(a) In general. No deduction shall be allowed for any expenditure with respect to:
(1) Traveling away from home
(including meals and lodging) deductible under section 162 or 212,
(2) Any activity which is of a type generally
considered to constitute entertainment, amusement, or recreation, or with
respect to a facility used in connection with such an activity, including the
items specified in section 274(e), or
(3) Gifts defined in section 274, unless the
taxpayer substantiates such expenditure as provided in paragraph (c) of this
section. This limitation supersedes with respect to any such expenditure the
doctrine of Cohan v. Commissioner (C.C.A. 2d 1930) 39 F. 2d 540. The decision
held that, where the evidence indicated a taxpayer incurred deductible travel
or entertainment expense but the exact amount could not be determined, the
court should make a close approximation and not disallow the deduction
entirely. Section 274(d) contemplates that no deduction shall be allowed a
taxpayer for such expenditures on the basis of such approximations or
unsupported testimony of the taxpayer. For purposes of this section, the term
entertainment means entertainment, amusement, or recreation
and use of a facility therefore; and the term expenditure
includes expenses and items (including items such as losses and
depreciation).
(b) Elements of an expenditure -
(1)
In general. Section
274(d) and this section contemplate that no deduction shall be allowed for any
expenditure for travel, entertainment, or a gift unless the taxpayer
substantiates the following elements for each such expenditure
(i) Amount;
(ii) Time and place of travel or
entertainment (or use of a facility with respect to entertainment), or date and
description of a gift;
(iii)
Business purpose; and
(iv) Business
relationship to the taxpayer of each person entertained, using an entertainment
facility or receiving a gift.
(2)
Travel. The elements to
be proved with respect to an expenditure for travel are
(i)
Amount. Amount of each
separate expenditure for traveling away from home, such as cost of
transportation or lodging, except that the daily cost of the traveler's own
breakfast, lunch, and dinner and of expenditures incidental to such travel may
be aggregated, if set forth in reasonable categories, such as for meals, for
gasoline and oil, and for taxi fares;
(ii)
Time. Dates of
departure and return for each trip away from home, and number of days away from
home spent on business;
(iii)
Place. Destinations or locality of travel, described by name
of city or town or other similar designation; and
(iv)
Business purpose.
Business reason for travel or nature of the business benefit derived or
expected to be derived as a result of travel.
(3)
Entertainment in
general. Elements to be proved with respect to an expenditure for
entertainment are: (i)
Amount. Amount of each separate expenditure for entertainment
except that such incidental items as taxi fares or telephone calls may be
aggregated on a daily basis;
(ii)
Time. Date of entertainment;
(iii)
Place. Name, if any
address or location, and designation of type of entertainment, such as dinner
or theater, if such information is not apparent from the designation of the
place;
(iv)
Business
purpose. Business reason for the entertainment or nature of business
benefit derived or expected to be derived as a result of the entertainment and,
except in the case of business meals described in section 274(e)(1), the nature
of any business discussion or activity;
(v)
Business relationship.
Occupation or other information relating to the person or persons entertained,
including name, title, or other designation, sufficient to establish business
relationship to the taxpayer.
(4)
Entertainment directly preceding
or following a substantial and bona fide business discussion. If a
taxpayer claims a deduction for entertainment directly preceding or following a
substantial and bona fide business discussion on the ground that such
entertainment was associated with the active conduct of the taxpayer's trade or
business, the elements to be proved with respect to such expenditure, in
addition to those enumerated in subparagraph (3)(i), (ii), (iii), and (v) of
this paragraph, are:(i)
Time. Date and duration of business discussion;
(ii)
Place. Place of
business discussion;
(iii)
Business purpose. Nature of business discussion, and business
reason for the entertainment or nature of business benefit derived or expected
to be derived as the result of the entertainment;
(iv)
Business relationship.
Identification of those persons entertained who participated in the business
discussion.
(5)
Gifts. Elements to be proved with respect to an expenditure
for a gift are: (i)
Amount.
Cost of the gift to the taxpayer;
(ii)
Time. Date of the
gift;
(iii)
Description. Description of the gift;
(iv)
Business purpose.
Business reason for the gift or nature of business benefit derived or expected
to be derived as a result of the gift; and
(v)
Business relationship.
Occupation or other information relating to the recipient of the gift,
including name, title, or other designation, sufficient to establish business
relationship to the taxpayer.
(c) Rules for substantiation -
(1)
In general. A taxpayer
must substantiate each element of an expenditure (described in paragraph (b) of
this section) by adequate records or by sufficient evidence corroborating his
own statement except as otherwise provided in this section. Section 274(d)
contemplates that a taxpayer will maintain and produce such substantiation as
will constitute clear proof of an expenditure for travel, entertainment, or
gifts referred to in section 274. A record of the elements of an expenditure
made at or near the time of the expenditure, supported by sufficient
documentary evidence, has a high degree of credibility not present with respect
to a statement prepared subsequent thereto when generally there is a lack of
accurate recall. Thus, the corroborative evidence required to support a
statement not made at or near the time of the expenditure must have a high
degree of probative value to elevate such statement and evidence to the level
of credibility reflected by a record made at or near the time of the
expenditure supported by sufficient documentary evidence. The substantiation
requirements of section 274(d) are designed to encourage taxpayers to maintain
the records, together with documentary evidence, as provided in subparagraph
(2) of this paragraph. To obtain a deduction for an expenditure for travel,
entertainment, or gifts, a taxpayer must substantiate, in accordance with the
provisions of this paragraph, each element of such an expenditure.
(2)
Substantiation by adequate
records - (i)
In
general. To meet the "adequate records" requirements of section
274(d), a taxpayer shall maintain an account book, diary, statement of expense
or similar record (as provided in subdivision (ii) of this subparagraph) and
documentary evidence (as provided in subdivision (iii) of this subparagraph)
which, in combination, are sufficient to establish each element of an
expenditure specified in paragraph (b) of this section. It is not necessary to
record information in an account book, diary, statement of expense or similar
record which duplicates information reflected on a receipt so long as such
account book and receipt complement each other in an orderly manner.
(ii)
Account book, diary
etc. An account book, diary, statement of expense or similar record
must be prepared or maintained in such manner that each recording of an element
of an expenditure is made at or near the time of the expenditure.
(a)
Made at or near
the time of the expenditure. For purposes of this section, the phrase
made at or near the time of the expenditure means...
