Federal Register / Vol. 61, No. 105 / Thursday, May 30, 1996 / Rules and Regulations 27005

Dated: May 22, 1996.

William K. Hubbard,

Associate Commissioner for Policy

Coordination.

[FR Doc. 96–13537 Filed 5–29–96; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8666]

RIN 1545–AS74

Payment by Employer of Expenses for

Meals and Entertainment, Club Dues,

and Spousal Travel

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to reimbursement

and other expense allowance

arrangements for expenses of business

meals and entertainment that are

disallowed as a deduction under section

274(n), and working condition fringe

benefit treatment for expenses for club

dues and spousal travel that are

disallowed as a deduction under

sections 274(a)(3) and 274(m)(3). The

final regulations reflect changes to the

law made by the Omnibus Budget

Reconciliation Act of 1993. The persons

affected by the final regulations are

persons who provide or receive the use

of business meals and entertainment,

club membership dues, or spousal travel

expenses.

EFFECTIVE DATE: May 30, 1996.

FOR FURTHER INFORMATION CONTACT:

Concerning regulations under sections

62 and 132, David N. Pardys, (202) 622–

6040; concerning regulations under

section 274, John T. Sapienza, Jr., (202)

622–4920 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

On December 16, 1994, a notice of

proposed rulemaking relating to

payment by an employer of expenses for

business meals and entertainment, club

dues, and spousal travel was published

in the Federal Register (59 FR 64909).

A public hearing was held on April 14,

1995.

Written comments responding to the

notice were received. After

consideration of all the comments, the

proposed regulations are adopted as

revised by this Treasury decision. The

significant comments on the proposed

regulations and the principal revisions

made in the final regulations are

discussed below.

Explanation of Provisions

This Treasury decision contains final

regulations to the Income Tax

Regulations under sections 62(c),

132(d), and 274 of the Internal Revenue

Code (Code) to reflect changes made to

section 274 of the Code by sections

13209, 13210, and 13272 of OBRA (107

Stat. 469, 542). The OBRA provisions

amended section 274 of the Code by (1)

limiting the deductible portion of meal

and entertainment expenses to 50

percent; (2) eliminating the deduction

for club dues; and (3) restricting the

deduction for spousal travel. The

amendments to the regulations under

sections 62 and 132 of the Code concern

the income tax consequences to

employees when their employer’s (or

third party payor’s) deduction is

disallowed by the amendments to

section 274 of the Code.

Comments to the proposed

regulations concerned whether payment

of expenses for club dues and spousal

travel by an employer exempt from

taxation under subtitle A of the Internal

Revenue Code were eligible for the

working condition fringe exclusion. The

final regulations provide that any

reference in the regulations to an

employer’s deduction disallowed by

sections 274(a)(3) or 274(m)(3) of the

Code will be treated as a reference to the

amount which would be disallowed as

a deduction to the employer if the

employer were not exempt from

taxation.

Other comments suggested that the

final regulation extend the section

274(e)(2) option of an employer to avoid

the section 274 disallowance for

payment of spousal travel to persons

who pay expenses described in section

274(e)(9). To achieve consistent results

for payments to independent contractors

and employees with respect to spousal

travel, the final regulations adopted this

suggestion.

A number of comments requested

clarification of the term other individual

in section 274(m)(3). In particular, the

comments asked that the term be

clarified so as not to preclude the

deduction for travel expenses of a

business associate accompanying the

taxpayer (or an officer or employee of

the taxpayer) on business travel. The

regulation was amended to reflect these

comments.

One comment concerned the person

to whom a fringe benefit is taxable. The

rules concerning to whom a fringe

benefit is taxable are set forth in § 1.61–

21(a)(4). For rules concerning

volunteers, see § 1.132–5(r).

Several comments involved the

amount of the employer’s disallowed

deduction when the expenses of a

spouse, dependent, or other individual

accompanying an employee on a

noncommercial flight qualify as a

working condition fringe benefit. This

issue is under further consideration. In

addition, other comments requested

clarification of what constitutes a

deductible expenditure for spousal

travel under the general rule of section

162(a). The rules for deducting travel

expenses of a spouse are in § 1.162–2(c).

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 has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

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

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

Drafting Information. The principal

authors of these regulations are David N.

Pardys, Office of the Associate Chief Counsel

(Employee Benefits and Exempt

Organizations), and John T. Sapienza, Jr.,

Office of the Assistant Chief Counsel (Income

Tax and Accounting), IRS. Personnel from

other offices of the IRS and Treasury

Department also participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read, in part, as

follows:

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

Par. 2. In § 1.62–2, paragraph (h)(1) is

amended by adding a second sentence

at the end of the paragraph to read as

follows:

§ 1.62–2 Reimbursements and other

expense allowance arrangements.

* * * * *
27006 Federal Register / Vol. 61, No. 105 / Thursday, May 30, 1996 / Rules and Regulations

(h) * * * (1) * * * If an arrangement

provides advances, allowances, or

reimbursements for meal and

entertainment expenses and a portion of

the payment is treated as paid under a

nonaccountable plan under paragraph

(d)(2) of this section due solely to

section 274(n), then notwithstanding

paragraph (h)(2)(ii) of this section, these

nondeductible amounts are neither

treated as gross income nor subject to

withholding and payment of

employment taxes.

* * * * *

Par. 3. In § 1.132–5, paragraphs (s)

and (t) are added to read as follows:

§ 1.132–5 Working condition fringes.

* * * * *

(s) Application of section 274(a)(3)—

(1) In general. If an employer’s

deduction under section 162(a) for dues

paid or incurred for membership in any

club organized for business, pleasure,

recreation, or other social purpose is

disallowed by section 274(a)(3), the

amount, if any, of an employee’s

working condition fringe benefit relating

to an employer-provided membership in

the club is determined without regard to

the application of section 274(a) to the

employee. To be excludible as a

working condition fringe benefit,

however, the amount must otherwise

qualify for deduction by the employee

under section 162(a). If an employer

treats the amount paid or incurred for

membership in any club organized for

business, pleasure, recreation, or other

social purpose as compensation under

section 274(e)(2), then the expense is

deductible by the employer as

compensation and no amount may be

excluded from the employee’s gross

income as a working condition fringe

benefit. See § 1.274–2(f)(2)(iii)(A).

(2) Treatment of tax-exempt

employers. In the case of an employer

exempt from taxation under subtitle A

of the Internal Revenue Code, any

reference in this paragraph (s) to a

deduction disallowed by section

274(a)(3) shall be treated as a reference

to the amount which would be

disallowed as a deduction by section

274(a)(3) to the employer if the

employer were not exempt from

taxation under subtitle A of the Internal

Revenue Code.

(3) Examples. The following examples

illustrate this paragraph (s):

Example 1. Assume that Company X

provides Employee B with a country club

membership for which it paid $20,000. B

substantiates, within the meaning of

paragraph (c) of this section, that the club

was used 40 percent for business purposes.

The business use of the club (40 percent) may

be considered a working condition fringe

benefit, notwithstanding that the employer’s

deduction for the dues allocable to the

business use is disallowed by section

274(a)(3), if X does not treat the club

membership as compensation under section

274(e)(2). Thus, B may exclude from gross

income $8,000 (40 percent of the club dues,

which reflects B’s business use). X must

report $12,000 as wages subject to

withholding and payment of employment

taxes (60 percent of the value of the club

dues, which reflects B’s personal use). B must

include $12,000 in gross income. X may

deduct as compensation the amount it paid

for the club dues which reflects B’s personal

use provided the amount satisfies the other

requirements for a salary or compensation

deduction under section 162.

Example 2. Assume the same facts as

Example 1 except that Company X treats the

$20,000 as compensation to B under section

274(e)(2). No portion of the $20,000 will be

considered a working condition fringe benefit

because the section 274(a)(3) disallowance

will apply to B. Therefore, B must include

$20,000 in gross income.

(t) Application of section 274(m)(3)—

(1) In general. If an employer’s

deduction under section 162(a) for

amounts paid or incurred for the travel

expenses of a spouse, dependent, or

other individual accompanying an

employee is disallowed by section

274(m)(3), the amount, if any, of the

employee’s working condition fringe

benefit relating to the employerprovided travel is determined without

regard to the application of section

274(m)(3). To be excludible as a

working condition fringe benefit,

however, the amount must otherwise

qualify for deduction by the employee

under section 162(a). The amount will

qualify for deduction and for exclusion

as a working condition fringe benefit if

it can be adequately shown that the

spouse’s, dependent’s, or other

accompanying individual’s presence on

the employee’s business trip has a bona

fide business purpose and if the

employee substantiates the travel within

the meaning of paragraph (c) of this

section. If the travel does not qualify as

a working condition fringe benefit, the

employee must include in gross income

as a fringe benefit the value of the

employer’s payment of travel expenses

with respect to a spouse, dependent, or

other individual accompanying the

employee on business travel. See

§§ 1.61–21(a)(4) and 1.162–2(c). If an

employer treats as compensation under

section 274(e)(2) the amount paid or

incurred for the travel expenses of a

spouse, dependent, or other individual

accompanying an employee, then the

expense is deductible by the employer

as compensation and no amount may be

excluded from the employee’s gross

income as a working condition fringe

benefit. See § 1.274–2(f)(2)(iii)(A).

(2) Treatment of tax-exempt

employers. In the case of an employer

exempt from taxation under subtitle A

of the Internal Revenue Code, any

reference in this paragraph (t) to a

deduction disallowed by section

274(m)(3) shall be treated as a reference

to the amount which would be

disallowed as a deduction by section

274(m)(3) to the employer if the

employer were not exempt from

taxation under subtitle A of the Internal

Revenue Code.

Par. 4. The last sentence of § 1.274–

1 is revised to read as follows:

§ 1.274–1 Disallowance of certain

entertainment, gift and travel expenses.

* * * For specific provisions with

respect to the deductibility of

expenditures: for an activity of a type

generally considered to constitute

entertainment, amusement, or

recreation, and for a facility used in

connection with such an activity, as

well as certain travel expenses of a

spouse, etc., see § 1.274–2; for expenses

for gifts, see § 1.274–3; for expenses for

foreign travel, see § 1.274–4; for

expenditures deductible without regard

to business activity, see § 1.274–6; and

for treatment of personal portion of

entertainment facility, see § 1.274–7.

Par. 5. Section 1.274–2 is amended as

follows:

1. The section heading for § 1.274–2 is

revised.

2. In paragraph (c)(6), a second

sentence is added at the end of the

paragraph.

3. The paragraph heading for

paragraph (f)(2)(i) is revised.

4. Paragraph (f)(2)(iii) is revised.

5. Paragraph (g) is added.

The revised and added provisions

read as follows:

§ 1.274–2 Disallowance of deductions for

certain expenses for entertainment,

amusement, recreation, or travel.

* * * * *

(c) * * *

(6) * * * This paragraph (c)(6)

applies to club dues paid or incurred

before January 1, 1987.

* * * * *

(f) * * *

(2) * * *

(i) Business meals and similar

expenditures paid or incurred before

January 1, 1987—* * *

* * * * *

(iii) Certain entertainment and travel

expenses treated as compensation—(A)

In general. Any expenditure by a

taxpayer for entertainment (or for use of

a facility in connection therewith) or for

travel described in section 274(m)(3), if

an employee is the recipient of the
Federal Register / Vol. 61, No. 105 / Thursday, May 30, 1996 / Rules and Regulations 27007

entertainment or travel, is not subject to

the limitations on allowability of

deductions provided for in paragraphs

(a) through (e) of this section to the

extent that the expenditure is treated by

the taxpayer—

(1) On the taxpayer’s income tax

return as originally filed, as

compensation paid to the employee; and

(2) As wages to the employee for

purposes of withholding under chapter

24 (relating to collection of income tax

at source on wages).

(B) Expenses includible in income of

persons who are not employees. Any

expenditure by a taxpayer for

entertainment (or for use of a facility in

connection therewith), or for travel

described in section 274(m)(3), is not

subject to the limitations on allowability

of deductions provided for in

paragraphs (a) through (e) of this section

to the extent the expenditure is

includible in gross income as

compensation for services rendered, or

as a prize or award under section 74, by

a recipient of the expenditure who is

not an employee of the taxpayer. The

preceding sentence shall not apply to

any amount paid or incurred by the

taxpayer if such amount is required to

be included (or would be so required

except that the amount is less that $600)

in any information return filed by such

taxpayer under part III of subchapter A

of chapter 61 and is not so included. See

section 274(e)(9).

(C) Example. The following example

illustrates the provisions this paragraph

(f):

Example. If an employer rewards the

employee (and the employee’s spouse) with

an expense paid vacation trip, the expense is

deductible by the employer (if otherwise

allowable under section 162 and the

regulations thereunder) to the extent the

employer treats the expenses as

compensation and as wages. On the other

hand, if a taxpayer owns a yacht which the

taxpayer uses for the entertainment of

business customers, the portion of salary

paid to employee members of the crew which

is allocable to use of the yacht for

entertainment purposes (even though treated

on the taxpayer’s tax return as compensation

and treated as wages for withholding tax

purposes) would not come within this

exception since the members of the crew

were not recipients of the entertainment. If

an expenditure of a type described in this

subdivision properly constitutes a dividend

paid to a shareholder or if it constitutes

unreasonable compensation paid to an

employee, nothing in this exception prevents

disallowance of the expenditure to the

taxpayer under other provisions of the

Internal Revenue Code.

* * * * *

(g) Additional provisions of section

274—travel of spouse, dependent or

others. Section 274(m)(3) provides that

no deduction shall be allowed under

this chapter (except section 217) for

travel expenses paid or incurred with

respect to a spouse, dependent, or other

individual accompanying the taxpayer

(or an officer or employee of the

taxpayer) on business travel, unless

certain conditions are met. As provided

in section 274(m)(3), the term other

individual does not include a business

associate (as defined in paragraph

(b)(2)(iii) of this section) who otherwise

meets the requirements of sections

274(m)(3)(B) and (C).

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: March 26, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–13298 Filed 5–29–96; 8:45 am]

BILLING CODE 4830–01–P

26 CFR Parts 31 and 602

[TD 8672]

RIN 1545–AT86

Reporting of Nonpayroll Withheld Tax

Liabilities

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the reporting of

nonpayroll withheld income taxes

under section 6011 of the Internal

Revenue Code. The final regulations

require a person to file Form 945,

Annual Return of Withheld Federal

Income Tax, only for a calendar year in

which the person is required to

withhold Federal income tax from

nonpayroll payments.

EFFECTIVE DATE: These regulations are

effective May 30, 1996.

FOR FURTHER INFORMATION CONTACT:

Vincent G. Surabian, 202–622–6232 (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 (44 U.S.C. 3507) under

control number 1545–1413. Responses

to this collection of information are

required by the IRS to monitor

compliance with the Federal tax rules

related to the reporting and deposit of

nonpayroll withheld income taxes.

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.

Estimates of the reporting burden in

these final regulations are reflected in

the burden of Form 945.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T: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 October 16, 1995, final and

temporary regulations (TD 8624)

relating to the reporting of nonpayroll

withheld income taxes under section

6011 were published in the Federal

Register (60 FR 53509). A notice of

proposed rulemaking (IA–30–95) crossreferencing the temporary regulations

was published in the Federal Register

for the same day (60 FR 53561).

The IRS received no written

comments responding to the notice.

Accordingly, the regulations proposed

by IA–30–95 are adopted as proposed

with a minor editorial change.

Explanation of Provisions

These final regulations remove the

requirement that, once a person files a

Form 945 for a calendar year, the person

must file a Form 945 every subsequent

year until the person files a final return.

Under these final regulations, a person

must file a Form 945 only for a calendar

year in which the person is required to

withhold Federal income tax from

nonpayroll payments.

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) and the Regulatory

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

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue