Category: Deductions & Credits
Subject: Reduction for Meals and Entertainment Expenses
Title: Applicability of 50% Reduction to Expenses Related Directly to Business Operation
IRC Sections: 274(n), 274(e)
Filename: 1144.html
Date Produced: 3/96

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Background/Issue
Taxpayer is in the seminar business. As part of a seminar package, the taxpayer provides a meal at the seminar site. The issue is whether the cost of the meal is subject to the 50% reduction for meals and entertainment expenses under IRC Section 274(n).

Answer/Discussion
The portion of the taxpayer's seminar expenses related to meals is not subject to the 50% reduction under Section 274(n).

Section 274(n)(2)(A) provides that the general 50% reduction rule is inapplicable to expenses described in Section 274(e)(2), (3), (4), (7), (8), and (9). Section 274(e)(8) appears to provide an avenue under which the taxpayer in this case can deduct 100% of otherwise deductible expenses related to seminar meal costs.

Section 274(e)(8), entitled "Entertainment Sold to Customers", applies if a taxpayer sells goods and services in a bona fide transaction for an adequate and full consideration in money or money's worth. Obviously, the main thrust of this provision is to exclude taxpayers in the business of providing entertainment, such as a nightclub, from the 50% reduction rule. But, it seems to me the provision is sufficiently broad to cover the present fact pattern as well. After all, the taxpayer in this case is in the business of selling goods and services for which he is adequately and fully compensated.

Apparently, the IRS agrees at least for purposes of one private letter ruling. In 1990, the IRS explicitly addressed a seminar provider. See Private Letter Ruling 9029015, attached. Note that a private ruling cannot be cited as precedent either by the IRS or any taxpayer other than the specific taxpayer who was the subject of the ruling. However, it is important that the IRS made the connection, at least for private letter ruling purposes, between a seminar provider and Sections 274(n)(2)(A) and 274(e)(8).

Letter Ruling 9029015, April 18, 1990
CCH IRS Letter Rulings Report No. 699, 07-25-90
IRS REF: Symbol: CC:IT&A:3-TR-31-1408-89

Uniform Issue List Information: UIL No. 0274.00-00
Disallowance of certain entertainment, etc., expense

[Code Sec. 274]
This is in reply to a request for a ruling by the above-named taxpayer
relating to the application of section 274(n) of the Internal Revenue Code of
1986 to the following facts. A conducts seminars for a fee. The price per
attendee of attending the seminar is $5X. The price includes food and
beverages valued at $X. A asks:

1. How does section 274(n) apply to A?

2. How does section 274(n) apply to an attendee?

3. Would the answer to 1 or 2 be different if the value of the food and
beverages were separately stated by A to an attendee?

4. Would the answer to 1 or 2 be different if A were a nonprofit
organization?

Code section 274(n)(1)(A) provides that the amount allowable as a deduction
for any expenses for food or beverages shall not exceed 80% of the amount
which would otherwise be allowable. Section 274(n)(2)(A) provides, however,
that section 274(n)(1) does not apply to expenses described in section
274(e)(8), which include expenses for goods that are sold by the taxpayer in a
bona fide transaction for an adequate and full consideration in money or
money's worth.

We hold as follows:

1. Because A is selling the food and beverages in a bona fide transaction
for an adequate and full consideration in money or money's worth, Code section 274(n) does not limit A's deduction for expenses for the food and beverages.

2. To the extent an attendee is entitled to a deduction for expenses for
food and beverages, Code section 274(n) limits the deduction, unless one of
the exceptions in Code section 274(n)(2) applies.

3. The answers to 1 and 2 would not be different if the amounts for the food
and beverages were separately stated by A to an attendee. However, separately stating food and beverage amounts can be helpful to attendees in establishing and substantiating their deductions, although such separately stated amounts will not be binding on the Service.

4. The answers to 1 and 2 would not be different if A were a nonprofit
organization.

No opinion is expressed as to the tax treatment of these transactions under
the provisions of any other sections of the Code and regulations which may be
applicable thereto.

This ruling is directed only to the taxpayer that requested it. Section
6110(j)(3) of the Code provides that it may not be used or cited as precedent.