Rev. Proc. 63-4

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to set forth answers to a number of specific questions which have been asked with respect to the substantiation requirements of section 1.274-5 of the Income Tax Regulations promulgated under section 274(d) of the Internal Revenue Code of 1954.

IN GENERAL

1. Question: Why did the Internal Revenue Service promulgate section 1.274-5 of the regulations, covering substantiation of deductions for travel, entertainment, and gifts at this time?

Answer: The Revenue Act of 1962, which was passed by Congress in October, 1962, imposes new restrictions on the deductibility of expenses for travel, entertainment, and gifts. One provision of the new law establishes tighter record-keeping requirements for substantiation of such deductions. The new law became effective on January 1, 1963. Consequently, it was important that taxpayers have definite rules for their guidance by January 1st in order that they might be certain their record keeping procedures conformed to the new requirements.

2. Question: Does the Service expect to publish any additional rules governing deductions for travel, entertainment, and gifts?

Answer: Yes. The regulations published now relate only to the new record-keeping requirements for substantiating such deductions. The Revenue Act of 1962, however, also imposes other restrictions on deductions for travel, entertainment, and gifts. For example, one of these restrictions is that a taxpayer must establish that an entertainment facility was used primarily for the furtherance of his trade or business. Regulations relating to these other restrictions will be issued in the near future.

3. Question: When must a taxpayer start keeping records under the new regulations which have been issued?

Answer: The new regulations are effective beginning January 1, 1963. However, the Commissioner of Internal Revenue has announced that he has instructed examining agents to allow reasonable tolerances in applying the new regulations to expenses incurred during January 1963, if the taxpayer makes a good-faith effort to comply with the new rules as rapidly as possible. See Rev. Proc. 63-3, page 473, this Bulletin.

4. Question: Do employers have a period during which to adjust their accounting procedures to comply with the new regulations?

Answer: The Service recognizes that some employers will not be able to adjust their present accounting systems and prepare new expense account forms and instructional material for their employees by January 1. Such taxpayers will be allowed up to March 31 to accommodate their accounting systems and procedures to the new regulations. They must, however, make every good-faith effort to comply as expeditiously as practicable with the new rules, and their present accounting systems must substantially conform to record-keeping requirements of pre-1963 law. See Rev. Proc. 63-3.

5. Question: What kind of substantiation for expenditures is required by the new regulations before a taxpayer may claim deductions?

Answer: In general, the new regulations require that a taxpayer keep records in reasonable detail covering his expenditures and keep receipts in some circumstances. The regulations explain in detail what procedures the taxpayer should follow.

RECORD KEEPING

6. Question: Must I keep my records in any special form of account book or expense statement, and do so at any special time?

Answer: No special form of record or diary is prescribed, but entries must be made on your records while you have full present knowledge of your expenditures.

7. Question: May an employee who keeps an adequate record of his expenditures in a diary transcribe such information onto an expense account form which he submits to his employer?

Answer: Yes.

8. Question: If a taxpayer wishes to take a deduction for business travel away from home, what records must he keep?

Answer: A taxpayer must record-

(1) the amount he spends daily, broken down into reasonable categories such as for meals, for gasoline and oil, and for taxi fares;

(2) the dates of departure and return for each trip and the number of days spent on business:

(3) the destinations or locality of travel; and

(4) the business reason for the travel or the nature of business benefits obtained or expected.

9. Question: Do the new rules require that I keep any new records for local travel?

Answer: No. The new rules apply to travel only when you are traveling away from home. The record-keeping requirements of existing law continue to apply to expenses for local travel.

10. Question: If a taxpayer wishes to take a deduction for entertainment which directly precedes or follows a substantial and bona fide business discussion, what records must he keep?

Answer: The taxpayer must record-

(1) the amounts he spends for entertainment;

(2) the date of the entertainment;

(3) the place by name and address and designation of type of entertainment (such as dinner or theater) if that is not apparent from the name of the place;

(4) the business reason for the entertainment or the business benefit obtained or expected; and

(5) the occupation or other information relating to all of the persons entertained, including name, title, or other designation sufficient to establish business relationship to the taxpayer.

In addition, the taxpayer must record the date, duration, place and the nature of the business discussion, and also an identification of those persons entertained who participated in the discussion.

11. Question: If a taxpayer wishes to take a deduction for purchasing a business meal for a customer or prospective customer, what records must he keep?

Answer: He must record the cost, the date, the name and place of the restaurant or hotel, etc., a description such as lunch or dinner, and the occupation or other information relating to all of the persons entertained, including names, titles, or other designations sufficient to establish business relationship to the taxpayer. The business purpose need not be separately stated where it is evident from the business relationship of the persons entertained.

12. Question: If a taxpayer wishes to take a deduction for a business gift, what records must he keep?

Answer: He must record the cost of the gift, the date of the gift, and the business reason or the nature of the business benefit expected as a result of the gift. He must also record the 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.

13. Question: Must I make a separate entry in my expense account record for each incidental separate expenditure, such as for each taxifare, streetcar fare, or telephone charge?

Answer: No. For any day, a taxpayer may aggregate expenditures in reasonable categories, such as for taxi and local transportation, for gasoline and oil, or for the taxpayer's own meals while traveling.

14. Question: Must a taxpayer disclose confidential information on his expense account statement?

Answer: No. Information of a confidential nature need not be set forth in a regular statement of expense. However, in order to obtain a deduction for such an expenditure, the information must be recorded elsewhere, at a time when the taxpayer has full knowledge of such information, and it must be available for audit by the Service.

15. Question: If a taxpayer entertains a relatively large number of people, must he record each of their names?

Answer: No. If any situation where a class of readily identifiable individuals is involved, a designation of such class would be sufficient. For example, if a taxpayer entertains all of the stockholders of a small corporation, a designation such as `all of the stockholders of Acme Corporation' would be sufficient. On the other hand, if the identity of a class, such as `customers of X corporation,' is not sufficient to identity the persons entertained, then an individual designation of each person entertained would be required. Even in this latter case, however, persons entertained may be readily identifiable from a more general designation such as `Mr. Jones, branch manager of Y Co., and his 15 salesmen.'

16. Question: Is it always necessary to record the name of the recipient of a business gift?

Answer: No. In some situations, a more general designation will be sufficient if it is evident that the taxpayer is not attempting to avoid the new $25 annual limitation on the amount which can be deducted for gifts to any single individual. For example, if a taxpayer purchases a large number of inexpensive tickets to local high school basketball games, and he distributes one or two tickets to each of a large number of his customers, it usually would be sufficient to record a general description of the recipients of the tickets. This answer assumes that the amount, time, description and business purpose of the gifts are also substantiated.

17. Question: What records must a taxpayer keep for season or series tickets to events, such as to home games of a baseball team, which he sends as business gifts to customers or which he uses when entertaining visiting customers?

Answer: In general, a taxpayer must treat each ticket in the series as a separate item, and allocate the cost of the season ticket accordingly. He must also keep records as to the use of each ticket for a gift or as entertainment, as the case may be.

18. Question: If an employer pays directly for an airplane fare, must the employee record the amount of such payment in his account book or expense account statement?

Answer: In general, no. If an employer purchases directly any ticket or other travel item for an employee's use, the employee need not record the amount of such item. However, if the employee purchases such travel through a credit card or otherwise and charges such item to his employer, he then must make a record of such expenditure.

19. Question: Must a taxpayer make a separate entry on his expense account statement for tips?

Answer: No. A taxpayer may aggregate the amount of a tip with the underlying expense, such as with his meals or taxi fares. However, if he so desires, the taxpayer may separately state the daily aggregate amount of tips.

RECEIPTS

20. Question: When is it necessary to obtain receipts for expenditures for travel, entertainment, or gifts?

Answer: The general rule is that you must obtain a receipt for any expenditure of $25 or more for travel, entertainment, or gifts, if you wish to claim a tax deduction for such an expense. In the case of travel expenses, however, the regulations provide two special rules. One is that you must obtain a receipt for lodging regardless of cost. The second is that you need obtain a receipt for transportation (such as railroad, airplane, or bus fare) only where such receipts are readily available. In addition, the regulations grant authority to the Commissioner to prescribe rules waiving the requirement of receipts in circumstances where he determines it is impracticable for such documentary evidence to be required.

21. Question: What must a receipt show to support an expenditure?

Answer: Ordinarily a receipt, to be considered sufficient to support an expenditure, must include sufficient information to establish the amount, date, place, and the essential character of an expenditure. For example, a hotel receipt is sufficient to support expenditures for business travel if it shows the hotel name and location, the date, and separate amounts for charges such as for lodging, meals, and telephone. A restaurant receipt would be sufficient if it shows the name and location of the restaurant, the date, and the amount of the expenditure (and, if a charge is made for an item other than meals and beverages, such as a tip, an indication that such is the case).

22. Question: Is a cancelled check sufficient documentary evidence to support the amount of an expenditure?

Answer: A cancelled check, together with a bill from the payee, ordinarily would establish the element of cost. In contrast, a cancelled check drawn payable to a named payee would not by itself support a business expenditure without other evidence showing that the check was used for a certain business purpose.

23. Question: Is it possible to obtain a tax deduction for an entertainment expenditure of over $25 if a receipt is not obtained?

Answer: A receipt ordinarily is the best evidence to prove the amount of an expenditure. However, it may be possible to obtain a deduction for an expenditure of $25 or more even without a supporting receipt. The regulations provide that a taxpayer who does not have adequate records to substantiate a deduction may establish his right to a deduction by other evidence such as a statement in writing of witnesses containing specific information. In addition, the regulations provide special rules for cases where, by reason of the inherent nature of the situation in which an expenditure is made, a taxpayer is unable to obtain a receipt or where a taxpayer cannot produce a receipt for reasons beyond his control, such as loss of the receipt by fire, flood, or other casualty.

FACILITIES

24. Question: Do special rules apply to the deductibility of expenses for entertainment facilities, such as yachts, and dues to country clubs?

Answer: Yes, the Revenue Act of 1962 provides that a taxpayer, in order to deduct any portion of dues to country clubs or any portion of the geenral operating expenses of entertainment facilities, must establish that the facility was used primarily for the furtherance of his trade or business, rather than for personal purposes. In addition, only such expenses as are directly related to the active conduct of the taxpayer's trade or business are deductible.

25. Question: Specifically, in the case of country clubs, what records must I keep to establish the primary use?

Answer: The nature of activities at clubs differs so greatly that it is impracticable to prescribe precise procedures applicable to all situations. In general, a taxpayer must keep records which will establish the primary use of the facility, such as the times of use, number of persons entertained, the nature of the entertainment, and the cost of use. However, in the case of routine personal family use. a notation to that effect, with the date of such use, will be sufficient.

INDEPENDENT CONTRACTORS

26. Question: In general, in an attorney-client relationship, who must maintain the records (including required documentation) of travel, entertainment, and gifts in order to substantiate a deduction?

Answer: Generally, the attorney.

27. Question: If a client reimburses his attorney for expenditures for travel, entertainment, or gifts, must the client obtain records and documentary evidence from his attorney concerning those expenditures in order to deduct the reimbursed expenses?

Answer: Generally, no. A client does not have to obtain records, including required documentary evidence, to substantiate reimbursements to an independent contractor for travel and gifts. This is also true in the case of entertainment unless the independent contractor does in fact account to his client by providing him with such records and evidence.

28. Question: Why would an independent contractor, such as an attorney, want to account to his client by providing him with detailed records and documentary evidence of reimbursed entertainment expenses?

Answer: Under the Revenue Act of 1962, certain good will entertainment may not be deductible. However, if an independent contractor incurs such an expense under a reimbursement arrangement with his client, the expense will not be disallowed to the attorney if he does adequately account to his client by providing adequate records, including required documentary evidence, of the expense to his client.

29. Question: If an independent contractor, such as an attorney, does adequately account to his client for a reimbursed entertainment expense in order to make sure that the expense will not be disallowed to the attorney, must the attorney also maintain detailed records of the expenditure?

Answer: Yes. The independent contractor who incurs the expenditure should maintain adequate records of the expenditure, including receipts, or copies of receipts, where necessary.

RETENTION OF RECORDS AND RECEIPTS

30. Question: How long must a taxpayer retain any required records, including any required documentary evidence?

Answer: A taxpayer must retain proof to support his right to a deduction so long as his Federal income tax return is open for audit. Thus, generally it will be necessary for a taxpayer who claims a deduction to retain his expense records, including any required documentary evidence, for three years from the date of filing of the income tax return on which he has claimed the deduction, since this is the normal statute of limitations period. However, the period of limitations is longer if a taxpayer consents to extension of the normal period of limitation or if there is a substantial understatement of income. Also, there is no statute of limitations in cases of fraud.

31. Question: Is the Commissioner considering rules to permit an employer to dispose of receipts and similar supporting documentary evidence?

Answer: Yes. The Service is studying the problems presented to employers regarding warehousing and retention of documentary evidence and intends to issue a Revenue Ruling on this matter in the near future.

32. Question: If an employee keeps the records and documentation required by the new regulations and turns them over to his employer who reimburses him for such expenditures, does the employee have to retain copies of such records?

Answer: The average employee will not have to retain duplicate copies of records or documentary evidence which he turns over to his employer. However, employees who claim deductions for expenses which exceed reimbursements, certain shareholder-employees, and employees whose employers do not maintain adequate accounting procedures providing for vertification of expense accounts, may be required individually to substantiate their expenditures.

33. Question: If a taxpayer keeps the records and documentation the way the new regulations specify, will the Service ask him for any additional information?

Answer: The records and documentation generally should be sufficient in themselves to establish the facts called for in the regulations if they are kept as prescribed in the regulations. Of course, additional information will be required if the records or documentation are not clear or if there is a question about their reliability or accuracy.

DISCLOSURE OF EXPENSE ACCOUNT INFORMATION

34. Question: What disclosure of information relating to travel and entertainment will be required on Federal income tax returns?

Answer: The final regulations grant authority to the Commissioner to prescribe rules for the disclosure of information on tax returns. The Commissioner has directed that full study be made of this matter, and conferences with representatives of businesses and others will be held. For expenses incurred during 1963, it is anticipated that the existing disclosure requirements as to expense account allowances generally will not be materially changed, pending completion of the study. However, even for 1963 expense account allowances, it is contemplated that more specific disclosure (such as a separate statement of allowances for travel, for entertainment, and for gifts) will be required of certain owners and highly compensated employees.

PER DIEM AND OTHER ALLOWANCES

35. Question: Do special rules apply in cases of reimbursements, per diem allowances and mileage allowances for travel?

Answer: The Service has announced rules providing that reimbursement arrangements for subsistence and per diem allowances in lieu of subsistence not exceeding $25 per day for ordinary and necessary expenses of an employee traveling away from home (exclusive of transportation costs to and from destination) will be regarded as satisfying the substantiation requirements of the new regulations with respect to the daily total amount of such travel, provided the time, place, and business purpose of the travel are established. In addition, reimbursements by the employer must be made under adequate internal audit controls, and per diem allowances must be based on reasonably accurate estimates of travel costs. Certain mileage allowances not exceeding 15 cents per mile also will be considered as satisfying the substantiation requirements of the new regulations. See Rev. Rul. 63-13, page 69, this Bulletin.

36. Question: If an employee adopts a subsistence reimbursement arrangement or a per diem allowance in lieu of subsistence practice not exceeding $25 per day, or a mileage allowance practice not exceeding 15 cents per mile, to pay travel expenses of his employees, is it necessary that receipts for lodging be obtained?

Answer: It is not necessary that receipts for lodging be obtained in order to qualify for the special provisions applicable to travel expenses paid under reimbursement, per diem, or mileage allowance practices. However, in order to obtain a deduction for travel expense, even in the case of a qualifying reimbursement, per diem, or mileage practice, it is always necessary that the time, place, and business purpose of travel be established. Note: It may well be, of course, that a loding receipt is the best means to establish the time and place of business travels. Also, an employee may find that the retention of receipts is the best means to establish that he has not received taxable income from a travel allowance paid to him.

37. Question: With respect to reimbursement arrangements or per diem allowances, I understand that special rules apply in cases of employees who are members of the same family as their employer or who are stockholders owning more than 10 percent of the outstanding stock of an employer corporation?

Answer: The special relief provisions for subsistence reimbursement arrangements or per diem allowances in lieu of subsistence not exceeding $25 a day for travel expenses are not available for employers and employees who are so related.

38. Question: What kind of substantiation is required of employees who are members of the same family as their employer or who are stockholders owning more than 10 percent of the outstanding stock of an employer corporation?

Answer: Employees who are so related to their employers, in addition to establishing time, place, and business purpose of travel, must keep records of the amount spent daily for travel, broken down into reasonable categories such as for meals, for gasoline and oil, and for taxi fares. They must also obtain receipts for lodging, regardless of amount.

39. Question: Does the same special rule for family members or persons owning more than 10 percent stock interests apply in the case of mileage allowances?

Answer: No, the relief provisions for qualifying mileage allowances are applicable regardless of degree of relationship between employer and employee.

EXAMPLES

The following examples illustrate the type of records taxpayers are required to maintain under the new regulations. It should be understood, however, that no inference may be drawn from these examples as to the deductibility or nondeductibility of any specific expenditure or as to the primary use of a facility.

Example (1). B , a vice president of Z corporation (the taxpayer), resides in Chicago, Illinois, where the home office of Z corporation is located. B travels by airplane from Chicago to Dallas, Texas, where he inspects a plant of the Z corporation. He remains in Dallas for two days and returns to Chicago. During his stay in Dallas, he entertains Charles Young, the purchasing agent of the Sharpe Company, a prospective customer of the Z corporation. B prepares, at or near the time of his expenditures, a statement of expense or similar record covering the elements of his expenditures, which might show the following information:

 TRAVEL EXPENSES

Example (2) . Taxpayer C , an architect, has submitted architectural plans to the Modern Real Estate Investment Trust for an apartment building which the Trust has decided to construct. In order to discuss and promote his plans, C invites the four trustees of the Trust to lunch. C prepares, at or near the time of his expenditure, a statement of expense or similar record of his expenditures, which might show the following information:

Entertainment Expenses

          1-3-63: Lunch and tip-$17.00; Cafe Plaza, New York, N.Y.;

Example (3). D , the president of Y corporation (the taxpayer), engages in a substantial and bona fide business discussion with three officers of Acme Corporation. Directly thereafter they go to the Flair Nightclub where D pays for drinks at the bar in the amount of $14, including tip. They then go to the dining room where D pays the dinner bill of $24, plus tip. D prepares, at or near the time of his expenditures, a statement of expense or similar record of his expenditures, which might show the following information:

Entertainment Expenses

          1-3-63: Taxi and tip ($2.55); drinks at bar and tip

Example (4) . Taxpayer E, a self-employed building equipment supplier, maintains a family membership in an athletic club which he uses frequently to entertain business customers. The club submits monthly bills to E for all charges at the club. In order to obtain a deduction in any amount for the club membership dues, E must establish that the club was used primarily for the furtherance of his trade or business. E must maintain records of the daily use of the club, the cost of using the club, and such other information as shall tend to establish such use. An illustrative record might show the following information:

Month of January, 1963 :

          Jan. 6-Lunch with John Jones (general manager, Doe

Example (5). X corporation, engaged in the manufacture of automobile parts, maintains a yacht for for purpose of entertaining company customers and employees. In order to obtain a deduction in any amount for general operating expenses of the yacht, X must establish that the yacht was used primarily for the furtherance of its trade or business. X must maintain a clear and detailed record of each use of the yacht. Such a record for the one-week period from July 7-13, 1963, might show the following information:

Week beginning July 7, 1963:

July 10, 1963

Negotiate and sign contract to manufacture engine blocks for Williams Motor Co.; sailing on Salt Bay 9 a.m.-6 p.m.; contract negotiation-6 hours.

Mike Roberts-president of X

Don Jones-vice president of X

Frank Brown-manager of X

Stan Williams-president, Williams Motor Co.

Bob Fleming-general manager, Williams Motor Co.

Ernie Edwards-office clerk, X Corp.

July 12, 1963 Personal use by company officers-9 a.m.-4 p.m.

July 13, 1963 Employee recreation; 10 a.m.-8 p.m.-Fishing and sun bathing-Salt Bay

Frank Brown-manager of X Corp.

Ben Smith-assistant manager of X Corp.

Ernie Edwards-office clerk of X Corp.

Mary Saunders-Secretary of X Corp.

Betty Peters-secretary of X Corp.

Jim Phillips-stock room employee of X Corp.

In order to substantiate direct expenditures relating to the entertainment of business guests (such as food, beverages, bait, and fuel) the X Corporation should also maintain records of such expenses together with any required documentary evidence. In addition, X Corporation should maintain records of general operating costs (such as maintenance, repairs, insurance, dockage fees, license fees, and depreciation).

¹ Based on `Questions and Answers Regarding Substantiation of Travel, Entertainment, and Gift Expenses,' dated Dec. 28, 1962. The only significant changes in the provisions of this Revenue Procedure from the document upon which it is based are (1) the answer to question 35 has been amended by deleting the last sentence therefrom, and (2) four new questions and answers, designated 36 through 39, have been added.