Rev. Rul. 54-195

SECTION 1. PURPOSE.

The purpose of this Revenue Ruling is to clarify Internal Revenue Service policy so as to promote uniformity in the application of the law and regulations to questions relating to the substantiation and allowance of deductions claimed under section 23(a)(1) of the Internal Revenue Code.

SEC. 2. PERSONAL AND FICTITIOUS EXPENSE DEDUCTIONS.

It appears that some taxpayers are erroneously claiming personal, living, or family expenses as business deductions. Also, instances have been found in which taxpayers have claimed fictitious deductions, or have otherwise made excessive claims with willful intent to defraud. Since the law specifically provides that only ordinary and necessary trade or business expenses properly may be claimed as deductions under section 23(a)(1), it follows that each taxpayer has the responsibility to claim as deductions only those items which the law so describes. It follows also that each representative of the Commissioner of Internal Revenue has the responsibility to make certain that no nondeductible items are allowed. Thus, each internal revenue agent is charged with the duty of closely scrutinizing claimed deductions for business expense and dealing appropriately with instances where personal expenses are claimed as business deductions. In any instance in which the examination of an income tax return reveals that fictitious deductions have been claimed, the case will be dealt with in accordance with the appropriate established procedures.

SEC. 3. ORDINARY AND NECESSARY BUSINESS EXPENSES.

.01. In the verification of deductions claimed for expenses paid or incurred in connection with a taxpayer's trade or business, problems constantly arise with respect to the verification of those deductions which are based upon a substantial number of small items of expenditure since they often are not susceptible of complete substantiation by documentary evidence. Typical of the deductions in which such questions arise are those for traveling and entertainment expense.

.02 This Revenue Ruling is not intended to require or permit that the taxpayer be relieved of the burden of proof in such matters nor to sanction any failure to comply with the record-keeping requirements of the law and regulations. It deals primarily with problems of evidence and its evaluation that are encountered in every day, practical administration of the tax laws. In connection with the consideration of deductions for items such as traveling and entertainment expense, the examining officer should excrcise careful judgment which will permit reasonable determinations under the law and regulations, provided he is satisfied that there is a proper basis for some allowance. This will involve consideration of such matters as the extent to which detailed verification is required, the papers or records essential to adequate substantiation, and the weight to be accorded oral statements and explanations. Such elements necessarily will vary according to the nature and relative tax importance of the items involved and the general circumstances surrounding the entire case.

.03 Close approximations of items not fully supported by documentary proof can very frequently be reached by reconstruction through resort to reliable secondary sources of information and collateral evidence. For example, in connection with a claimed item of traveling expense it might be possible for a taxpayer to satisfy the examiner that he was in a travel status a certain number of days out of each month or year but impossible for him to establish the details of all his various items of travel expense by documentary proof. In such a case rail fares or plane fares can be ascertained with exactness and automobile costs approximated on the basis of mileage covered. A reasonable approximation of meals and lodging might be based upon receipted hotel bills or by applying a daily rate (determined upon the basis of actual costs prevailing in the particular community for comparable accommodations) to the provable days of travel. Items such as tips, taxi fares, and the like can be based upon a reasonable approximation.

.04 In connection with the determination of factual matters of this type, due consideration should be given to the reasonableness of the taxpayer's stated expenditures for the claimed purposes in relation to his reported income, to the reliability and accuracy of his records in connection with other items more readily lending themselves to detailed record-keeping, and to the general credibility of his statements in the light of the entire record in the case. Disallowing amounts claimed for such items merely because there is available no documentary evidence which will establish the precise amount beyond any reasonable doubt ignores commonly-recognized business practice as well as the fact that proof may be established by credible oral testimony. On the other hand, it is not Service policy to allow a percentage or other arbitrarily-computed portion of deductions of this character merely for the purpose of settlement.

/*/ Originally issued as IR-Mimeograph No. 54-92, dated May 25, 1954.