. 1.274-2 Disallowance of deductions for certain expenses for
entertainment, amusement, recreation, or travel.
* * * * *
(f) * * *
(2) * * *
(iv) Reimbursed entertainment, food, or beverage expenses--(A)
Introduction. In the case of any expenditure for entertainment,
amusement, recreation, food, or beverages made by one person in
performing services for another person (whether or not the other person
is an employer) under a reimbursement or other expense allowance
arrangement, the limitations on deductions in paragraphs (a) through
(e) of this section and section 274(n)(1) apply either to the person
who makes the expenditure or to the person who actually bears the
expense, but not to both. If an expenditure of a type described in this
paragraph (f)(2)(iv) properly constitutes a dividend paid to a
shareholder, unreasonable compensation paid to an employee, a personal
expense, or other nondeductible expense, nothing in this exception
prevents disallowance of the expenditure to the taxpayer under other
provisions of the Code.
(B) Reimbursement arrangements involving employees. In the case of
an employee's expenditure for entertainment, amusement, recreation,
food, or beverages in performing services as an employee under a
reimbursement or other expense allowance arrangement with a payor (the
employer, its agent, or a third party), the limitations on deductions
in paragraphs (a) through (e) of this section and section 274(n)(1)
apply--
(1) To the employee to the extent the employer treats the
reimbursement or other payment of the expense on the employer's income
tax return as originally filed as compensation paid to the employee and
as wages to the employee for purposes of withholding under chapter 24
(relating to collection of income tax at source on wages); and
(2) To the payor to the extent the reimbursement or other payment
of the expense is not treated as compensation and wages paid to the
employee in the manner provided in paragraph (f)(2)(iv)(B)(1) of this
section (however, see paragraph (f)(2)(iv)(C) of this section if the
payor receives a payment from a third party that may be treated as a
reimbursement arrangement under that paragraph).
(C) Reimbursement arrangements involving persons that are not
employees. In the case of an expense for entertainment, amusement,
recreation, food, or beverages of a person who is not an employee
(referred to as an independent contractor) in performing services for
another person (a client or customer) under a reimbursement or other
expense allowance arrangement with the person, the limitations on
deductions in paragraphs (a) through (e) of this section and section
274(n)(1) apply to the party expressly identified in an agreement
between the parties as subject to the limitations. If an agreement
between the parties does not expressly identify the party subject to
the limitations, the limitations apply--
(1) To the independent contractor (which may be a payor described
in paragraph (f)(2)(iv)(B) of this section) to the extent the
independent contractor does not account to the client or customer
within the meaning of section 274(d) and the associated regulations;
and
(2) To the client or customer if the independent contractor
accounts to the client or customer within the meaning of section 274(d)
and the associated regulations. See also Sec. 1.274-5.
(D) Reimbursement or other expense allowance arrangement. The term
reimbursement or other expense allowance arrangement means--
(1) For purposes of paragraph (f)(2)(iv)(B) of this section, an
arrangement under which an employee receives an advance, allowance, or
[[Page 45523]]
reimbursement from a payor (the employer, its agent, or a third party)
for expenses the employee pays or incurs; and
(2) For purposes of paragraph (f)(2)(iv)(C) of this section, an
arrangement under which an independent contractor receives an advance,
allowance, or reimbursement from a client or customer for expenses the
independent contractor pays or incurs if either--
(a) A written agreement between the parties expressly states that
the client or customer will reimburse the independent contractor for
expenses that are subject to the limitations on deductions in
paragraphs (a) through (e) of this section and section 274(n)(1); or
(b) A written agreement between the parties expressly identifies
the party subject to the limitations.
(E) Examples. The following examples illustrate the application of
this paragraph (f)(2)(iv).
Example 1. (i) Y, an employee, performs services under an
arrangement in which L, an employee leasing company, pays Y a per
diem allowance of $10x for each day that Y performs services for L's
client, C, while traveling away from home. The per diem allowance is
a reimbursement of travel expenses for food and beverages that Y
pays in performing services as an employee. L enters into a written
agreement with C under which C agrees to reimburse L for any
substantiated reimbursements for travel expenses, including meals,
that L pays to Y. The agreement does not expressly identify the
party that is subject to the deduction limitations. Y performs
services for C while traveling away from home for 10 days and
provides L with substantiation that satisfies the requirements of
section 274(d) of $100x of meal expenses incurred by Y while
traveling away from home. L pays Y $100x to reimburse those expenses
pursuant to their arrangement. L delivers a copy of Y's
substantiation to C. C pays L $300x, which includes $200x
compensation for services and $100x as reimbursement of L's payment
of Y's travel expenses for meals. Neither L nor C treats the $100x
paid to Y as compensation or wages.
(ii) Under paragraph (f)(2)(iv)(D)(1) of this section, Y and L
have established a reimbursement or other expense allowance
arrangement for purposes of paragraph (f)(2)(iv)(B) of this section.
Because the reimbursement payment is not treated as compensation and
wages paid to Y, under section 274(e)(3)(A) and paragraph
(f)(2)(iv)(B)(1) of this section, Y is not subject to the section
274 deduction limitations. Instead, under paragraph (f)(2)(iv)(B)(2)
of this section, L, the payor, is subject to the section 274
deduction limitations unless L can meet the requirements of section
274(e)(3)(B) and paragraph (f)(2)(iv)(C) of this section.
(iii) Because the agreement between L and C expressly states
that C will reimburse L for expenses for meals incurred by employees
while traveling away from home, under paragraph (f)(2)(iv)(D)(2)(a)
of this section, L and C have established a reimbursement or other
expense allowance arrangement for purposes of paragraph
(f)(2)(iv)(C) of this section. L accounts to C for C's reimbursement
in the manner required by section 274(d) by delivering to C a copy
of the substantiation L received from Y. Therefore, under section
274(e)(3)(B) and paragraph (f)(2)(iv)(C)(2) of this section, C and
not L is subject to the section 274 deduction limitations.
Example 2. (i) The facts are the same as in Example 1 except
that, under the arrangements between Y and L and between L and C, Y
provides the substantiation of the expenses directly to C, and C
pays the per diem directly to Y.
(ii) Under paragraph (f)(2)(iv)(D)(1) of this section, Y and C
have established a reimbursement or other expense allowance
arrangement for purposes of paragraph (f)(2)(iv)(C) of this section.
Because Y substantiates directly to C and the reimbursement payment
was not treated as compensation and wages paid to Y, under section
274(e)(3)(A) and paragraph (f)(2)(iv)(C)(1) of this section Y is not
subject to the section 274 deduction limitations. Under paragraph
(f)(2)(iv)(C)(2) of this section, C, the payor, is subject to the
section 274 deduction limitations.
Example 3. (i) The facts are the same as in Example 1, except
that the written agreement between L and C expressly provides that
the limitations of this section will apply to C.
(ii) Under paragraph (f)(2)(iv)(D)(2)(b) of this section, L and
C have established a reimbursement or other expense allowance
arrangement for purposes of paragraph (f)(2)(iv)(C) of this section.
Because the agreement provides that the 274 deduction limitations
apply to C, under section 274(e)(3)(B) and paragraph (f)(2)(iv)(C)
of this section, C and not L is subject to the section 274 deduction
limitations..
Example 4. (i) The facts are the same as in Example 1, except
that the agreement between L and C does not provide that C will
reimburse L for travel expenses.
(ii) The arrangement between L and C is not a reimbursement or
other expense allowance arrangement within the meaning of section
274(e)(3)(B) and paragraph (f)(2)(iv)(D)(2) of this section.
Therefore, even though L accounts to C for the expenses, L is
subject to the section 274 deduction limitations.
(F) Effective/applicability date. This paragraph (f)(2)(iv) applies
to expenses paid or incurred in taxable years beginning after the date
these regulations are published as final regulations in the Federal
Register.
* * * * *
Par. 3. Section 1.274-8 is revised to read as follows:
Sec. 1.274-8 Effective/applicability date.
Except as provided in Sec. Sec. 1.274-2(a), 1.274-2(e), 1.274-
2(f)(2)(iv)(F) and 1.274-5, Sec. Sec. 1.274-1 through 1.274-7 apply to
taxable years ending after December 31, 1962.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-18691 Filed 7-31-12; 8:45 am]
BILLING CODE 4830-01-P