Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Rules and Regulations 4121

Dated: August 6, 1999.

Margaret M. Dotzel,

Acting Associate Commissioner for Policy.

[FR Doc. 00–1785 Filed 1–25–00; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8864]

RIN 1545–AV87; 1545–AT97

Substantiation of Business Expenses

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary

regulations.

SUMMARY: This document contains final

and temporary Income Tax Regulations

that provide rules for the substantiation

of certain business expenses under

sections 62 and 274 of the Internal

Revenue Code (Code). Individuals and

other taxpayers who claim or reimburse

certain business expenses will be

affected by these regulations.

DATES: Effective date. These regulations

are effective January 26, 2000.

Date of Applicability. For date of

applicability, see §§ 1.62–2(m) and

1.274–5(m).

FOR FURTHER INFORMATION CONTACT:

Edwin B. Cleverdon, (202) 622–4920

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3507)

under control number 1545–0771.

Responses to this collection of

information are required in order to

deduct certain business expenses or

exclude from income certain reimbursed

business expenses of employees.

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.

The estimated annual burden per

respondent or recordkeeper varies from

10 minutes to 20 hours, depending on

individual circumstances, with an

estimated average of 1.3 hours.

Comments concerning the accuracy of

this burden estimate and suggestions or

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, OP:FS:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to this

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

On November 6, 1985, the IRS

published in the Federal Register (50

FR 46006) temporary regulations (TD

8061) adding § 1.274–5T regarding

substantiation of expenses with

documentary evidence under section

274(d) of the Code. A notice of proposed

rulemaking (LR–145–84, 1985–2 C.B.

809) cross-referencing the temporary

regulations was published in the

Federal Register (50 FR 46087) for the

same day. The notice of proposed

rulemaking invited comments on only

those portions of the temporary

regulations under § 1.274–5T that

amended § 1.274–5 (now designated

§ 1.274–5A) to reflect contemporaneous

legislation.

On March 25, 1997, the IRS published

in the Federal Register (62 FR 13988)

temporary regulations (TD 8715)

amending paragraphs (c)(2)(iii)(B) and

(f)(4) of § 1.274–5T. The amendments

raised the receipt threshold from $25 to

$75 and authorized 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). A notice of proposed

rulemaking (REG–209785–95, 1997–1

C.B. 753) cross-referencing the

temporary regulations was published in

the Federal Register (62 FR 14051) for

the same day.

On October 1, 1998, the IRS published

a notice of proposed rulemaking (REG–

122488–97, 1998–42 I.R.B. 19) in the

Federal Register (63 FR 52660),

proposing amendments to the Income

Tax Regulations (26 CFR part 1) under

sections 62(c) and 274(d) of the Code

regarding substantiation of expenses

using mileage and per diem rates.

Specifically, the amendments removed

the limitation in § 1.274(d)–1(a)(3) that

provides that mileage allowances

prescribed in rules by the Commissioner

are available only to the owner of a

vehicle. On that date the IRS also

published temporary Income Tax

Regulations (TD 8784, 1998–42 I.R.B. 4)

under section 62(c) and 274(d) of the

Code in the Federal Register (63 FR

52600), relating to the substantiation of

expenses under a reimbursement or

other expense allowance arrangement.

Comments were received in response

to the 1985 proposed regulations, and a

public hearing was held on March 3,

1986. Few of the written comments, and

none of the comments at the hearing,

relate to the provisions in this Treasury

Decision. Written comments were also

received with respect to the 1997

proposed regulations, but no public

hearing was requested or held. No

comments were received, and no

hearings were requested or held, with

respect to the 1998 proposed

regulations.

Summary and Discussion of Comments

This Treasury Decision incorporates

the suggestions made in the written

comments with some exceptions. With

respect to the 1985 regulations, one

commentator suggested that the

definition of an adequate accounting in

§ 1.274–5T(f)(4), in the case of

automobile expense reimbursements,

should be satisfied by a reimbursement

based on data on the type of automobile

and local operating and fixed costs.

Although this suggestion has not been

specifically adopted in the final

regulations, the standard mileage rate

revenue procedure provides for this

type of substantiation. See, e.g., section

8 of Rev. Proc. 98–63, 1998–52 I.R.B. 25.

Another commentator suggested, inter

alia, (1) adding exceptions to the

documentary evidence requirements

under § 1.274–5T(c)(2)(iii) and (2)

providing that the Commissioner, in

establishing a meal allowance under

§ 1.274–5T(j), may allow a specific

dollar allowance per meal. These

suggestions are not adopted because the

intent of the regulations is to give the

Commissioner the discretion to make

these practical decisions.

Similarly, with respect to the 1997

regulations, commentators made

suggestions regarding the specific

content of the guidance to be issued

under the proposed regulations at

§ 1.274–5(f)(4). We did not incorporate

these suggestions because the

regulations are designed to describe

appropriate published guidance of

general applicability, not the specific

4122 Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Rules and Regulations

provisions of such guidance. However,

all of the comments will be taken into

consideration by the Commissioner in

issuing published guidance.

Explanation of Provisions

This Treasury Decision adopts the

revision to § 1.62–2(e)(2) proposed in

REG–122488–97, with minor changes.

This Treasury Decision also adopts

§§ 1.274–5(c)(2)(iii), (f)(4), (g), (j), and

(m) as proposed by LR–216–84,

modified by REG–209785–95 and REG122488–97, and removes and reserves

the corresponding provisions in

§ 1.274–5T. Finally, this Treasury

Decision adopts the proposal in REG–

122488–97 to remove §§ 1.62–2T,

1.274(d)–1, and 1.274(d)–1T.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. 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. Sections 1.274–5(c)(2)(iii)

and (f) were originally proposed by a

notice of proposed rulemaking (LR–

145–84) that was issued on November 6,

1985. Therefore, the Regulatory

Flexibility Act (5 U.S.C. chapter 6) does

not apply with respect to those

collections of information. With respect

to the collection of information in

§ 1.274–5(c)(iii)(B) as proposed by REG–

209785–95 on March 25, 1997, it is

hereby certified that these regulations

will 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, the IRS

submitted the notices of proposed

rulemaking preceding these regulations

to the Chief Counsel for Advocacy of the

Small Business Administration for

comment on its impact on small

business.

Drafting Information

The principal author of these final

and temporary regulations is Edwin B.

Cleverdon, Office of the Assistant Chief

Counsel (Income Tax and Accounting).

However, personnel from other offices

of the IRS and Treasury Department

participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding an entry

to read in part as follows:

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

Section 1.274–5 also issued under 26

U.S.C. 274(d). * * *

PAR. 2. Section 1.62–2 is amended by:

1. Revising paragraph (e)(2).

2. Removing the last two sentences of

paragraph (m).

3. Adding a sentence to the end of

paragraph (m).

The revision and addition read as

follows:

§ 1.62–2 Reimbursement and other

expense allowance arrangements.

* * * * *

(e) * * *

(2) Expenses governed by section

274(d). An arrangement that reimburses

travel, entertainment, use of a passenger

automobile or other listed property, or

other business expenses governed by

section 274(d) meets the requirements of

this paragraph (e)(2) if information

sufficient to satisfy the substantiation

requirements of section 274(d) and the

regulations thereunder is submitted to

the payor. See § 1.274–5. Under section

274(d), information sufficient to

substantiate the requisite elements of

each expenditure or use must be

submitted to the payor. For example,

with respect to travel away from home,

§ 1.274–5(b)(2) requires that information

sufficient to substantiate the amount,

time, place, and business purpose of the

expense must be submitted to the payor.

Similarly, with respect to use of a

passenger automobile or other listed

property, § 1.274–5(b)(6) requires that

information sufficient to substantiate

the amount, time, use, and business

purpose of the expense must be

submitted to the payor. See § 1.274–5(g),

however, which grants the

Commissioner authority to prescribe

rules permitting the amount of certain

expenses to be deemed substantiated to

the payor (in lieu of substantiating the

actual amount of such expenses) by

means of per diem or mileage rates for

travel away from home or transportation

expenses. See also § 1.274–5(j)(1), which

grants the Commissioner the authority

to establish a method under which a

taxpayer may use a specified amount for

meals while traveling away from home

in lieu of substantiating the actual cost

of meals, and § 1.274–5(j)(2), which

grants the Commissioner the authority

to establish a method under which a

taxpayer may use mileage rates to

determine the amount of the ordinary

and necessary expenses of using a

vehicle for local transportation and

transportation to, from, and at the

destination while traveling away from

home in lieu of substantiating the actual

costs. Substantiation of the amount of a

business expense in accordance with

rules prescribed pursuant to the

authority granted by § 1.274–5(g) or (j)

will be treated as substantiation of the

amount of such expense for purposes of

this section.

* * * * *

(m) * * * Paragraph (e)(2) of this

section applies to payments made under

reimbursement or other expense

allowance arrangements received by an

employee with respect to expenses paid

or incurred after December 31, 1997.

§ 1.62–2T [Removed]

Par. 3. Section 1.62–2T is removed.

Par. 4. Section 1.274–5 is added to

read as follows:

§ 1.274–5 Substantiation requirements.

(a) and (b) [Reserved]. For further

guidance, see § 1.274–5T(a) and (b).

(c) Rules of substantiation—(1)

[Reserved]. For further guidance, see

§ 1.274–5T(c)(1).

(2) Substantiation by adequate

records—(i) and (ii) [Reserved]. For

further guidance, see § 1.274–5T(c)(2)(i)

and (ii).

(iii) Documentary evidence—(A)

Except as provided in paragraph

(c)(2)(iii)(B), documentary evidence,

such as receipts, paid bills, or similar

evidence sufficient to support an

expenditure, is required for—

(1) Any expenditure for lodging while

traveling away from home, and

(2) Any other expenditure of $75 or

more except, for transportation charges,

documentary evidence will not be

required if not readily available.

(B) The Commissioner, in his or her

discretion, may prescribe rules waiving

the documentary evidence requirements

in circumstances where it is

Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Rules and Regulations 4123

impracticable for such documentary

evidence to be required. Ordinarily,

documentary evidence will be

considered adequate to support an

expenditure if it includes sufficient

information to establish the amount,

date, place, and the essential character

of the expenditure. For example, a hotel

receipt is sufficient to support

expenditures for business travel if it

contains the following: name, location,

date, and separate amounts for charges

such as for lodging, meals, and

telephone. Similarly, a restaurant

receipt is sufficient to support an

expenditure for a business meal if it

contains the following: name and

location of the restaurant, the date and

amount of the expenditure, the number

of people served, and, if a charge is

made for an item other than meals and

beverages, an indication that such is the

case. A document may be indicative of

only one (or part of one) element of an

expenditure. Thus, a cancelled check,

together with a bill from the payee,

ordinarily would establish the element

of cost. In contrast, a cancelled check

drawn payable to a named payee would

not by itself support a business

expenditure without other evidence

showing that the check was used for a

certain business purpose.

(iv) and (v) [Reserved]. For further

guidance, see § 1.274–5T(c)(2)(iv) and

(v).

(d) and (e) [Reserved]. For further

guidance, see § 1.274–5T(d) and (e).

(f) Reporting and substantiation of

expenses of certain employees for travel,

entertainment, gifts, and with respect to

listed property—(1) through (3)

[Reserved]. For further guidance, see

§ 1.274–5T(f)(1) through (3).

(4) Definition of an adequate

accounting to the employer—(i) In

general. For purposes of this paragraph

(f) an adequate accounting means the

submission to the employer of an

account book, diary, log, statement of

expense, trip sheet, or similar record

maintained by the employee in which

the information as to each element of an

expenditure or use (described in

paragraph (b) of this section) is recorded

at or near the time of the expenditure or

use, together with supporting

documentary evidence, in a manner that

conforms to all the adequate records

requirements of paragraph (c)(2) of this

section. An adequate accounting

requires that the employee account for

all amounts received from the employer

during the taxable year as advances,

reimbursements, or allowances

(including those charged directly or

indirectly to the employer through

credit cards or otherwise) for travel,

entertainment, gifts, and the use of

listed property. The methods of

substantiation allowed under paragraph

(c)(4) or (c)(5) of this section also will

be considered to be an adequate

accounting if the employer accepts an

employee’s substantiation and

establishes that such substantiation

meets the requirements of paragraph

(c)(4) or (c)(5). For purposes of an

adequate accounting, the method of

substantiation allowed under paragraph

(c)(3) of this section will not be

permitted.

(ii) Procedures for adequate

accounting without documentary

evidence. The Commissioner may, in his

or her discretion, prescribe rules under

which an employee may make an

adequate accounting to an 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.

(5) [Reserved]. For further guidance,

see § 1.274–5T(f)(5).

(g) Substantiation by reimbursement

arrangements or per diem, mileage, and

other traveling allowances—(1) In

general. The Commissioner may, in his

or her discretion, prescribe rules in

pronouncements of general applicability

under which allowances for expenses

described in paragraph (g)(2) of this

section will, if in accordance with

reasonable business practice, be

regarded as equivalent to substantiation

by adequate records or other sufficient

evidence, for purposes of paragraph (c)

of this section, of the amount of the

expenses and as satisfying, with respect

to the amount of the expenses, the

requirements of an adequate accounting

to the employer for purposes of

paragraph (f)(4) of this section. If the

total allowance received exceeds the

deductible expenses paid or incurred by

the employee, such excess must be

reported as income on the employee’s

return. See paragraph (j)(1) of this

section relating to the substantiation of

meal expenses while traveling away

from home, and paragraph (j)(2) of this

section relating to the substantiation of

expenses for the business use of a

vehicle.

(2) Allowances for expenses

described. An allowance for expenses is

described in this paragraph (g)(2) if it is

a—

(i) Reimbursement arrangement

covering ordinary and necessary

expenses of traveling away from home

(exclusive of transportation expenses to

and from destination);

(ii) Per diem allowance providing for

ordinary and necessary expenses of

traveling away from home (exclusive of

transportation costs to and from

destination); or

(iii) Mileage allowance providing for

ordinary and necessary expenses of

local transportation and transportation

to, from, and at the destination while

traveling away from home.

(h) [Reserved]. For further guidance,

see § 1.274–5T(h).

(i) [Reserved].

(j) Authority for optional methods of

computing certain expenses—(1) Meal

expenses while traveling away from

home. The Commissioner may establish

a method under which a taxpayer may

use a specified amount or amounts for

meals while traveling away from home

in lieu of substantiating the actual cost

of meals. The taxpayer will not be

relieved of the requirement to

substantiate the actual cost of other

travel expenses as well as the time,

place, and business purpose of the

travel. See paragraphs (b)(2) and (c) of

this section.

(2) Use of mileage rates for vehicle

expenses. The Commissioner may

establish a method under which a

taxpayer may use mileage rates to

determine the amount of the ordinary

and necessary expenses of using a

vehicle for local transportation and

transportation to, from, and at the

destination while traveling away from

home in lieu of substantiating the actual

costs. The method may include

appropriate limitations and conditions

in order to reflect more accurately

vehicle expenses over the entire period

of usage. The taxpayer will not be

relieved of the requirement to

substantiate the amount of each

business use (i.e., the business mileage),

or the time and business purpose of

each use. See paragraphs (b)(2) and (c)

of this section.

(k) and (l) [Reserved]. For further

guidance, see § 1.274–5T(k) and (l).

(m) Effective date. This section

applies to expenses paid or incurred

after December 31, 1997.

PAR. 5. Section 1.274–5T is amended

by:

1. Revising paragraphs (c)(2)(iii),

(f)(4), (g) and (j).

2. Adding a sentence at the end of

paragraph (m).

The revision and addition read as

follows:

§ 1.274–5T Substantiation requirements.

* * * * *

(c) * * *

(2) * * *

4124 Federal Register / Vol. 65, No. 17 / Wednesday, January 26, 2000 / Rules and Regulations

(iii) [Reserved]. For further guidance,

see § 1.274–5(c)(2)(iii).

* * * * *

(f) * * *

(4) [Reserved]. For further guidance,

see § 1.274–5(f)(4).

* * * * *

(g) [Reserved]. For further guidance,

see § 1.274–5(g).

* * * * *

(j) [Reserved]. For further guidance,

see § 1.274–5(j).

* * * * *

(m) Effective date. * * * Paragraphs

(c)(2)(iii), (f)(4), (g), and (j) of this

section apply to expenses paid or

incurred after December 31, 1997.

§ 1.274(d)–1 [REMOVED]

Par. 6. Section 1.274(d)–1 is removed.

§ 1.274(d)–1T [REMOVED]

Par. 7. Section 1.274(d)-1T is

removed.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 8. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 9. In § 602.101, paragraph (b) is

amended by adding the following entry

to the table:

§ 602.101 OMB Control numbers

* * * * *

(b) * * *

CFR part or section where identified and described Current OMB control No.

*******

1.274–5 .......................................................................................................................................................................................... 1545–0771

*******

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: December 28, 1999.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 00–1382 Filed 1–21–00; 3:06 pm]

BILLING CODE 4830–01–U

DEPARTMENT OF DEFENSE

Department of the Army; Corps of

Engineers

33 CFR Part 207

Navigation Regulations

AGENCY: U.S. Army Corps of Engineers,

DoD.

ACTION: Final rule.

SUMMARY: The U.S. Army Corps of

Engineers is amending its regulations

which establish restricted areas at

Bonneville Lock and Dam, at McNary

Lock and Dam, at Ice Harbor Lock and

Dam, at Lower Monumental Lock and

Dam, at Little Goose Lock and Dam, and

at Lower Granite Lock and Dam on the

Columbia and Snake Rivers, Oregon and

Washington. The Corps is making

adjustments in the restricted area

boundaries to provide a greater margin

of vessel safety from sudden dangerous

currents, turbulence, and whirlpools

caused by the operation of spillways,

electrical generators, and navigation

locks. Vessels, except Government

vessels, are prohibited within the

restricted areas. The restricted areas

upstream and downstream from the

spillways can be extremely dangerous

should vessels be in the restricted area

when water is released. The electrical

generators and spillway gates are

remotely controlled from Portland and

not operated by personnel at the facility.

The equipment can be activated within

seconds, creating very dangerous water

currents, turbulence, and whirlpools.

Operation of the navigation lock also

creates a very dangerous condition in

the downstream area. Water that is

discharged from the lock discharge

culvert can create waves up to 6 feet

high. Therefore, the downstream areas

are reclassified from ‘‘hazardous’’ to

‘‘restricted’’ at McNary Lock and Dam,

Columbia River, River Mile 292.0; at Ice

Harbor Lock and Dam, Snake River,

River Mile 9.7; at Lower Monumental

Lock and Dam, Snake River, River Mile

41.6; at Little Goose Lock and Dam,

Snake River, River Mile 70.3; and at

Lower Granite Lock and Dam, Snake

River, River Mile 107.5. A change in

alignment of the upstream restricted

areas at Bonneville Lock and Dam, at

McNary Lock and Dam and at Ice

Harbor Lock and Dam are to provide

additional protection for the boating

public.

DATES: The final rule is effective

February 25, 2000.

ADDRESSES: U.S. Army Corps of

Engineers, ATTN: CECW–OD, 20

Massachusetts Avenue, NW.,

Washington, DC 20314–1000.

FOR FURTHER INFORMATION CONTACT: Mr.

James Hilton, Dredging and Navigation

Branch, CECW–OD at (202) 761–8830,

or Jim Runkles, (541) 374–8344, ext. 254

for Bonneville Lock and Dam or Ms.

Ann Glassley at (509) 527–7115 for

McNary, Ice Harbor, Lower

Monumental, Little Goose, and Lower

Granite Locks and Dams.

SUPPLEMENTARY INFORMATION: The notice

of proposed rulemaking was published

on Wednesday, October 13, 1999, vol.

64, No. 197, pages 55441—55442.

Pursuant to its authorities in Sections 4,

7, and 28 of the Rivers and Harbors Act

of 1917 (40 Stat. 266; 33 U.S.C. 1) and

Chapter XIX of the Army

Appropriations Act of 1919 (40 Stat.

892; 33 U.S.C. 3), the Corps is amending

its regulations in 33 CFR Part

207.718(v), (w)(1), (w)(4), (w)( 5), (w)(6),

(w)(7), and (w)(8). Paragraph (v) is

deleted since the area below the dams

at McNary, Ice Harbor, Lower

Monumental, Little Goose, and Lower

Granite is changed from ‘‘hazardous’’ to

‘‘restricted’’. Signs mark the restricted

areas. The redesignation of the

downstream area from ‘‘hazardous’’ to

‘‘restricted’’ is to prohibit vessels,

except government vessels, from

entering the area. Under a hazardous

designation, vessels could enter at their

own risk. An increase in fishing vessels

into the hazardous area in pursuit of

adult salmon and steelhead is of great

concern, since the electrical generators

and spillway gates are operated

remotely from Portland. There are no

personnel at the dam to warn boaters of

an immediate release of water.

Paragraph (w)(1) is amended to provide

an additional margin of safety for

recreational boaters operating above and

below Bonneville Lock and Dam during

the discharge of water from the Juvenile

Bypass System outfall structures.

Paragraphs (w)(4), (w)(5), (w)(6), (w)(7),

and (w)(8) are amended to provide a

greater margin of safety for recreational