'NORTH AMERICAN AREA' DEFINED FOR PURPOSES OF DEDUCTIBLE CONVENTION EXPENSES.

Rev. Rul. 87-95

ISSUE

Section 274(h) of the Internal Revenue Code of 1986 limits deductions for expenses incurred in connection with a convention, seminar, or similar meeting held outside the "North American area." This revenue ruling lists all the geographical areas included in the North American area for purposes of this section.

LAW AND ANALYSIS

Section 274(h) of the Code, as amended by the Tax Reform Act of 1986, 1986-3 (Vol. l) C.B. 1, prohibits any taxpayer from deducting under section 162 expenses incurred by or on behalf of an individual in attending a convention, seminar, or similar meeting (a "convention") held outside the "North American area." The prohibition does not apply if the taxpayer can demonstrate that the convention's location satisfies specified standards of reasonableness.

Section 274(h)(7) of the Code, added by the Tax Reform Act of 1986, provides that no deduction is allowed under section 212 for expenses allocable to a convention. This provision is effective for taxable years beginning after December 31, 1986.

Three different statutory provisions define the term "North American area" for purposes of section 274(h) of the Code.

SECTION 274(h)(3)(A)

Section 274(h)(3)(A) of the Code defines the North American area as the United States, its possessions, the Trust Territory of the Pacific Islands, Canada, and Mexico. Rev. Rul. 82-151, 1982-2 C.B. 75, holds that the North American area includes the United States Virgin Islands, Guam, and American Samoa. Rev. Rul. 78-23, 1978-1 C.B. 79, holds that for purposes of section 274(h), the Commonwealth of Puerto Rico is treated as a possession of the United States.

Until November 3, 1986, the Northern Mariana Islands were included in the Trust Territory of the Pacific Islands, and were part of the North American area for that reason. The Covenant to establish a Commonwealth of the Northern Mariana Islands in Political Union with the Unites States, Pub. L. No. 94-241, 90 Stat. 263 (1976), reprinted at 48 U.S.C. section 1681 note (1982) (the "Covenant"), entered into force on November 3, 1986, pursuant to Presidential Proclamation 5564, 22 Weekly Comp. Pres. Doc. 1522 (Nov. 3, 1986) (the "1986 Proclamation"). The 1986 Proclamation terminated the Trust Agreement with respect to the Northern Mariana Islands on the date the Covenant entered into force. The Covenant defines the relationship between the United States and the Commonwealth of the Northern Mariana Islands. Beginning November 3, 1986, the Commonwealth of the Northern Mariana Islands will be treated for purposes of section 274(h) of the Code as a possession of the United States, and from that date is part of the North American area for that reason.

As described in this revenue ruling, the Trust Agreement governing the Trust Territory of the Pacific Islands has been terminated for most areas therein. However, the 1986 Proclamation states that Palau is still included in the Trust Territory. Palau is therefore part of the North American area for that reason.

SECTION 274(h)(6)

Section 274(h)(6) of the Code provides that, with respect to any convention, the North American area includes "any beneficiary country" if at the time the convention begins (1) there is in effect an agreement described in section 274(h)(6)(C) providing for the exchange of information between the United States and the beneficiary country, and (2) there is not in effect a finding by the Secretary of the Treasury that the tax laws of the beneficiary country discriminate against conventions held in the United States. Section 274(h)(6)(B) defines a beneficiary country as either (1) a beneficiary country as defined in section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act (the "Act), 1983-2 C.B. 352, 360, or (2) Bermuda. Section 212(a)(1)(A) of the Act defines a beneficiary country as any country that (1) is on a list contained in that section, and (2) has been designated a beneficiary country by presidential proclamation.

Barbados, Jamaica, and Grenada are among the countries listed in section 212(a)(1)(A) of the Act, and are among the countries designated as beneficiary countries by Presidential Proclamation 5133, 3 CFR, 1983 Comp., page 126 (November 30, 1983), reprinted at 19 U.S.C section 1202 (Supp. III 1985). These three countries are therefore beneficiary countries as defined in section 274(h)(6) of the Code. Each has entered into an agreement described in section 274 (h)(6)(C) (the Agreement between the United States and Barbados for the Exchange of Information with Respect to Taxes, signed at Washington, D.C., on November 3, 1984, and entered into force on that date; the Agreement between the United States and Jamaica for the Exchange of Information with Respect to Taxes, signed at Washington, D.C., on December 18, 1986, and entered into force on that date; and the Agreement between the United States and Grenada for the Exchange of Information with Respect to Taxes, signed at Washington, D.C., on December 18, 1986, and entered into force on July 13, 1987). There has been no finding by the Secretary of the Treasury that the tax laws of Barbados, Jamaica, or Grenada discriminate against conventions held in the United States. These three countries are therefore part of the North American area pursuant to section 274(h)(6).

Article 25 of the Unites States-Jamaica Income Tax Convention, 1982-1 C.B. 257, provides in general that certain expenses incurred by a citizen or resident of the United States in connection with a convention, seminar, or similar meeting held in Jamaica may be deducted as if the convention had been held in the United States. This provision was added by a Protocol to the convention dated May 21, 1980, and is effective for conventions and meetings that began on or after January 1, 1982. These expenses may therefore be deducted without a specific showing of reasonableness, even though Jamaica did not become part of the North American area until December 18, 1986.

THE COMPACT OF FREE ASSOCIATION ACT OF 1985

Until late 1986, the Marshall Islands and the Federated States of Micronesia were included in the Trust Territory of the Pacific Islands, and were part of the North American area for that reason. Pursuant to the 1986 Proclamation, the Compact of Free Association Act of 1985, Pub. L. No. 99-239, 99 Stat. 1770 (1986), reprinted at 48 U.S.C. section 1681 note (Supp. III 1985) (the "Compact"), entered into force on October 21, 1986, with respect to the Republic of the Marshall Islands, and on November 3, 1986, with respect to the Federated States of Micronesia. The 1986 Proclamation terminated the Trust Agreement with respect to each area on the date the Compact entered into force for that area. However, section 405 of Title IV of the Compact provides that, for purposes of section 274(h)(3)(A) of the Code, both the Republic of the Marshall Islands and the Federated States of Micronesia are included in the North American area. Therefore, both areas continue to be part of the North American area despite the termination of the Trust Agreement.

HOLDING

For purposes of section 274(h) of the Code, the term "North American area" means the following places:

l. The fifty states of the United States and the District of Columbia;

2. The possessions of the Unites States, which for this purpose are American Samoa, Baker Island, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands, Palmyra, the United States Virgin Islands, Wake Island, and other United States islands, cays, and reefs not part of any of the fifty states or the District of Columbia;

3. Canada;

4. Mexico;

5. The Trust Territory of the Pacific Islands (that is, Palau);

6. Barbados (for expenses incurred in attending a convention that began on or after November 3, 1984);

7. Jamaica (for expenses incurred in attending a convention that began on or after December 18, 1986; See also the United States- Jamaica Income Tax Convention);

8. Grenada (for expenses incurred in attending a convention that began on or after July 13, 1987);

9. The Republic of the Marshall Islands; and

l0. The Federated States of Micronesia.

Expenses incurred in attending a convention, seminar, or similar meeting in these geographical areas may be deducted as provided in section 274(h). Pursuant to the United States-Jamaica Income Tax Convention, certain expenses incurred in connection with such a meeting held in Jamaica that began in a taxable year beginning on or after January 1, 1982, may also be deducted without a specific demonstration of reasonableness.

This revenue ruling will be updated as future events cause geographical areas to become included in or excluded from the North American area. For example, exchange of information agreements with Costa Rica and Saint Lucia have been signed, but have not yet entered into force. For current information on the compass of the North American area, taxpayers may telephone Branch 1 of the Office of the Associate Chief Counsel (International) at (202) 287-4851 (not a toll-free call).

EFFECTS ON OTHER REVENUE RULINGS

Rev. Rul. 82-151 and Rev. Rul. 78-23 are superseded.