PROPOSED AND TEMPORARY REGULATIONS RELATING TO SUBSTANTIATION REQUIREMENTS, LIMITATIONS ON COST RECOVERY DEDUCTIONS, AND INVESTMENT TAX CREDIT ALLOWED FOR PASSENGER AUTOMOBILES.

CC:LR-145-84 (4830-01)

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In the Rules and Regulations portion of this issue of the Federal Register the Internal Revenue Service is issuing temporary income tax regulations under section 274 and amending other temporary regulations under sections 162 and 280F. The temporary regulations under section 274 provide rules for the substantiation of any deduction or credit claimed with respect to traveling away from home, certain entertainment expenditures, business-related gifts, and "listed property." The amendments to the temporary regulations under section 162 relate to the deductibility of certain expenses incurred by employers and employees with respect to noncash fringe benefits. The amendments to the temporary regulations under section 280F provide new limitations on the deductions of lessees of passenger automobiles. The text of the new and amended temporary regulations serves as the comment document for the notice of proposed rulemaking contained in this document.

DATES: Proposed effective dates: The regulations under section 162 are proposed to be effective as of January 1, 1985. The regulations under section 274 relating to the substantiation of deductions and credits claimed with respect to certain business expenditures are proposed to be effective generally for taxable years beginning after December 31, 1985. The amendments relating to the limitations on the deductions of lessees of passenger automobiles are proposed to be effective generally for automobiles leased after April 2, 1985.

Dates for comments and requests for a public hearing: Written comments and requests for a public hearing must be delivered or mailed by January 5, 1986.

ADDRESS: Send comments and requests for a public hearing to Commissioner of Internal Revenue, Attention: CC:LR:T (LR-145-84), Washington, D.C. 20224.

FOR FURTHER INFORMATION CONTACT: Michel A. Daze of the Legislation and Regulations Division, Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (202-566-6456, not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

The temporary regulations published in the Rules and Regulations portion of this issue of the Federal Register amend the Income Tax Regulations (26 CFR Part 1) to reflect amendments to section 274 of the Internal Revenue Code of 1954, relating to substantiation requirements, and to section 280F relating to limitations on cost recovery deductions and the investment tax credit allowed for passenger automobiles. The temporary regulations issued under section 274 reflect amendments to section 274(d) by section 179 of the Tax Reform Act of 1984 (Pub. L. 98-369, 98 Stat. 494) and by sections 1 (a) and 2 of the Repeal of Contemporaneous Recordkeeping Requirements (Pub. L. 99-44, 99 Stat. 77). The amendments to the temporary regulations under section 280F reflect amendments to that section by section 4 of Public Law 99-44. The preamble to the temporary regulations contains an explanation of the provisions of those regulations. The temporary regulations will remain in effect until superseded by final regulations which are proposed to be based on the temporary regulations.

Before amendment by the Tax Reform Act of 1984 and Public Law 99-44, section 274(d) required that any deduction for expenses incurred for (1) traveling away from home, (2) entertainment, amusement, or recreation activities or the use of a facility in connection with those activities, or (3) business-related gifts be substantiated by adequate records or sufficient evidence corroborating a taxpayer's own statement. Section 274(d) did not apply to vehicles when used in local travel. Instead, the more general substantiation standards under section 162 were applicable. As amended, section 274(d) requires, for taxable years beginning after December 31, 1985, that any deduction or credit claimed for the expenses described above and for expenses incurred with respect to "listed property" be substantiated by adequate records or sufficient evidence corroborating a taxpayer's own statement. Section 274 (d) will then apply to vehicles used in local travel.

First adopted by Treasury decision in 1962, section 1.274-5 of the Income Tax Regulations reflects the addition of section 274(d) to the Code. Amendments to section 1.274-5 are proposed to conform the regulations to the 1984 Act and to Public Law 99-44. For the convenience of taxpayers who must comply with the section 274(d) substantiation requirements, the proposed amendments are incorporated into section 1.274-5 and published in full in the format of a temporary regulation. New material is indicated by underlining.

COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Before these proposed amendments are adopted, consideration will be given to any written comments that are submitted (preferably eight copies) to the Commissioner of Internal Revenue. All comments will be available for public inspection and copying.

Comments are invited, however, on only those portions of new temporary section 1.274-5T that are amendments to section 1.274-5 to reflect the recent legislation. Specifically, comments are invited on the following provisions that are included among those amendments:

In the case of a fleet of vehicles owned or leased by an employer and used by employees in connection with the employer's business, the Service is considering an alternative method for the employer to satisfy its substantiation requirements. An employer would be able to establish the business use of each vehicle in the fleet and the personal use by an employee by a method similar to the following:

A public hearing will be held upon written request to the Commissioner by any person who submits written comments. If a public hearing is held, notice of the time and place will be published in the Federal Register

The collection of information requirements contained in the temporary regulations have been submitted to the Office of Management and Budget (OMB) for review under section 3504(h) of the Paperwork Reduction Act. Comments on these requirements should be sent to the Office of Information and Regulatory Affairs, Attention: Desk Officer for Internal Revenue Service, New Executive Office Building, Washington, D.C. 20503. The Internal Revenue Service requests that persons submitting comments on the requirements to OMB also send copies of those comments to the Service.

EXECUTIVE ORDER 12291 AND REGULATORY FLEXIBILITY ACT

The Commissioner of Internal Revenue has determined that this proposed rule is not a major rule as defined in Executive Order 12291 and that a Regulatory Impact Analysis is therefore not required.

Although this document is a notice of proposed rulemaking which solicits public comment, the Internal Revenue Service has concluded that the regulations proposed herein are interpretative and that the notice and public procedure requirements of 5 U.S.C. 553 do not apply. Accordingly, these proposed regulations do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. Chapter 6).

DRAFTING INFORMATION

The principal author of this document is Michel A. Daze of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations on matters of both substance and style.

LIST OF SUBJECTS 26 CFR 1.61-1 - 1.281-4

Income taxes, Taxable income, Deductions, Exemptions.

LIST OF SUBJECTS 26 CFR Part 602

Reporting and recordkeeping requirements. __________

ACTION: Temporary regulations.

SUMMARY: This document contains temporary income tax regulations relating to the requirement that any deduction or credit with respect to certain business-related expenses be substantiated with adequate records or sufficient evidence corroborating a taxpayer's own statement. This document also amends other temporary income tax regulations relating to the limitations on cost recovery deductions and the investment tax credit for "listed property" and temporary income tax regulations relating to the taxation of fringe benefits. In addition, the text of the temporary regulations set forth in this document serves as the text of proposed regulations for two notices of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register. This action is necessary to conform the income tax regulations to recent legislation and to provide the public with guidance necessary to comply with the law.

EFFECTIVE DATES: The amendments to section 1.61-2T are generally effective with respect to the commuting use of employer-provided vehicles that occurs after December 31, 1984. The amendments to section 1.132-1T are generally effective with respect to noncash fringe benefits received after December 31, 1984. The amendments to section 1.162-25T, relating to certain deductions with respect to noncash fringe benefits, are effective as of January 1, 1985. The temporary regulations relating to the substantiation requirements of section 274 (d) (sections 1.274-5T and 1.274-6T) are generally effective for taxable years beginning after December 31, 1985. Section 1.274-5T(d)(2) and (3) applies to taxable years beginning after December 31, 1984. The amendments to the temporary regulations relating to the limitations on the investment tax credit and cost recovery deductions have the following effective dates: section 1.280F-3T(d)(3), as amended, applies to listed property placed in service after June 18, 1984, beginning with the first taxable year in which section 274(d) applies to that property; the amendments to sections 1.280F-1T and 1.280F-5T are generally effective for passenger automobiles leased after April 2, 1985; the amendment to section 1.280F-6T(b)(2)(ii) is effective for vehicles placed in service after December 31, 1985; and the amendment to section 1.280F-6T(b)(3) is effective for property placed in service after June 18, 1984.

FOR FURTHER INFORMATION CONTACT: Michel A. Daze, with respect to the provisions under sections 162, 274, and 280F (202-566-6456), or Annette J. Guarisco, with respect to the taxation of fringe benefits (202-566-3918), of the Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington D.C. 20224, Attention: CC:LR:T.

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document adds new temporary regulations to the Income Tax Regulations (26 CFR Part 1) under section 274 of the Internal Revenue Code of 1954 (Code), relating to the substantiation requirements with respect to certain "listed property." Section 179 of the Tax Reform Act of 1984 (the 1984 Act) amended Code section 274 to provide that no deduction or credit shall be allowed with respect to "listed property" (as defined in section 280F (d) (4)), unless the taxpayer substantiated any deduction or credit with "adequate contemporaneous records." Temporary regulations were published in the Federal Register on October 24, 1984, and February 20, 1985 (49 FR 42701 and 50 FR 7038), providing guidance for taxpayers affected by the requirement to maintain adequate contemporaneous records for taxable years beginning after December 31, 1984. Section 1 of the Repeal of Contemporaneous Recordkeeping Requirements (the 1985 Act) amended section 274 to provide that any deduction or credit with respect to listed property must be substantiated by adequate records or sufficient corroborative evidence and repealed any regulations issued to carry out the amendments made to section 274 by the 1984 Act. This document provides temporary regulations under section 274 to clarify the types of records that are generally necessary to substantiate any deduction or credit with respect to listed property.

Section 531 of the 1984 Act (98 Stat. 877) made various amendments to Code sections 61, 3121, 3231, 3306, 3401, and 3501 and added new Code sections 132 and 4977, relating to the taxation of fringe benefits. Temporary regulations were published in the Federal Register on January 7, 1985 (50 FR 747) to provide guidance on the treatment of taxable and nontaxable fringe benefits, including the valuation of taxable fringe benefits for purposes of income and employment tax withholding. Where necessary, to clarify the interaction between the section 274 substantiation requirements and the section 132 regulations, these regulations were amended in the Federal Register on February 20, 1985 (50 FR 7038). To reflect the changes made by the 1985 Act to section 274 and the effect on the section 132 regulations, this document amends those temporary regulations.

Section 179 of the 1984 Act also added a new Code section 280F to provide limitations on the investment tax credit and depreciation with respect to "listed property" when such property is used for both business and personal purposes. "Listed property" includes a passenger automobile or any other property used as a means of transportation. The 1985 Act amended section 280F to lower the limitations on the amount of the investment tax credit and annual cost recovery deductions allowable for passenger automobiles placed in service after April 2, 1985. This document amends the temporary regulations under section 280F, which were also published in the Federal Register on October 24, 1984 (49 FR 42701).

The temporary regulations contained in this document relating to both substantiation and the taxation of fringe benefits serve as the text of proposed regulations for two notices of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

EXPLANATION OF PROVISIONS

SUBSTANTIATION REQUIREMENTS

INTRODUCTION

As enacted in 1962, section 274(d) required a taxpayer to substantiate any deduction claimed for certain ordinary and necessary business expenses with adequate records or sufficient evidence corroborating the taxpayer's own statement. The three categories of expenses subject to these substantiation requirements are expenses incurred (1) while traveling away from home, including meals and lodging, (2) for entertainment, amusement, or recreation activities or the use of a facility in connection with those activities, or (3) for business-related gifts. Section 274(d) provides that a deduction for the expenses listed above is disallowed unless substantiated by adequate records or sufficient corroborative evidence.

Regulations under section 274(d) were first issued in 1962 (see section 1.274-5). Under those regulations, a taxpayer was required to prove certain elements of an expenditure, for example, the amount, time, place, and business purpose of an expenditure for travel away from home. The regulations also described the types of evidence that constitute an adequate record or that may be corroborative of each element of an expenditure. To minimize duplication of records, the regulations provided special rules for certain employees who adequately account to their employers for expenses incurred in the employer's behalf, or independent contractors who adequately account to clients for reimbursements or expense allowances.

After amendment by the 1984 Act and the 1985 Act, section 274(d) disallows any deduction or credit claimed for the expenses listed above and for expenses incurred with respect to "listed property" unless substantiated by adequate records or sufficient corroborative evidence. Listed property, as defined in Code section 280F(d)(4), generally includes any passenger automobile, any other property used as a means of transportation, any property used for entertainment, recreation, or amusement, and any computer and peripheral equipment.

Existing section 1.274-5 of the income tax regulations serves as the basis for the temporary regulations under section 274(d) that are contained in this Treasury decision. The temporary regulations contain additional provisions to reflect the application of section 274(d) to deductions or credits claimed with respect to listed property, and the exemption from the requirements of section 274(d) for "qualified nonpersonal use vehicles" under section 274(i).

APPLICATION TO LISTED PROPERTY

As set forth in section 1.274-5T(b)(6), the elements of an expenditure with respect to listed property that a taxpayer must prove are (i) the amount, (ii) the date, and (iii) the business purpose of an expenditure or use. The amount of an expenditure may be the cost of acquisition (i.e., the basis of the property), a lease payment, the cost of maintenance and repairs, or the cost of capital improvements. The amount of use is the ratio of business use to total use of the property for a period of time, determined on the basis of mileage for automobiles and other vehicles and time for other listed property.

Section 274(d) contemplates that a taxpayer will maintain and produce records or other evidence that will constitute proof of the elements of an expenditure or use. As explained in section 1.274-5T(c)(1), written evidence has more probative value than oral evidence alone, and the value of written evidence is greater the closer in time it relates to the expenditure or use. A contemporaneous log is not required by the temporary regulations, but a record of the elements of an expenditure or of a business use made at or near the time of the expenditure or use when there is generally accurate recall would constitute the best evidence to satisfy the substantiation requirements of section 274(d).

A taxpayer may satisfy the adequate records requirement by maintaining an account book, diary, log, statement of expense, trip sheets, or similar record prepared at or near the time of an expenditure or use, and documentary evidence which, in combination, are sufficient to establish each element of an expenditure. Information in an account book, etc. need not duplicate information contained in documentary evidence, such as a receipt, as long as the two forms of evidence complement each other in an orderly manner. The information required must be recorded at or near the time of the expenditure or use when the taxpayer has full present knowledge of each element of the expenditure or use. For example, a taxpayer may substantiate the business use of an automobile for a period with a journal in which the taxpayer records at the end of every week each element of the business uses of the automobile during the week.

The temporary regulations provide that the level of detail required in an adequate record to establish the element of the business use of property may vary depending on the facts and circumstances. If the taxpayer's use of property follows a regular pattern, the taxpayer may not need to record as much information as would be required if business use were sporadic. See section 1.274-5T(c)(2)(ii) for an example.

If a taxpayer fails to maintain an adequate record, then the taxpayer must establish the elements of an expenditure or use by a written or oral statement and other corroborative evidence sufficient to establish the elements. For example, a taxpayer may maintain an adequate record for portions of a taxable year and use that record to substantiate the business/investment use of listed property if the taxpayer can demonstrate by other evidence that the periods for which the adequate record is maintained are representative of the taxable year. See section 1.274-5T(c)(3)(ii).

Generally, a taxpayer must substantiate the elements of each separate expenditure or use to which section 274(d) applies. However, the taxpayer may substantiate concurrent or repetitious expenditures or uses as a single item in certain cases. As provided in section 1.274-5T(c)(6)(i)(B), amounts expended in connection with the use of listed property, such as for gasoline or repairs for an automobile, may be aggregated. If these expenses are aggregated, the taxpayer need not prove the business purpose of each expense, but may prorate the expenses based on the total business use of the property. Similarly, a taxpayer may consider a round trip or an uninterrupted period of business use as a single use (see section 1.274-5T(c)(6)(i)(C)).

TAX RETURN INFORMATION

As required by the conference report to the 1985 Act (H.R. Rep. No. 67, 99th Cong., 1st Sess. 10 (1985)), section 1.274-5T(d)(2) and (3) of the temporary regulations provides that taxpayers must include certain information on their tax returns about the business use of vehicles and other listed property. On returns for taxable years beginning after December 31, 1984, taxpayers that claim a deduction or credit with respect to any vehicle are required to provide the date that the vehicle was placed in service, information about the number of miles driven for various purposes, the percent of business use, whether evidence to support the business use is available, and whether that evidence is written. It is expected that an employer who provides the use of a vehicle to an employee will obtain information from the employee sufficient to complete the employer's tax return. As provided by section 1.274-5T(d)(2)(ii), however, certain employers need not include all the information collected from employees on their tax returns and other employers need not obtain any information from employees. With respect to other types of listed property, taxpayers are required to provide the date that the property was placed in service, the percent of business use, whether evidence is available to support the amount of business use, and whether that evidence is written.

LISTED PROPERTY PROVIDED TO EMPLOYEES

Section 1.274-5T(e) provides new rules for the substantiation of the business use of listed property made available by an employer for use by an employee. Generally, an employee may not exclude from gross income as a working condition fringe any amount of the value of the availability of listed property provided by an employer to the employee, unless the employee substantiates for the period of availability the amount of the exclusion with adequate records or sufficient corroborative evidence. If the employer provides the use of a vehicle to an employee and includes the value of the availability of the vehicle in the employee's gross income without taking into account any exclusion for a working condition fringe, the employee must substantiate any deduction claimed for the business use of the vehicle with adequate records or sufficient corroborative evidence.

An employer substantiates its business use of listed property provided to employees by showing either (1) that, based on adequate records maintained by the employees or on other evidence corroborating the employees' statements, all or a portion of the use of the listed property is by employees in the employer's trade or business, and that if any employee used the property for personal purposes, the employer included an appropriate amount in the employee's income, or (2) in the case of an employer-provided automobile, that the employer treats all use by employees as personal use and includes an appropriate amount in the employees' incomes.

For purposes of substantiating the business use of employer- provided listed property under section 1.274-5T(e), an employer may rely on adequate records maintained by its employee or on the employee's own statement if corroborated by other sufficient evidence unless the employer knows or has reason to know that they are not accurate. Alternatively, the employer may rely on a statement submitted by the employee that provides sufficient information to allow the employer to determine the business use of the property unless the employer knows or has reason to know that the statement is not based on adequate records or sufficient corroborative evidence.

EMPLOYEE BUSINESS EXPENSES

The provisions of section 1.274-5T(f) of the temporary regulations are derived from existing section 1.274-5(e) with only minor amendments. Section 1.274-5T(f) applies to employees who are reimbursed for deductible business expenses that they incur in connection with the performance of services as employees. If the employee makes an adequate accounting (i.e. provides adequate records) to the employer of the expenses incurred and receives reimbursements equal to the expenses, the employee need not report either the reimbursements or the expenses on a tax return. If the amount of the reimbursements exceeds the amount of deductible expenses incurred by the employee, the employee must include the excess in income. If the employee's deductible expenses exceed any reimbursement received from the employer, the employee must be able to substantiate any deduction for the excess in accordance with the requirements of section 274(d).

An employee who is not required to make an adequate accounting to the employer, or who is required and fails to do so, must submit, as part of his tax return, the appropriate form issued by the Internal Revenue Service for claiming deductions for employee business expenses (for 1985, Form 2106) and provide the information requested on that form. In addition, the employee must be able to substantiate any deduction for business expenses in accordance with the requirements of section 274(d).

Any employee, whether required to make an adequate accounting to the employer or not, who claims any deduction or credit with respect to listed property, must submit the appropriate form issued by the Internal Revenue Service to provide the necessary information about the use of that property, as discussed above.

REIMBURSEMENT ARRANGEMENTS AND MILEAGE ALLOWANCES

Under section 1.274-5T(g) of the temporary regulations, which is similar to existing section 1.274-5(f), the Commissioner is authorized to prescribe rules under which reimbursement arrangements or per diem allowances covering ordinary and necessary expenses of traveling away from home, or mileage allowances providing for ordinary and necessary expenses of local travel or transportation while traveling away from home, will be regarded as equivalent to substantiation by adequate records or other sufficient evidence. (See, for example, Rev. Rul. 80-62, 1980-1 C.B. 63, as modified by Rev. Rul. 80-203, 1980-2 C.B. 101, Rev. Rul. 84-51, 1984-1 C.B. 90, and Rev. Rul. 85-155, 1985-40 I.R.B. 18.) A mileage allowance for use of a vehicle may be paid only to the owner of the vehicle.

For example, an employer may pay an employee a fixed mileage allowance for use of the employee's own automobile in connection with the employer's trade or business. If a fixed mileage allowance not exceeding the prescribed standard mileage rate (see Rev. Proc. 85-49, 1985-40 I.R.B. 26) is used in payment of an employee's ordinary and necessary expenses of transportation, whether for travel away from home or local travel, and the elements of time, place, and business purpose are substantiated in accordance with the requirements of section 274(d), the mileage allowance is deemed to substantiate the amount of the transportation expenses.

Rev. Rul. 84-127, 1984-2 C.B. 246, provides that an employer is not required to report as wages on Form W-2 reimbursements of amounts equal to or less than the standard mileage rate, but is required to report amounts of reimbursement to an employee exceeding that rate. In theory, the reimbursement equal to or less than the standard mileage rate would be for otherwise deductible expenses incurred by the employee and need not be reported as income. Because the standard mileage rate includes a component for depreciation, the limitations on the investment tax credit and cost recovery deductions imposed by section 280F(d)(3) and section 1.280F-6T(a) affect the holding of Rev. Rul. 84-127.

Under section 1.280F-6T(a)(1), employee use of the employee's own automobile (or other listed property) in connection with the employer's trade or business is not treated as business use for purposes of determining the amount of any investment credit or cost recovery deduction unless the use is for the convenience of the employer and required as a condition of employment. Whether use of an employee's own automobile is for the convenience of the employer and required as a condition of employment is determined by applying the same principles for determining whether the value of any meals or lodging furnished by an employer to an employee are excluded under section 119 from the employee's gross income. If either requirement is not met and the employee has no other business use of the automobile, the employee is not entitled to any investment credit or cost recovery deduction with respect to that automobile. Under those circumstances, a reimbursement for transportation expenses at the standard mileage rate would exceed the employee's deductible expenses by the amount of the depreciation component. The reimbursement, therefore, must be reported by the employer as income on Form W-2.

BUSINESS EXPENSES OF INDEPENDENT CONTRACTORS

Similar to existing section 1.274-5(g), section 1.274-5T(h) provides rules for the reporting and substantiation of certain expenses for travel, entertainment, gifts, or with respect to listed property paid or incurred by an independent contractor in connection with services performed for a client or customer under a reimbursement or other expense allowance arrangement. Unless an independent contractor substantiates each element of an expenditure in accordance with the requirements of section 274(d) or makes an adequate accounting of that expenditure to a client or customer, the independent contractor must include any reimbursement for that expenditure in income. If the independent contractor accounts to the client or customer for any expenses with adequate records or other sufficient evidence, the client or customer must be prepared to substantiate each element of the expenditure as required by section 274(d).

QUALIFIED NONPERSONAL USE VEHICLES

Section 2 of the 1985 Act also amended section 274(d) to provide that the substantiation requirements of that section do not apply to any qualified nonpersonal use vehicle. As defined in section 274(i), a qualified nonpersonal use vehicle is any vehicle which, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes. Section 1.274-5T(k) of the temporary regulations contains a list of these vehicles to which section 274(d) does not apply. Under section 1.274-5T(k)(2)(ii)(S), the Commissioner may rule that other vehicles are qualified nonpersonal use vehicles. Comments are, therefore, invited concerning other vehicles that may be designated as qualified nonpersonal use vehicles.

BUSINESS USE OF AUTOMOBILES AND CERTAIN OTHER VEHICLES

A taxpayer whose use of an automobile or certain other vehicles meets certain requirements during a taxable year or shorter period may use, for the relevant period, one of the methods prescribed in section 1.274-6T to satisfy the substantiation requirements of section 274(d). Two types of written policy statements, in conjunction with other evidence, if initiated and kept by an employer to implement a policy of no personal use, or no personal use except for commuting, of a vehicle provided by the employer to an employee, may qualify as sufficient evidence corroborating the employer's or employee's own statement regarding the amount of business use of that vehicle. Methods of satisfying the substantiation requirements are also provided for vehicles used in connection with the business of farming and for automobiles provided to employees by employers who treat all use by the employees as personal use. For taxable years beginning in 1985, the methods prescribed in section 1.274-6T will also satisfy the requirements of section 162.

As provided in section 1.274-6T(b), for a vehicle used in connection with the business of farming, an employer may determine any deduction or credit with respect to the vehicle as if the amount of business use were 75 percent plus that percentage attributable to an amount included in an employee's income to reflect any personal use of the vehicle by the employee. Unlike the special rule for farm vehicles contained in the repealed temporary regulations that were published in the Federal Register for February 20, 1985, section 1.274-6T(b) does not provide separate percentages of business use for vehicles designed for commercial use and for other vehicles. Only one percentage is considered appropriate because section 274(i) exempts most vehicles designed for commercial use from the section 274(d) substantiation requirements.

TEMPORARY REGULATIONS UNDER SECTION 280F

As added to the Code by the 1984 Act and amended by the 1985 Act, section 280F generally imposes limitations on the amount of investment tax credit and annual depreciation deductions allowed for an automobile placed in service or leased after June 18, 1984. Section 280F also requires the Internal Revenue Service to issue regulations that impose on lessees of passenger automobiles limitations "substantially equivalent" to the limitations imposed on similarly situated owners of passenger automobiles. On October 19, 1984, pursuant to this requirement, the Service issued section 1.280F-5T of the temporary regulations. The 1985 Act further limits the amount of investment tax credit and annual depreciation deductions allowable for passenger automobiles placed in service after April 2, 1985.

Limitations applicable to automobiles leased after April 2, 1985, were issued on August 20, 1985, in Announcement 85-127 (also published in 1985-35 I.R.B. 40, September 3, 1985). Section 1.280F-5T of the temporary regulations is amended to incorporate the provisions of that announcement. An error in paragraph(d)(2) of the announcement is also corrected: section 1.280F-5T(e)(5)(ii) clarifies that, for any passenger automobile that has a fair market value greater than $32,400, the limitation in the form of an income inclusion in the seventh and subsequent taxable year during which the automobile is leased is only six percent of the amount prescribed by the announcement.

One comment on the temporary regulations issued in October, 1984, was that the limitations applicable to leased automobiles did not account for situations when a lessor elects under section 48(d) to treat the lessee as having acquired the automobile allowing the lessee to claim the investment credit. The Internal Revenue Service plans to issue an announcement in the near future that will provide a separate set of limitations applicable to lessees to whom lessors have passed through the investment credit.

Additionally, as issued on October 19, 1984, section 1.280F-6T(b)(3) provided that one category of listed property, property of a type generally used for purposes of entertainment, recreation, or amusement, includes photographic, phonographic, communication, and video recording equipment. That section is amended to exclude that equipment in general from the definition of listed property if it is used exclusively at a regular business establishment or in connection with a taxpayer's principal trade or business. If any equipment is not listed property, it is not subject to the substantiation requirements imposed by section 274(d)(4).

FRINGE BENEFITS

Section 61 of the Code provides that gross income includes "all income from whatever source derived," unless specifically excluded by another provision of the Code. In addition, section 61 specifies that gross income includes compensation for services. Section 531 of the 1984 Act clarified that fringe benefits are included in gross income as compensation for services and subject to income and employment taxes. Section 531 also provided an exclusion from gross income for the value of certain fringe benefits (such as no-additional-cost services, qualified employee discounts, working condition fringes, and de minimis fringes).

The temporary regulations under section 61 contain a special rule that may be used to value the commuting use of an employer-provided vehicle. As issued in January 1985, the temporary regulations provided that the special rule could not be used to value the commuting use of an employer-provided vehicle by an officer or five-percent owner of the employer. In February 1985, this restriction was amended to provide that the special rule could not be used to value commuting use (that occurs after March 22, 1985) by an officer or one-percent owner of the employer. This document simplifies the temporary regulations to provide that, for any commuting use that occurs during 1985, the special rule may not be used to value the commuting use of an employer-provided vehicle by an officer or five-percent owner of the employer.

For commuting use occurring after December 31, 1985, the temporary regulations provide that the special rule may not be used to value the commuting use of an employer-provided vehicle by a control employee. However, if a control employee is provided the commuting use of an employer-provided vehicle that is not an automobile (as defined in the regulations), the control employee may use the special rule. The regulations define a control employee separately for government and non-government employers. The Service and Treasury are interested in comments concerning the definition of control employee, especially the treatment of state and local executive officers as control employees. The definition of control employee prescribed for purposes of valuing the commuting use of an employer-provided vehicle will not apply to the valuation of flights on employer-provided aircraft.

The temporary regulations under section 132 clarify the relationship between the section 274 substantiation requirements and a section 132 working condition fringe. The regulations provide that neither an employer nor an employee may exclude the value of property or services from an employee's income as a working condition fringe unless the substantiation requirements of either section 162 or 274 (whichever is applicable) are satisfied. In addition, the section 132 regulations provide that the special substantiation safe harbor rules provided in section 1.274-6T may be used by both employers and employees.

SPECIAL ANALYSES

The Commissioner of Internal Revenue has determined that this temporary rule is not a major rule as defined in Executive Order 12291 and that a regulatory impact analysis is not required.

A notice of proposed rulemaking is not required by 5 U.S.C. 553(d) for temporary regulations. Accordingly, the temporary regulations do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. Chapter 6).

The collection of information requirements contained in these regulations have been submitted to the Office of Management and Budget in accordance with the requirements of the Paperwork Reduction Act of 1980. These requirements have been approved by OMB.

DRAFTING INFORMATION

The principal authors of these temporary regulations are Michel A. Daze and Annette J. Guarisco of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from the other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations on matters of both substance and style.

LIST OF SUBJECTS 26 CFR 1.61-1 - 1.281-4

Income taxes, Taxable income, Deductions, Exemptions.

LIST OF SUBJECTS 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--(AMENDED)

Paragraph 1. The authority for Part 1 is amended by adding the following citation:

Authority: 26 U.S.C. 7805. * * * Section 1.132-1T also issued under 26 U.S.C. 132; section 1.280F-5T also issued under 26 U.S.C. 280F(c).

Par. 2. Section 1.61-2T is amended by removing the heading immediately preceding Q/A-20, Q/A-20, and Q/A-21.

Par. 3. Section 1.61-2T is amended by adding a new heading immediately preceding Q/A-20, new Q/A-20, Q/A-20a, Q/A-20b, and Q/A-21 immediately after Q/A-19 to read as follows:

[Editor's Note: Temporary regulation section 1.61-2T was modified by Treasury Decision 8063, by Treasury Decision 8256 on July 6, 1989, and by Treasury Decision 8457 on December 30, 1992.]

Section 1.61-2T Questions and answers relating to the taxation of fringe benefits (temporary).

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USE OF EMPLOYER-PROVIDED VEHICLES FOR COMMUTING

Q-20: Is there a special rule that taxpayers may use to value employer-provided vehicles which are not available for personal purposes other than commuting?

A-20: A special rule may be used to compute commuting value if the following criteria are met by employers and employees with respect to an employer-provided vehicle:

(a) The vehicle is owned or leased by the employer and is provided to one or more employees for use in connection with the employer's trade or business and is used in the employer's trade or business,

(b) For bona fide noncompensatory business reasons, the employer requires the employee to commute to and/or from work in the vehicle,

(c) The employer has established a written policy under which neither the employee, nor any individual whose use would be taxable to the employee, may use the vehicle for personal purposes, other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee's home),

(d) Except for de minimis personal use, neither the employee nor any individual whose use would be taxable to the employee uses the vehicle for any personal purpose other than commuting, and

(e) The employee required to use the vehicle for commuting is not a control employee of the employer (as defined in Q/A-20b of this section).

If the vehicle is a chauffeur-driven vehicle, the special rule of this Q/A-20 may not be used to value the commuting use of any passenger who commutes in the vehicle. The rule may be used, however, to value the commuting use of the chauffeur. For purposes of Q/A-20 through Q/A-22 of this section, the term "vehicle" means any motorized wheeled vehicle manufactured primarily for use on public streets, roads, and highways. Except as otherwise provided in Q/A-20a and Q/A-20b of this section, the term "vehicle" includes an automobile as defined in Q/A-11 of this section. For purposes of this section, the term "personal use" has the same meaning as prescribed in section 1.274-6T(e)(5).

Q-20a: What special effective dates apply to the criteria provided in Q/A-20 of this section?

A-20a: Notwithstanding anything in Q/A-20 of this section to the contrary--

(a) WRITTEN POLICY NOT REQUIRED IN 1985. The policy described in Q/A-20(c) of this section prohibiting personal use need not be written provided the commuting use being valued under the special rule occurs prior to January 1, 1986; and

(b) COMMUTING DURING 1985. For commuting use that occurs after December 31, 1984, but before January 1, 1986, Q/A-20(e) of this section shall be applied by substituting "an employee who is an officer or a five-percent owner of the employer" in lieu of "control employee." If the vehicle in which the employee is required to commute is not an automobile as defined in Q/A-11 of this section, neither the restrictions of Q/A-20(e) of this section (relating to control employees) nor the restrictions of this Q/A-20a(b) (relating to officers and five-percent owners) apply. For purposes of determining who is a five-percent owner, any individual who owns (or is considered as owning) five or more percent of the fair market value of an entity (the "owned entity") is considered a five-percent owner of all entities which would be aggregated with the owned entity under the rules of section 414(b), (c), or (m).

Q-20b: Who is a "control employee" for purposes of determining the value of the availability of an employer-provided vehicle for commuting?

A-20b: (a) NON-GOVERNMENT EMPLOYER. For purposes of Q/A-20 of this section, a control employee of a non-government employer is any employee--

(b) GOVERNMENT EMPLOYER. For purposes of Q/A-20 of this section, a control employee of a government employer is any--

(c) CONTROL EMPLOYEE EXCEPTION. Notwithstanding anything in this section to the contrary, an employee who is a control employee may use the special valuation rule of Q/A-20 of this section if the criteria of Q/A-20 are satisfied (except for the condition in Q/A-20 (e) of this section) and the vehicle in which the control employee is required to commute is not an automobile as defined in Q/A-11 of this section.

Q-21: If the requirements of Q/A-20 of this section are satisfied, what is the special rule for valuing the commuting use of an employer-provided vehicle?

A-21: Under the special rule, the commuting use is valued at $1.50 per one-way commute (e.g., from home to work or from work to home). If there is more than one employee who commutes in the vehicle, such as in the case of an employer-sponsored car pool, the amount includible in the income of each such employee is $1.50 per one-way commute. Thus, the amount includible for each round-trip commute is $3.00 per employee.

Par. 4. Section 1.132-1T is amended by adding new Q/A-4a and Q/A-4b immediately after Q/A-4 to read as follows:

[Editor's Note: Regulation section 1.132-1T was modified by Treasury Decision 8063 and by Treasury Decision 8256 on July 6, 1989.]

Section 1.132-1T Questions and answers relating to the exclusion from gross income of certain fringe benefits (temporary).

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WORKING CONDITION FRINGE

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Q-4a: Do section 162 and section 274(d) and the regulations thereunder apply in determining the amount, if any, of an employee's working condition fringe with respect to employer-provided property or services?

A-4a: Yes, as provided below.

(a) IN GENERAL. The value of property or services provided to an employee by an employer may not be excluded from the employee's gross income as a working condition fringe, by either the employer or the employee, unless the substantiation requirements of either section 162 or section 274(d) (whichever is applicable) and the regulations thereunder are satisfied.

(b) LISTED PROPERTY. With respect to listed property (as defined in section 280F(d)(4)), the substantiation requirements of section 274(d) and the regulations thereunder do not apply to the determination of an employee's working condition fringe exclusion prior to the first taxable year of the employer beginning in 1986. For example, if an employer's first taxable year beginning in 1986 begins on July 1, the substantiation requirements of section 274(d) apply to the employee as of that date. The substantiation requirements of section 274(d) apply generally to an employee regardless of whether the requirements of section 274 apply to the employee's employer (such as when the employer is a tax-exempt organization); in these cases, the requirements of section 274(d) apply to the employee as of January 1, 1986.

In general, the substantiation requirements of section 274(d) are satisfied by adequate records or sufficient evidence corroborating the employee's own statement. Thus, such records or evidence provided by the employee, and relied upon by the employer to the extent permitted by the regulations promulgated under section 274(d), will be sufficient to substantiate a working condition fringe exclusion.

(c) SAFE HARBOR RULES. Section 1.274-6T provides that the substantiation requirements of section 274(d) and the regulations thereunder may be satisfied, in certain circumstances, by using one or more of the safe harbor rules prescribed in section 1.274-6T. If the employer uses one of the safe harbor rules prescribed in section 1.274-6T during a period with respect to a vehicle (as defined in section 1.61-2T Q/A-20), that rule must be used by the employer to substantiate a working condition fringe exclusion with respect to that vehicle during the period. An employer that is exempt from Federal income tax may still use one of the safe harbor rules (if the requirements of that section are otherwise met during a period) to substantiate a working condition fringe exclusion with respect to the same vehicle during the period. If the employer uses one of the methods prescribed in section 1.274-6T during a period with respect to an employer-provided vehicle, that method may be used by an employee to substantiate a working condition fringe exclusion with respect to the same vehicle during the period, as long as the employee includes in gross income the amount allocated to the employee pursuant to section 1.274-6T and this section. If, however, the employer uses the safe harbor rule prescribed in section 1.274-6T (a)(2) or (3) and the employee without the employer's knowledge uses the vehicle for purposes other than de minimis personal use (in the case of the rule prescribed in section 1.274-6T(a)(2)), or for purposes other than de minimis personal use and commuting (in the case of the rule prescribed in section 1.274-6T(a)(3)), then the employee has additional gross income.

The rules prescribed in this Q/A-4a assume that the safe harbor rules prescribed in section 1.274-6T are used for a one-year period. Accordingly, references to the value of the availability of a vehicle, amounts excluded as a working condition fringe, etc., are based on a one year period. If the safe harbor rules prescribed in section 1.274-6T are used for a period of less than a year, the amounts referenced in the previous sentence must be adjusted accordingly. For purposes of this section, the term "personal use" has the same meaning as prescribed in section 1.274-6T(e)(5).

(d) VEHICLES NOT AVAILABLE TO EMPLOYEES FOR PERSONAL USE. For a vehicle described in section 1.274-6T(a)(2) (relating to certain vehicles not used for personal purposes), the working condition fringe exclusion is equal to the value of the availability of the vehicle if the employer uses the method prescribed in section 1.274-6T(a)(2).

(e) VEHICLES NOT AVAILABLE TO EMPLOYEES FOR PERSONAL USE OTHER THAN COMMUTING. For a vehicle described in section 1.274-6T(a)(3) (relating to certain vehicles not used for personal purposes other than commuting), the working condition fringe exclusion is equal to the value of the availability of the vehicle for purposes other than commuting if the employer uses the method prescribed in section 1.274-6T(a)(3). The rule applies only if the special rule for valuing commuting use, as prescribed in Q/A-20 through Q/A-22 of section 1.61-2T, is used and the amount determined under the special rule is included in the employee's income (or the employee reimburses the employer for such amount).

(f) VEHICLES USED IN CONNECTION WITH THE BUSINESS OF FARMING THAT ARE AVAILABLE TO EMPLOYEES FOR PERSONAL USE. For a vehicle described in section 1.274-6T(b) (relating to certain vehicles used in connection with the business of farming), the working condition fringe exclusion is calculated by multiplying the value of the availability of the vehicle by 75 percent.

If the vehicle is available to more than one individual, the employer must allocate the gross income attributable to the vehicle (25 percent of the value of the availability of the vehicle) among the employees (and other individuals whose use would not be attributed to an employee) to whom the vehicle was available. This allocation must be done in a reasonable manner to reflect the personal use of the vehicle by the individuals. Amounts that would be allocated to individuals who are not employees (such as a sole proprietor) reduce the amount that may be allocated to employees but are otherwise to be disregarded for purposes of this Q/A-4a.

For purposes of this Q/A-4a(f), the value of the availability of a vehicle may be calculated as if the vehicle had been available to only one employee continuously and without regard to any working condition fringe exclusion.

The following examples illustrate a reasonable allocation of gross income with respect to an employer-provided vehicle between two employees:

A-4b: Effective January 1, 1985, one hundred percent of the value of the use of a qualified nonpersonal use vehicle (as described in section 1.274-5T(k)) is excluded from gross income as a working condition fringe, provided that, in the case of vehicles described in paragraph (k)(3) through (7) of that section, the use of the vehicles conforms to the requirements of that paragraph.

Par. 5. Section 1.162-25T is revised to read as follows:

[Editor's Note: Regulation section 1.162-25T was modified by Treasury Decision 8063, by Treasury Decision 8276 on December 12, 1989 and by Treasury Decision 8451 on December 7, 1992.]

Section 1.162-25T Deductions with respect to noncash fringe benefits (temporary).

(a) EMPLOYER. If an employer includes the value of a noncash fringe benefit in an employee's gross income, the employer may not deduct this amount as compensation for services, but rather may deduct only the costs incurred by the employer in providing the benefit to the employee. The employer may be allowed a cost recovery deduction under section 168 or a deduction under section 179 for an expense not chargeable to capital account, or, if the noncash fringe benefit is property leased by the employer, a deduction for the ordinary and necessary business expense of leasing the property.

(b) EMPLOYEE. If an employer provides the use of a vehicle (as defined in section 1.61-2T Q/A-20) to an employee as a noncash fringe benefit and includes the entire value of the benefit in an employee's gross income without taking into account any exclusion for a working condition fringe allowable under section 132 and the regulations thereunder, the employee may deduct, for purposes of determining adjusted gross income, that value multiplied by the percentage of the total use of the vehicle that is in connection with the employer's trade or business. If the employer determines the value of the noncash fringe benefit under a special accounting rule that allows the employer to treat the value of benefits provided during the last two months of the calendar year or any shorter period as paid during the subsequent calendar year, then the employee must determine the deduction allowable under this paragraph (b) without regard to any use of the benefit during those last two months or any shorter period. The employee may not use a cents-per-mile valuation method to determine the deduction allowable under this paragraph (b).

(c) EXAMPLES. The following examples illustrate the provisions of this section.

[Editor's Note: Regulation section 1.274-5T has been modified by Treasury Decisions 8063, 8276, and 8451.]

Section 1.274-5T Substantiation requirements (temporary).

(a) IN GENERAL. For taxable years beginning on or after January 1, 1986, no deduction or credit shall be allowed with respect to--

(1) Traveling away from home (including meals and lodging),

(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),

(3) Gifts defined in section 274(b), or

(4) Any listed property (as defined in section 280F(d) (4) and section 1.280F-6T(b)),

unless the taxpayer substantiates each element of the expenditure or use (as described in paragraph (b) of this section) in the manner provided in paragraph (c) of this section. This limitation supersedes the doctrine founded in Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). The decision held that, where the evidence indicated a taxpayer incurred deductible travel or entertainment expenses 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 or credit shall be allowed a taxpayer 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 therefor; and the term "expenditure" includes expenses and items (including items such as losses and depreciation).

(b) ELEMENTS OF AN EXPENDITURE OR USE--(1) IN GENERAL. Section 274(d) and this section contemplate that no deduction or credit shall be allowed for travel, entertainment, a gift, or with respect to listed property unless the taxpayer substantiates the requisite elements of each expenditure or use as set forth in this paragraph (b).

(2) TRAVEL AWAY FROM HOME. The elements to be proved with respect to an expenditure for travel away from home 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. The 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 paragraph (b)(3)(i), (ii), (iii), and (v) of this section 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. The 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.

(6) LISTED PROPERTY. The elements to be proved with respect to any listed property are--

(i) AMOUNT.--(A) EXPENDITURES. The amount of each separate expenditure with respect to an item of listed property, such as the cost of acquisition, the cost of capital improvements, lease payments, the cost of maintenance and repairs, or other expenditures, and

(B) USES. The amount of each business/investment use (as defined in section 1.280F-6T(d)(3) and (e)), based on the appropriate measure (i.e., mileage for automobiles and other means of transportation and time for other listed property, unless the Commissioner approves an alternative method), and the total use of the listed property for the taxable period.

(ii) TIME. Date of the expenditure or use with respect to listed property, and

(iii) BUSINESS OR INVESTMENT PURPOSE. The business purpose for an expenditure or use with respect to any listed property (see section 1.274-5T(c)(6)(i)(B) and (C) for special rules for the aggregation of expenditures and business use and section 1.280F-6T(d)(2) for the distinction between qualified business use and business/investment use).

See also section 1.274-5T(e) relating to the substantiation of business use of employer-provided listed property and section 1.274-6T for special rules for substantiating the business/investment use of certain types of listed property.

(c) RULES OF SUBSTANTIATION--(1) IN GENERAL. Except as otherwise provided in this section and section 1.274-6T, a taxpayer must substantiate each element of an expenditure or use (described in paragraph (b) of this section) by adequate records or by sufficient evidence corroborating his own statement. Section 274(d) contemplates that a taxpayer will maintain and produce such substantiation as will constitute proof of each expenditure or use referred to in section 274. Written evidence has considerably more probative value than oral evidence alone. In addition, the probative value of written evidence is greater the closer in time it relates to the expenditure or use. A contemporaneous log is not required, but a record of the elements of an expenditure or of a business use of listed property made at or near the time of the expenditure or use, 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 or use 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 or use 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 paragraph (c)(2) of this section.

(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, log, statement of expense, trip sheets, or similar record (as provided in paragraph (c)(2)(ii) of this section), and documentary evidence (as provided in paragraph (c)(2)(iii) of this section) which, in combination, are sufficient to establish each element of an expenditure or use specified in paragraph (b) of this section. It is not necessary to record information in an account book, diary, log, statement of expense, trip sheet, or similar record which duplicates information reflected on a receipt so long as the account book, etc. and receipt complement each other in an orderly manner.

(ii) ACCOUNT BOOK, DIARY, ETC. An account book, diary, log, statement of expense, trip sheet, or similar record must be prepared or maintained in such manner that each recording of an element of an expenditure or use is made at or near the time of the expenditure or use.

(A) MADE AT OR NEAR THE TIME OF THE EXPENDITURE OR USE. For purposes of this section, the phrase "made at or near the time of the expenditure or use" means the elements of an expenditure or use are recorded at a time when, in relation to the use or making of an expenditure, the taxpayer has full present knowledge of each element of the expenditure or use, such as the amount, time, place, and business purpose of the expenditure and business relationship. An expense account statement which is a transcription of an account book, diary, log, or similar record prepared or maintained in accordance with the provisions of this paragraph (c)(2)(ii) shall be considered a record prepared or maintained in the manner prescribed in the preceding sentence if such expense account statement is submitted by an employee to his employer or by an independent contractor to his client or customer in the regular course of good business practice. For example, a log maintained on a weekly basis, which accounts for use during the week, shall be considered a record made at or near the time of such use.

(B) SUBSTANTIATION OF BUSINESS PURPOSE. In order to constitute an adequate record of business purpose within the meaning of section 274(d) and this paragraph (c)(2), a written statement of business purpose generally is required. However, the degree of substantiation necessary to establish business purpose will vary depending upon the facts and circumstances of each case. Where the business purpose is evident from the surrounding facts and circumstances, a written explanation of such business purpose will not be required. For example, in the case of a salesman calling on customers on an established sales route, a written explanation of the business purpose of such travel ordinarily will not be required. Similarly, in the case of a business meal described in section 274(e)(1), if the business purpose of such meal is evident from the business relationship to the taxpayer of the persons entertained and other surrounding circumstances, a written explanation of such business purpose will not be required.

(C) SUBSTANTIATION OF BUSINESS USE OF LISTED PROPERTY--(1) DEGREE OF SUBSTANTIATION. In order to constitute an adequate record (within the meaning of section 274(d) and this paragraph (c)(2)(ii)), which substantiates business/investment use of listed property (as defined in section 1.280F-6T(d)(3)), the record must contain sufficient information as to each element of every business/investment use. However, the level of detail required in an adequate record to substantiate business/investment use may vary depending upon the facts and circumstances. For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of a truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number miles driven during the taxable year, the length of the delivery route once, and the date of each trip at or near the time of the trips. Alternatively, the taxpayer may establish the date of each trip with a receipt, record of delivery, or other documentary evidence.

(2) WRITTEN RECORD. Generally, an adequate record must be written. However, a record of the business use of listed property, such as a computer or automobile, prepared in a computer memory device with the aid of a logging program will constitute an adequate record.

(D) CONFIDENTIAL INFORMATION. If any information relating to the elements of an expenditure or use, such as place, business purpose, or business relationship, is of a confidential nature, such information need not be set forth in the account book, diary, log, statement of expense, trip sheet, or similar record, provided such information is recorded at or near the time of the expenditure or use and is elsewhere available to the district director to substantiate such element of the expenditure or use.

(iii) DOCUMENTARY EVIDENCE. Documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure shall be required for--

(v) SUBSTANTIAL COMPLIANCE. If a taxpayer has not fully substantiated a particular element of an expenditure or use, but the taxpayer establishes to the satisfaction of the district director that he has substantially complied with the "adequate records" requirements of this paragraph (c)(2) with respect to the expenditure or use, the taxpayer may be permitted to establish such element by evidence which the district director shall deem adequate.

(3) SUBSTANTIATION BY OTHER SUFFICIENT EVIDENCE--(i) IN GENERAL. If a taxpayer fails to establish to the satisfaction of the district director that he has substantially complied with the "adequate records" requirements of paragraph (c) (2) of this section with respect to an element of an expenditure or use, then, except as otherwise provided in this paragraph, the taxpayer must establish such element--

(ii) SAMPLING--(A) IN GENERAL. Except as provided in paragraph (c)(3)(ii)(B) of this section, a taxpayer may maintain an adequate record for portions of a taxable year and use that record to substantiate the business/investment use of listed property for all or a portion of the taxable year if the taxpayer can demonstrate by other evidence that the periods for which an adequate record is maintained are representative of the use for the taxable year or a portion thereof.

(B) EXCEPTION FOR POOLED VEHICLES. The sampling method of paragraph (c)(3)(ii)(A) of this section may not be used to substantiate the business/investment use of an automobile or other vehicle of an employer that is made available for use by more than one employee for all or a portion of a taxable year.

(C) EXAMPLES. The following examples illustrate this paragraph (c)(3)(ii).

(4) SUBSTANTIATION IN EXCEPTIONAL CIRCUMSTANCES. If a taxpayer establishes that, by reason of the inherent nature of the situation--

(i) He was unable to obtain evidence with respect to an element of the expenditure or use which conforms fully to the "adequate records" requirements of paragraph (c)(2) of this section,

(ii) He is unable to obtain evidence with respect to such element which conforms fully to the "other sufficient evidence" requirements of paragraph (c)(3) of this section, and

(iii) He has presented other evidence, with respect to such element, which possesses the highest degree of probative value possible under the circumstances, such other evidence shall be considered to satisfy the substantiation requirements of section 274(d) and this paragraph.

(5) LOSS OF RECORDS DUE TO CIRCUMSTANCES BEYOND CONTROL OF THE TAXPAYER. Where the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through circumstances beyond the taxpayer's control, such as destruction by fire, flood, earthquake, or other casualty, the taxpayer shall have a right to substantiate a deduction by reasonable reconstruction of his expenditures or use.

(6) SPECIAL RULES--(i) SEPARATE EXPENDITURE OR USE--(A) IN GENERAL. For the purposes of this section each separate payment or use by the taxpayer shall ordinarily be considered to constitute a separate expenditure. However, concurrent or repetitious expenses or uses may be substantiated as a single item. To illustrate the above rules, where a taxpayer entertains a business guest at dinner and thereafter at the theater, the payment for dinner shall be considered to constitute one expenditure and the payment for the tickets for the theater shall be considered to constitute a separate expenditure. Similarly, if during a day of business travel a taxpayer makes separate payments for breakfast, lunch, and dinner, he shall be considered to have made three separate expenditures. However, if during entertainment at a cocktail lounge the taxpayer pays separately for each serving of refreshments, the total amount expended for the refreshments will be treated as a single expenditure. A tip may be treated as a separate expenditure.

(B) AGGREGATION OF EXPENDITURES. Except as otherwise provided in this section, the account book, diary, log, statement of expense, trip sheet, or similar record required by paragraph (c)(2)(ii) of this section shall be maintained with respect to each separate expenditure and not with respect to aggregate amounts for two or more expenditures. Thus, each expenditure for such items as lodging and air or rail travel shall be recorded as a separate item and not aggregated. However, at the option of the taxpayer, amounts expended for breakfast, lunch, or dinner, may be aggregated. A tip or gratuity which is related to an underlying expense may be aggregated with such expense. In addition, amounts expended in connection with the use of listed property during a taxable year, such as for gasoline or repairs for an automobile, may be aggregated. If these expenses are aggregated, the taxpayer must establish the date and amount, but need not prove the business purpose of each expenditure. Instead, the taxpayer may prorate the expenses based on the total business use of the listed property. For other provisions permitting recording of aggregate amounts in an account book, diary, log, statement of expense, trip sheet, or similar record, see paragraphs (b)(2)(i) and (b)(3) of this section (relating to incidental costs of travel and entertainment).

(C) AGGREGATION OF BUSINESS USE. Uses which may be considered part of a single use, for example, a round trip or uninterrupted business use, may be accounted for by a single record. For example, use of a truck to make deliveries at several different locations which begins and ends at the business premises and which may include a stop at the business premises in between two deliveries may be accounted for by a single record of miles driven. In addition, use of a passenger automobile by a salesman for a business trip away from home over a period of time may be accounted for by a single record of miles traveled. De minimis personal use (such as a stop for lunch on the way between two business stops) is not an interruption of business use.

(ii) ALLOCATION OF EXPENDITURE. For purposes of this section, if a taxpayer has established the amount of an expenditure, but is unable to establish the portion of such amount which is attributable to each person participating in the event giving rise to the expenditure, such amount shall ordinarily be allocated to each participant on a pro rata basis, if such determination is material. Accordingly, the total number of persons for whom a travel or entertainment expenditure is incurred must be established in order to compute the portion of the expenditure allocable to each such person.

(iii) PRIMARY USE OF A FACILITY. Section 274(a)(1)(B) and (2)(C) deny a deduction for any expenditure paid or incurred before January 1, 1979, with respect to a facility, or paid or incurred at any time with respect to a club, used in connection with an entertainment activity unless the taxpayer establishes that the facility (including a club) was used primarily for the furtherance of the taxpayer's trade or business. A determination whether a facility before January 1, 1979, or a club at any time, was used primarily for the furtherance of the taxpayer's trade or business will depend upon the facts and circumstances of each case. In order to establish that a facility was used primarily for the furtherance of his trade or business, the taxpayer shall maintain records of the use of the facility, the cost of using the facility, mileage or its equivalent (if appropriate), and such other information as shall tend to establish such primary use. Such records of use shall contain--

(iv) ADDITIONAL INFORMATION. In a case where it is necessary to obtain additional information, either--

(7) SPECIFIC EXCEPTIONS. Except as otherwise prescribed by the Commissioner, substantiation otherwise required by this paragraph is not required for--

(i) Expenses described in section 274(e)(2) relating to food and beverages for employees, section 274(e)(3) relating to expenses treated as compensation, section 274(e)(8) relating to items available to the public, and section 274(e)(9) relating to entertainment sold to customers, and

(ii) Expenses described in section 274(e)(5) relating to recreational, etc., expenses for employees, except that a taxpayer shall keep such records or other evidence as shall establish that such expenses were for activities (or facilities used in connection therewith) primarily for the benefit of employees other than employees who are officers, shareholders or other owners (as defined in section 274(e)(5)), or highly compensated employees.

(d) DISCLOSURE ON RETURNS--(1) IN GENERAL. The Commissioner may, in his discretion, prescribe rules under which any taxpayer claiming a deduction or credit for entertainment, gifts, travel, or with respect to listed property, or any other person receiving advances, reimbursements, or allowances for such items, shall make disclosure on his tax return with respect to such items. The provisions of this paragraph shall apply notwithstanding the provisions of paragraph (f) of this section.

(2) BUSINESS USE OF PASSENGER AUTOMOBILES AND OTHER VEHICLES. (i) On returns for taxable years beginning after December 31, 1984, taxpayers that claim a deduction or credit with respect to any vehicle are required to answer certain questions providing information about the use of the vehicle. The information required on the tax return relates to mileage (total, business, commuting, and other personal mileage), percentage of business use, date placed in service, use of other vehicles, after-work use, whether the taxpayer has evidence to support the business use claimed on the return, and whether or not the evidence is written.

(ii) Any employer that provides the use of a vehicle to an employee must obtain information from the employee sufficient to complete the employer's tax return. Any employer that provides more than five vehicles to its employees need not include any information on its return. The employer, instead, must obtain the information from its employees, indicate on its return that it has obtained the information, and retain the information received. Any employer--

(3) BUSINESS USE OF OTHER LISTED PROPERTY. On returns for taxable years beginning after December 31, 1984, taxpayers that claim a deduction or credit with respect to any listed property other than a vehicle (for example, a yacht, airplane, or certain computers) are required to provide the following information:

(i) The date that the property was placed in service,

(ii) The percentage of business use,

(iii) Whether evidence is available to support the percentage of business use claimed on the return, and

(iv) Whether the evidence is written.

(e) SUBSTANTIATION OF THE BUSINESS USE OF LISTED PROPERTY MADE AVAILABLE BY AN EMPLOYER FOR USE BY AN EMPLOYEE--(1) EMPLOYEE--(i) IN GENERAL. An employee may not exclude from gross income as a working condition fringe any amount of the value of the availability of listed property provided by an employer to the employee, unless the employee substantiates for the period of availability the amount of the exclusion in accordance with the requirements of section 274(d) and either this section or section 1.274-6T.

(ii) VEHICLES TREATED AS USED ENTIRELY FOR PERSONAL PURPOSES. If an employer includes the value of the availability of a vehicle (as defined in section 1.61-2T Q/A-20) in an employee's gross income without taking into account any exclusion for a working condition fringe allowable under section 132 and the regulations thereunder with respect to the vehicle, the employee must substantiate any deduction claimed under section 1.162-25T for the business/investment use of the vehicle in accordance with the requirements of section 274 (d) and either this section or section 1.274-6T.

(2) EMPLOYER--(i) IN GENERAL. An employer substantiates its business/investment use of listed property by showing either--

(f) REPORTING AND SUBSTANTIATION OF EXPENSES OF CERTAIN EMPLOYEES FOR TRAVEL, ENTERTAINMENT, GIFTS, AND WITH RESPECT TO LISTED PROPERTY--(1) IN GENERAL. The purpose of this paragraph is to provide rules for reporting and substantiation of certain expenses paid or incurred by employees in connection with the performance of services as employees. For purposes of this paragraph, the term "business expenses" means ordinary and necessary expenses for travel, entertainment, gifts, or with respect to listed property which are deductible under section 162, and the regulations thereunder, to the extent not disallowed by sections 262, 274(c), and 280F. Thus, the term "business expenses" does not include personal, living, or family expenses disallowed by section 262, travel expenses disallowed by section 274(c), or cost recovery deductions and credits with respect to listed property disallowed by section 280F(d)(3) because the use of such property is not for the convenience of the employer and required as a condition of employment. Except as provided in paragraph (f)(2), advances, reimbursements, or allowances for such expenditures must be reported as income by the employee.

(2) REPORTING OF EXPENSES FOR WHICH THE EMPLOYEE IS REQUIRED TO MAKE AN ADEQUATE ACCOUNTING TO HIS EMPLOYER--(i) REIMBURSEMENTS EQUAL TO EXPENSES. For purposes of computing tax liability, an employee need not report on his tax return business expenses for travel, transportation, entertainment, gifts, or with respect to listed property, paid or incurred by him solely for the benefit of his employer for which he is required to, and does, make an adequate accounting to his employer (as defined in paragraph (f)(4) of this section) and which are charged directly or indirectly to the employer (for example, through credit cards) or for which the employee is paid through advances, reimbursements, or otherwise, provided that the total amount of such advances, reimbursements, and charges is equal to such expenses.

(ii) REIMBURSEMENTS IN EXCESS OF EXPENSES. In case the total of the amounts charged directly or indirectly to the employer or received from the employer as advances, reimbursements, or otherwise, exceeds the business expenses paid or incurred by the employee and the employee is required to, and does, make an adequate accounting to his employer for such expenses, the employee must include such excess (including amounts received for expenditures not deductible by him) in income.

(iii) EXPENSE IN EXCESS OF REIMBURSEMENTS. If an employee incurs deductible business expenses on behalf of his employer which exceed the total of the amounts charged directly or indirectly to the employer and received from the employer as advances, reimbursements, or otherwise, and the employee makes an adequate accounting to his employer, the employee must be able to substantiate any deduction for such excess with such records and supporting evidence as will substantiate each element of an expenditure (described in paragraph (b) of this section) in accordance with paragraph (c) of this section.

(3) REPORTING OF EXPENSES FOR WHICH THE EMPLOYEE IS NOT REQUIRED TO MAKE AN ADEQUATE ACCOUNTING TO HIS EMPLOYER. If the employee is not required to make an adequate accounting to his employer for his business expenses or, though required, fails to make an adequate accounting for such expenses, he must submit, as a part of his tax return, the appropriate form issued by the Internal Revenue Service for claiming deductions for employee business expenses (e.g., Form 2106, Employee Business Expenses, for 1985) and provide the information requested on that form, including the information required by paragraph (d)(2) and (3) of this section if the employee's business expenses are with respect to the use of listed property. In addition, the employee must maintain such records and supporting evidence as will substantiate each element of an expenditure or use (described in paragraph (b) of this section) in accordance with paragraph (c) of this section.

(4) DEFINITION OF AN "ADEQUATE ACCOUNTING" TO THE EMPLOYER. For purposes of this paragraph 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 which 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 his 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 such 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.

(5) SUBSTANTIATION OF EXPENDITURES BY CERTAIN EMPLOYEES. An employee who makes an adequate accounting to his employer within the meaning of this paragraph will not again be required to substantiate such expense account information except in the following cases:

(i) An employee whose business expenses exceed the total of amounts charged to his employer and amounts received through advances, reimbursements or otherwise and who claims a deduction on his return for such excess,

(ii) An employee who is related to his employer within the meaning of section 267(b), but for this purpose the percentage referred to in section 267(b)(2) shall be 10 percent, and

(iii) Employees in cases where it is determined that the accounting procedures used by the employer for the reporting and substantiation of expenses by such employees are not adequate, or where it cannot be determined that such procedures are adequate. The district director will determine whether the employer's accounting procedures are adequate by considering the facts and circumstances of each case, including the use of proper internal controls. For example, an employer should require that an expense account be verified and approved by a reasonable person other than the person incurring such expenses. Accounting procedures will be considered inadequate to the extent that the employer does not require an adequate accounting from his employees as defined in paragraph (f)(4) of this section, or does not maintain such substantiation. To the extent an employer fails to maintain adequate accounting procedures he will thereby obligate his employees to substantiate separately their expense account information.

(g) SUBSTANTIATION BY REIMBURSEMENT ARRANGEMENTS OR PER DIEM, MILEAGE, AND OTHER TRAVELING ALLOWANCES. The Commissioner may, in his discretion, prescribe rules under which--

(h) REPORTING AND SUBSTANTIATION OF CERTAIN REIMBURSEMENTS OF PERSONS OTHER THAN EMPLOYEES--(1) IN GENERAL. The purpose of this paragraph is to provide rules for the reporting and substantiation of certain expenses for travel, entertainment, gifts, or with respect to listed property paid or incurred by one person (hereinafter termed "independent contractor") in connection with services performed for another person other than an employer (hereinafter termed "client or customer") under a reimbursement or other expense allowance arrangement with such client or customer. For purposes of this paragraph, the term "business expenses" means ordinary and necessary expenses for travel, entertainment, gifts, or with respect to listed property which are deductible under section 162, and the regulations thereunder, to the extent not disallowed by sections 262 and 274(c). Thus, the term "business expenses" does not include personal, living, or family expenses disallowed by section 262 or travel expenses disallowed by section 274(c), and reimbursements for such expenditures must be reported as income by the independent contractor. For purposes of this paragraph, the term "reimbursements" means advances, allowances, or reimbursements received by an independent contractor for travel, entertainment, gifts, or with respect to listed property in connection with the performance by him of services for his client or customer, under a reimbursement or other expense allowance arrangement with his client or customer, and includes amounts charged directly or indirectly to the client or customer through credit card systems or otherwise. See paragraph (j) of this section relating to the substantiation of meal expenses while traveling away from home.

(2) SUBSTANTIATION BY INDEPENDENT CONTRACTORS. An independent contractor shall substantiate, with respect to his reimbursements, each element of an expenditure (described in paragraph (b) of this section) in accordance with the requirements of paragraph (c) of this section; and, to the extent he does not so substantiate, he shall include such reimbursements in income. An independent contractor shall so substantiate a reimbursement for entertainment regardless of whether he accounts (within the meaning of paragraph (h)(3) of this section) for such entertainment.

(3) ACCOUNTING TO A CLIENT OR CUSTOMER UNDER SECTION 274(e)(4)(B). Section 274(e)(4)(B) provides that section 274(a) (relating to disallowance of expenses for entertainment) shall not apply to expenditures for entertainment for which an independent contractor has been reimbursed if the independent contractor accounts to his client or customer, to the extent provided by section 274(d). For purposes of section 274(e)(4)(B), an independent contractor shall be considered to account to his client or customer for an expense paid or incurred under a reimbursement or other expense allowance arrangement with his client or customer if, with respect to such expense for entertainment, he submits to his client or customer adequate records or other sufficient evidence conforming to the requirements of paragraph (c) of this section.

(4) SUBSTANTIATION BY CLIENT OR CUSTOMER. A client or customer shall not be required to substantiate, in accordance with the requirements of paragraph (c) of this section, reimbursements to an independent contractor for travel and gifts, or for entertainment unless the independent contractor has accounted to him (within the meaning of section 274(e)(4)(B) and paragraph (h)(3) of this section) for such entertainment. If an independent contractor has so accounted to a client or customer for entertainment, the client or customer shall substantiate each element of the expenditure (as described in paragraph (b) of this section) in accordance with the requirements of paragraph (c) of this section.

(i) (Reserved).

(j) AUTHORITY FOR AN OPTIONAL METHOD OF COMPUTING MEAL EXPENSES WHILE TRAVELING AWAY FROM HOME. The Commissioner may establish a method under which a taxpayer may elect to use a specified amount or amounts for meals while traveling away from home in lieu of substantiating the actual cost of meals. The taxpayer would not be relieved of substantiating 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.

(k) EXCEPTIONS FOR QUALIFIED NONPERSONAL USE VEHICLES--(1) IN GENERAL. The substantiation requirements of section 274(d) and this section do not apply to any qualified nonpersonal use vehicle (as defined in paragraph (k)(2) of this section).

(2) QUALIFIED NONPERSONAL USE VEHICLE--(i) IN GENERAL. For purposes of section 274(d) and this section, the term "qualified nonpersonal use vehicle" means any vehicle which, by reason of its nature (i.e., design), is not likely to be used more than a de minimis amount for personal purposes.

      (ii) LIST OF VEHICLES. Vehicles which are qualified nonpersonal

(4) QUALIFIED MOVING VAN. The term "qualified moving van" means any truck or van used by a professional moving company in the trade or business of moving household or business goods if--

(i) No personal use of the van is allowed other than for travel to and from a move site (or for de minimis personal use, such as a stop for lunch on the way between two move sites),

(ii) Personal use for travel to and from a move site is an irregular practice (i.e., not more than five times a month on average), and

(iii) Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location.

(5) QUALIFIED SPECIALIZED UTILITY REPAIR TRUCK. The term "qualified specialized utility repair truck" means any truck (not including a van or pickup truck) specifically designed and used to carry heavy tools, testing equipment, or parts if--

(i) The shelves, racks, or other permanent interior construction which has been installed to carry and store such heavy items is such that it is unlikely that the truck will be used more than a de minimis amount for personal purposes, and

(ii) The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services.

(6) UNMARKED LAW ENFORCEMENT VEHICLES.--(i) IN GENERAL. The substantiation requirements of section 274(d) and this section do not apply to officially authorized uses of an unmarked vehicle by a "law enforcement officer". To qualify for this exception, any personal use must be authorized by the Federal, State, county, or local governmental agency or department that owns or leases the vehicle and employs the officer, and must be incident to law-enforcement functions, such as being able to report directly from home to a stakeout or surveillance site, or to an emergency situation. Use of an unmarked vehicle for vacation or recreation trips cannot qualify as an authorized use.

(ii) LAW ENFORCEMENT OFFICER. The term "law enforcement officer" means an individual who is employed on a full-time basis by a governmental unit that is responsible for the prevention or investigation of crime involving injury to persons or property (including apprehension or detention of persons for such crimes), who is authorized by law to carry firearms, execute search warrants, and to make arrests (other than merely a citizen's arrest), and who regularly carries firearms (except when it is not possible to do so because of the requirements of undercover work). The term "law enforcement officer" may include an arson investigator if the investigator otherwise meets the requirements of this paragraph (k)(6)(ii), but does not include Internal Revenue Service special agents.

(7) TRUCKS AND VANS. The substantiation requirements of section 274(d) and this section apply generally to any pickup truck or van, unless the truck or van has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes. For example, a van that has only a front bench for seating, in which permanent shelving that fills most of the cargo area has been installed, that constantly carries merchandise or equipment, and that has been specially painted with advertising or the company's name, is a vehicle not likely to be used more than a de minimis amount for personal purposes.

(8) EXAMPLES. The following examples illustrate the provisions of paragraph (k)(3) and (6) of this section:

(m) EFFECTIVE DATE. Section 274(d), as amended by the Tax Reform Act of 1984 and Public Law 99-44, and this section (except as provided in paragraph (d)(2) and (3) of this section) apply with respect to taxable years beginning after December 31, 1985. Section 274(d) and this section apply to any deduction or credit claimed in a taxable year beginning after December 31, 1985, with respect to any listed property, regardless of the taxable year in which the property was placed in service. However, except as provided in section 1.132-1T Q/A-4b with respect to qualified nonpersonal use vehicles, the substantiation requirements of section 274(d) and this section do not apply to the determination of an employee's working condition fringe exclusion or to the determination under section 1.162-25T(b) of an employee's deduction before the date that those requirements apply, under this paragraph (m), to the employer, if the employer is taxable.

Par. 7. New section 1.274-6T is added immediately after section 1.274-5T and reads as follows:

[Editor's Note: Regulation section 1.274-6T was modified by Treasury Decision 8063.]

Section 1.274-6T Substantiation with respect to certain types of listed property for taxable years beginning after 1985 (temporary).

(a) WRITTEN POLICY STATEMENTS AS TO VEHICLES--(1) IN GENERAL. Two types of written policy statements satisfying the conditions described in paragraph (a)(2) and (3) of this section, if initiated and kept by an employer to implement a policy of no personal use, or no personal use except for commuting, of a vehicle provided by the employer, qualify as sufficient evidence corroborating the taxpayer's own statement and therefore will satisfy the employer's substantiation requirements under section 274(d). Therefore, the employee need not keep a separate set of records for purposes of the employer's substantiation requirements under section 274(d) with respect to use of a vehicle satisfying these written policy statement rules. A written policy statement adopted by a governmental unit as to employee use of its vehicles is eligible for these exceptions to the section 274(d) substantiation rules. Thus, a resolution of a city council or a provision of state law or a state constitution would qualify as a written policy statement, as long as the conditions described in paragraph (a)(2) and (3) of this section are met.

(2) VEHICLES NOT USED FOR PERSONAL PURPOSES--(i) EMPLOYERS. A policy statement that prohibits personal use by an employee satisfies an employer's substantiation requirements under section 274(d) if all the following conditions are met--

(ii) EMPLOYEES. An employee, in lieu of substantiating the business/investment use of an employer-provided vehicle under section 1.274-5T, may treat all use of the vehicle as business/investment use if the following conditions are met--

(3) VEHICLES NOT USED FOR PERSONAL PURPOSES OTHER THAN COMMUTING--(i) EMPLOYERS. A policy statement that prohibits personal use by an employee, other than commuting, satisfies an employer's substantiation requirements under section 274(d) if all the following conditions are met--

(ii) EMPLOYEES. An employee, in lieu of substantiating the business/investment use of an employer-provided vehicle under section 1.274-5T, may substantiate any exclusion allowed under section 132 for a working condition fringe by including in income the commuting value of the vehicle (determined by the employer pursuant to section 1.61-2T Q/A-21) if all the following conditions are met:

(b) VEHICLES USED IN CONNECTION WITH THE BUSINESS OF FARMING-- (1) IN GENERAL. If, during a taxable year or shorter period, a vehicle, not otherwise described in section 274(i), section 1.74-5T(k), or paragraph (a)(2) or (3) of this section, is owned or leased by an employer and used during most of a normal business day directly in connection with the business of farming (as defined in paragraph (b)(2) of this section), the employer, in lieu of substantiating the use of the vehicle as prescribed in section 1.274-5T(b)(6)(i)(B), may determine any deduction or credit with respect to the vehicle as if the business/investment use (as defined in section 1.280F-6T(d)(3)(i)) and the qualified business use (as defined in section 1.280F-6T(d)(2)) of the vehicle in the business of farming for the taxable year or shorter period were 75 percent plus that percentage, if any, attributable to an amount included in an employee's gross income. If the vehicle is also available for personal use by employees, the employer must include the value of that personal use in the gross income of the employees, allocated among them in the manner prescribed in section 1.132-1T Q/A-4a(f).

(2) DIRECTLY IN CONNECTION WITH THE BUSINESS OF FARMING. The phrase "directly in connection with the business of farming" means that the vehicle must be used directly in connection with the business of operating a farm (i.e., cultivating land or raising or harvesting any agricultural or horticultural commodity, or the raising, shearing, feeding, caring for, training, and management of animals) or incidental thereto (for example, trips to the feed and supply store).

(3) SUBSTANTIATION BY EMPLOYEES. If an employee is provided with the use of a vehicle to which this paragraph (b) applies, the employee may, in lieu of substantiating the business/investment use of the vehicle in the manner prescribed in section 1.274-5T, substantiate any exclusion allowed under section 132 for a working condition fringe as if the business/investment use of the vehicle were 75 percent, plus that percentage, if any, determined by the employer to be attributable to the use of the vehicle by individuals other than the employee, provided that the employee includes in gross income the amount determined by the employer as includible in the employee's gross income. See Section 1.132-1T Q/A-4a(f) for examples illustrating the allocation of use of a vehicle among employees.

(c) VEHICLES TREATED AS USED ENTIRELY FOR PERSONAL PURPOSES. An employer may satisfy the substantiation requirements under section 274(d) for a taxable year or shorter period with respect to the business use of a vehicle that is provided to an employee by including the value of the availability of the vehicle during the relevant period in the employee's gross income without any exclusion for a working condition fringe with respect to the vehicle and, if required, by withholding any taxes. Under these circumstances, the employer's business/investment use of the vehicle during the relevant period is 100 percent. The employer's qualified business use of the vehicle is dependent upon the relationship of the employee to the employer (see section 1.280F-6T(d)(2)).

(d) LIMITATION. If a taxpayer chooses to satisfy the substantiation requirements of section 274(d) and section 1.274-5T by using one of the methods prescribed in paragraphs (a)(2) or (3), (b), or (c) of this section and files a return with the Internal Revenue Service for a taxable year consistent with such choice, the taxpayer may not later use another of these methods. Similarly, if a taxpayer chooses to satisfy the substantiation requirements of section 274(d) in the manner prescribed in section 1.274-5T and files a return with the Internal Revenue Service for a taxable year consistent with such choice, the taxpayer may not later use a method prescribed in paragraph (a)(2) or (3), (b), or (c) of this section. This rule applies to an employee for purposes of substantiating any working condition fringe exclusion as well as to an employer. For example, if an employee excludes on his federal income tax return for a taxable year 90 percent of the value of the availability of an employer-provided automobile on the basis of records that allegedly satisfy the "adequate records" requirement of section 1.274-5T(c) (2), and that requirement is not satisfied, then the employee may not satisfy the substantiation requirements of section 274(d) for the taxable year by any method prescribed in this section, but may present other corroborative evidence as prescribed in section 1.274-5T(c)(3).

(e) DEFINITIONS--(1) IN GENERAL. The definitions provided in this paragraph (e) apply for purposes of section 274 (d), section 1.274-5T, and this section.

(2) EMPLOYER AND EMPLOYEE. The terms "employer" and "employee" include the following:

(i) A sole proprietor shall be treated as both an employer and employee,

(ii) A partnership shall be treated as an employer of its partners, and

(iii) A partner shall be treated as an employee of the partnership.

(3) AUTOMOBILE. The term "automobile" has the same meaning as prescribed in section 1.61-2T Q/A-11.

(4) VEHICLE. The term "vehicle" has the same meaning as prescribed in section 1.61-2T Q/A-20.

(5) PERSONAL USE. "Personal use" by an employee of an employer-provided vehicle includes use in any trade or business other than the trade or business of being the employee of the employer providing the vehicle.

(f) EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 1885.

Par. 8. Section 1.280F-1T was amended by adding a new paragraph (c)(3) to read as follows:

[Editor's Note: Regulation section 1.280F-1T has been modified by Treasury Decision 8218 on August 9, 1988 and by Treasury Decision 8473 on April 12, 1993.]

Section 1.280F-1T Limitations on investment tax credit and recovery deductions under section 168 for passenger automobiles and certain other listed property; overview of regulations (temporary).

* * * * *

(c) EFFECTIVE DATES.-- * * *

(3) LEASED PASSENGER AUTOMOBILES. Section 1.280F-5T(e) generally applies to passenger automobiles leased after April 2, 1985, in taxable years ending after that date. Section 1.280F-5T(e) does not apply to any passenger automobile that is leased pursuant to a binding contract, which is entered into no later than April 2, 1985, and which is in effect at all times thereafter, but only if the automobile is used under the lease before August 1, 1985. If section 1.280F-5T(e) does not apply to a passenger automobile, see paragraph (c)(1) and (2) of this section.

Par. 9. Section 1.280F-3T is amended by revising the first sentence of paragraph (d)(3) to read as follows: "A taxpayer must be able to substantiate the use of any listed property, as prescribed in section 274(d)(4) and section 1.274-5T or section 1.274-6T, for any taxable year for which recapture under section 280F (b)(3) and paragraph (d)(1) and (2) of this section may occur even if the taxpayer has fully depreciated (or expensed) the listed property in a prior year."

Par. 10. Section 1.280F-5T is amended as follows:

1. The caption of paragraph (d) and the first sentence of paragraph (d)(1) are revised to read as set forth below.

2. The first sentence of paragraph (d)(2)(i) is amended by adding after the words "passenger automobile" the clause ", which is leased after June 18, 1984, and before April 3, 1985,".

3. Paragraph (d)(2)(ii) is amended by removing the words "paragraph (g)(2)" and "paragraph (g)(3)" wherever they appear and by adding in their places the words "paragraph (h)(2)" and "paragraph (h)(3)", respectively. Paragraph (d)(2)(ii) is further amended by removing the words "paragraph (d)(3)(iii)" and "paragraph (d)(3)(iv)" and by adding in their places the words "paragraph (d)(2)(iii)" and "paragraph (d)(2)(iv)", respectively.

4. Paragraphs (e), (f), (g), and (h) are redesignated as paragraphs (f), (g), (h), and (i).

5. A new paragraph (e) is added immediately after paragraph (d) and reads as set forth below.

6. Paragraph (f) as redesignated is amended by removing from paragraph (f)(2)(i) the words "paragraph (g)(2)" and by adding in their place the words "paragraph (h)(2)", by removing from paragraph (f)(2)(ii) the words "paragraph (g)(3)" and by adding in their place the words "paragraph (h)(3)", and by removing from paragraph (f) (2)(iii) the words "paragraph (e)(3)" and by adding in their place the words "paragraph (f)(3)".

7. The first sentence of paragraph (g) as redesignated is revised to read as set forth below.

8. Paragraph (g)(2) as redesignated is amended by removing the words "paragraph (f)(2)" and by adding in their place the words "paragraph (g)(2)".

9. The last sentence of paragraph (h)(3) as redesignated is amended by removing the words "paragraph (f)(1)" and by adding in their place the words "paragraph (g)(1)".

10. Example (3) of paragraph (i) as redesignated is amended by removing from the fourth sentence the words "paragraphs (e)(1) and (f)(1)", "paragraph (f)(3)", and "paragraph (e)(3)(ii)", and by adding in their places the words "paragraphs (f)(1) and (g)(1)", "paragraph (g)(3)", and "paragraph (f)(3)(ii)", respectively.

11. Example (4) of paragraph (i) as redesignated is amended by removing from the third sentence the words "paragraphs (e)(1) and (f)(1) and (2)", "paragraph (f)(3)", and "paragraph (e)(3)(i)", and by adding in their places the words "paragraphs (f)(1) and (g) (1) and (2)", "paragraph (g)(3)", and "paragraph (f)(3)(i)", respectively.

12. Paragraph (i) as redesignated is further amended by adding after example (4) two new examples to read as set forth below.

13. The new and revised provisions read as follows:

[Editor's Note: Regulation section 1.280F-5T was modified by Treasury Decision 8218 on August 9, 1988 and by Treasury Decision 8473 on April 12, 1993.]

Section 1.280F-5T Leased property (temporary).

* * * * *

(d) INCLUSIONS IN INCOME OF LESSEES OF PASSENGER AUTOMOBILES LEASED AFTER JUNE 18, 1984, AND BEFORE APRIL 3, 1985--(1) IN GENERAL. If a taxpayer leases a passenger automobile after June 18, 1984, but before April 3, 1985, for each taxable year during which the taxpayer leases the automobile, the taxpayer must include in gross income an inclusion amount (prorated for the number of days of the lease term included in that taxable year), determined under this paragraph (d) (1), and multiplied by the business/investment use (as defined in section 1.280F-6T(d)(3)(i)) for the particular taxable year. * * *

(e) INCLUSIONS IN INCOME OF LESSEES OF PASSENGER AUTOMOBILES LEASED AFTER APRIL 2, 1985--(1) IN GENERAL. For any passenger automobile that is leased after April 2, 1985, the inclusion amount for each taxable year during which an automobile is leased is based on the rules set forth in this paragraph (e). Additional inclusion amounts when a passenger automobile is not used predominantly in a qualified business use during a taxable year are determined under paragraph (e)(6) of this section. See paragraph (h)(2) of this section for the definition of fair market value.

(2) FAIR MARKET VALUE NOT GREATER THAN $50,000: YEARS ONE THROUGH THREE. For any passenger automobile that has a fair market value not greater than $50,000, the inclusion amount for each of the first three taxable years during which the automobile is leased is determined as follows:

(A) Determine the dollar amount by using the appropriate formula in paragraph (e)(4)(ii) of this section,

(B) Prorate the dollar amount for the number of days of the lease term included in the taxable year, and

(C) Multiply this dollar amount by the business/investment use for the taxable year.

(ii) The dollar amount is computed as follows:

(A) If the automobile is first used under the lease in the fourth quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of--

(1) $124, and

(2) 11 percent of the excess of the automobile's fair market value over $13,200.

(B) If the automobile is first used under the lease in the third quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of--

(1) $110, and

(2) 10 percent of the excess of the automobile's fair market value over $13,200.

(C) If the automobile is first used under the lease in the second quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of--

(1) $100, and

(2) 9 percent of the excess of the automobile's fair market value over $13,200.

(D) If the automobile is first used under the lease in the first quarter of a taxable year, the dollar amount for each of the first three taxable years during which the automobile is leased is the sum of--

(1) $90, and

(2) 8 percent of the excess of the automobile's fair market value over $13,200.

(E) For the fourth taxable year during which the automobile is leased, the dollar amount is 6 percent of the excess of the automobile's fair market value over $18,000.

(F) For the fifth taxable year during which the automobile is leased, the dollar amount is 6 percent of the excess of the automobile's fair market value over $22,800.

(G) For the sixth taxable year during which the automobile is leased, the dollar amount is 6 percent of the excess of the automobile's fair market value over $27,600.

(5) SEVENTH AND SUBSEQUENT TAXABLE YEARS. (i) For any passenger automobile that has a fair market value less than or equal to $32,400, the inclusion amount for the seventh and subsequent taxable years during which the automobile is leased is zero.

(ii) For any passenger automobile that has a fair market value greater than $32,400, the inclusion amount for the seventh and subsequent taxable years during which the automobile is leased is 6 percent of--

(A) The excess (if any) of the automobile's fair market value, over

(B) The sum of--

(1) $13,200 and

(2) $4,800 multiplied by the number of taxable years in excess of three years.

(6) ADDITIONAL INCLUSION AMOUNT WHEN LESS THAN PREDOMINANT USE IN A QUALIFIED BUSINESS USE. (i) If a passenger automobile, which is leased after April 2, 1985, is not predominantly used in a qualified business use during a taxable year, the lessee must add to gross income in the first taxable year that the automobile is not so used (and only in that year) an inclusion amount determined under this paragraph (e)(6). This inclusion amount is in addition to the amount required to be included in gross income under paragraph (e) (2), (3), (4), and (5) of this section.

(ii) If the fair market value (as defined in paragraph (h)(2) of this section) of the automobile is greater than $11,250, the inclusion amount is determined by multiplying the average of the business/investment use (as defined in paragraph (h)(3) of this section) by the appropriate dollar amount from the table in paragraph (e)(6)(iii) of this section. If the fair market value of the automobile is $11,250 or less, the inclusion amount is the product of the fair market value of the automobile, the average business/investment use, and the applicable percentage from the table in paragraph (e)(6)(iv) of this section.

(iii) The dollar amount is determined under the following table:

      If a passenger automobile          THE DOLLAR AMOUNT IS:

      If a passenger automobile       THE APPLICABLE PERCENTAGE

(g) SPECIAL RULES APPLICABLE TO INCLUSIONS IN INCOME OF LESSEES. This paragraph (g) applies to the inclusions in gross income of lessees prescribed under paragraphs (d)(2), (e)(6), or (f) of this section.

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(i) EXAMPLES. * * *

[Editor's Note: Reg. section 1.280F-6T was adopted as Sec. 1.280F-6 by T.D. 9133, 69 FR 35513-35515, June 25, 2004.]

Section 1.280F-6T Special rules and definitions (temporary).

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(b) * * *

(2) * * *

(ii) EXCEPTION. The term "listed property" does not include any vehicle that is a qualified nonpersonal use vehicle as defined in section 274(i) and section 1.274-5T(k).

(3) PROPERTY USED FOR ENTERTAINMENT, ETC.--(i) IN GENERAL. Property of a type generally used for purposes of entertainment, recreation, or amusement includes property such as photographic, phonographic, communication, and video recording equipment.

(ii) EXCEPTION. The term "listed property" does not include any photographic, phonographic, communication, or video recording equipment of a taxpayer if the equipment is used either exclusively at the taxpayer's regular business establishment or in connection with the taxpayer's principal trade or business.

(iii) REGULAR BUSINESS ESTABLISHMENT. The regular business establishment of an employee is the regular business establishment of the employer of the employee. For purposes of this paragraph (b)(3), a portion of a dwelling unit is treated as a regular business establishment if the requirements of section 280A(c)(1) are met with respect to that portion.

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PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 12. The authority citation for Part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 13. Section 602.101 (c) is amended by inserting in the appropriate places in the table

"Section 1.61-2T Q/A-20 . . . 1545-0771",

"Section 1.274-5T . . . . . . 1545-0771", and

"Section 1.274-6T . . . . . . 1545-0771".

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There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue this Treasury decision with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.