Lunches with Colleagues Are Deductible as Business Meals

Section 274 has been misinterpreted and misapplied for decades. This article applies for tax years 2017 and prior.

General Scope and Purpose of Section 274

Section 274 is listed under Chapter A “Income Taxes,” Chapter 1 “Normal Taxes and Surtaxes,” Subchapter B “Computation of Taxable Income,” Part IX “Items Not Deductible.” Section 274 is titled “Disallowance of certain entertainment, etc., expenses.” This is important to emphasize because one judge incorrectly believed that every topic covered under Section 274, including meals, is considered “entertainment.” That’s incorrect by the presence of “etc.” in the title.

In other words, Congress, by adding “etc.,” simply did not want to list everything covered by Section 274, which includes entertainment, amusement, recreation, gifts, foreign travel, substantiation requirements for certain items enumerated, specific exemptions for low-risk items, exemptions for non-business deductible items, entertainment facilities, attendance at conventions, qualified non-personal business use vehicles, “business” meals, entertainment tickets, additional limits on travel expenses, and limits on the deductibility of meals and entertainment.

Paragraph (a) covers entertainment by stating “[n]o deduction… shall be allowed for any item… of the type generally considered to constitute entertainment amusement, or recreation unless” there is, either “preceding or following” the entertainment, a “substantial and bona fide discussion… associated with… business.” In the subparagraphs, it discusses facilities and other special rules regarding clubs and dues.

Paragraph (b) covers gifts by stating “[n]o deduction shall be allowed… for any expense for gifts.”

Paragraph (c) covers foreign travel by stating “no deduction shall be allowed… for that portion of the” foreign travel not allocable to business activity.

The purpose of this author emphasizing that each paragraph starts with “no deduction shall be allowed for” is to demonstrate that each paragraph is a separate and distinct provision prohibiting a deduction but then carving our limited exceptions.

Paragraph (d) creates substantiation requirements mandating that taxpayers detail the “amount of such expense,” “time and place,” “business purpose, and “business relationship,” but that paragraph is limited to travel expenses under Paragraph (c), entertainment under Paragraph (a), and gifts under Paragraph (b); coincidentally all three preceding paragraphs. It also includes listed property under section 280F(d)(4), which covers transportation and entertainment property like facilities. In other words, the substantiation requirements do not apply to meals.

Paragraph (e) established certain specific and limited exemptions for the following: employer-provided food and beverages, expenses reported as income to others, expenses reimbursed, employer-provided entertainment, employer-incurred expenses associated with business meetings, meetings of 501(a)-exempt business leagues, items available to the public, and entertainment sold to customers at fair market rates. This was primarily a Congressional provision to clean-up Section 274 that ended-up applying in ways Congress did not intend.

Paragraph (f) clarified that non-business expenses deductible under other provisions of the Code were not to be barred by Section 274, such as mortgage interest, real estate taxes, and casualty losses.

Paragraph (g) clarified that a denial under Paragraph (a) for an entertainment facility is personal and cannot be depreciated as a business asset.

Paragraph (h) generally denies a deduction for a convention, conference, or seminar that takes place outside of North America, including cruise ships, unless certain requirements are met.

Paragraph (i) exempted “qualified nonpersonal use vehicles” from the substation requirements of Paragraph (d) since that paragraph specifically included Section 280F(d)(4) listed property, such as automobiles.

Paragraph (j) covers “employee achievement awards” by stating “[n]o deduction shall be allowed… for employee achievement awards” unless, for a qualified plan, it’s less than $1600 or, for a non-qualified plan, it’s less than $400. It then defines qualified plans and establishes special rules.

Paragraph (k) covers “business meals” by stating “[n]o deduction shall be allowed… for any food or beverages” unless it is “not lavish” and “the taxpayer… is present.” That’s it. Nothing more.

Paragraph (l) places additional limits on entertainment tickets.

Paragraph (m) places additional limits on travel expenses.

Paragraph (n) limits the deductibility of entertainment under Paragraph (a) and meals under Paragraph (k) to 50%. In fact, this is the provision that clarifies that meals and entertainment are separate and distinct items. The statute reads:

(n) Only 50 percent of meal and entertainment expenses allowed as a deduction.—

(1) In general.—The amount allowable as a deduction under this chapter for--

(A) any expense for food or beverages, and

(B) any item with respect to an activity which is of a type generally

considered to constitute entertainment, amusement, recreation, or with respect to a facility used in connection with such activity,

shall not exceed 50 percent of the amount of such expense or item which

would (but for this paragraph) be allowable as a deduction under this chapter.

Why would “food or beverages” be listed separately if it were an item “of a type generally considered to constitute entertainment, amusement, or recreation” under Paragraph (a)?

Paragraph (o) granted regulation promulgating authority to the Treasury including exempting the requirements of Paragraphs (a) and (b) from subsections where they would “otherwise apply,” but Congress did not allow Treasury to apply Paragraph (a) requirements where they otherwise “would not apply.”

Each paragraph under Section 274 is separate and distinct unless it refers to another paragraph.

Paragraph Title and Statutory Interpretation

For meals, Section 274(k) states that no deduction is allowed for “food or beverages” unless it is “not lavish” and the “taxpayer… is present at the furnishing of” the meal. This is then followed by Section 274(n) that the “amount allowable as a deduction” for any “food or beverages” shall “not exceed 50 percent.” The term “business meals” only applies in the title of the paragraph; not in the actual statutory wording.

Although “it has long been established that the title of an Act ‘cannot enlarge or confer powers,’”[1] the title of a statute or section “can aid in resolving an ambiguity in the legislation’s text.”[2] As Chief Justice Marshall explained, “[w]here the mind labours to discover the design of the legislature, it seizes everything from which aid can be derived.”[3] A title or heading, however, being only “a short-hand reference to the general subject matter involved” and “not meant to take the place of the detailed provisions of the text,”[4] can provide only limited interpretive aid. Thus, a heading may shed light on the section’s basic thrust,[5] or on ambiguous language in the text, but it “cannot limit the plain meaning of the text,”[6] and “has no power to give what the text of the statute takes away.”[7]

Therefore, the U.S. Supreme Court would conclude that the use of the term “business meals” in the title of the paragraph “cannot limit the plain meaning of the text,” which would presumably allow a deduction for any meal that is in any way remotely associated with the business, including lunch expenses during working hours.

Focusing on the “Food or Beverages” Deduction

The substantiation requirements under Section 274(d) only apply to deductions and credits “under section 162 or 212 for any travel expense including meals and lodging while away from home” as well as “any item… generally considered to constitute entertainment, amusement, or recreation.”

Entertainment, amusement, and recreation are separate and distinct categories from business meals. Therefore, the substantiation requirements under Section 274(d) do not apply to Section 274(k) business meals.

Furthermore, the “substantial and bona fide” business discussions requirement for entertainment expenses do not apply to Section 274(k) either.

It was when the U.S. Department of the Treasury promulgated Regulation section 1.274-2(f)(2)(i) that meals were, by implication, treated similar to entertainment. Treasury exempted meals prior to 1987, but, by inference, all meals in and after 1987 were subject to the more stringent Paragraph (a) rules that statutorily only apply to entertainment.

Validity of Treasury Regulation 1.247-2(f)

Treasury cited Section 274(o) as their statutory authority for extending the requirements of Paragraph (a) Entertainment to Paragraph (k) Meals. However, Congress did not grant that authority. Congress allowed Treasury to exempt the application of Paragraph (a) to other Paragraphs to which the statute, as written by Congress, extended said coverage. It did not allow Treasury to extend Paragraph (a) to other Paragraphs that Congress did not intend that to be extended to. On this basis alone, that section of the regulation is invalid. Nevertheless, there’s a secondary and equally significant legal position to invalidate the regulation.

Generally, courts will give deference to an executive department’s interpretation of a statute they are tasked with enforcing. This is referred to as Chevron deference; named after the U.S. Supreme Court case that established the rule. Chevron deference was severely weakened with 2 major cases in 2010 and 2012: Home Concrete and Intermountain.

In 2012, the U.S. Supreme Court ruled that regulations cannot stretch the plain meaning of a statute. U.S. v. Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012). In other words, proper statutory interpretation requires one to look at the definition of each term in a statute. If the regulation exceeds a single word’s plain meaning, it’s invalid.

Lastly, in 2010, the United States Tax Court ruled that, if the plain meaning of a statute’s text is unambiguous, it forecloses Treasury’s ability to promulgate regulations to “fill-in gaps.” Intermountain v. C.I.R., 134 T.C. 211 (2010). Treasury only has the power to promulgate regulations that clarify ambiguity. If a statute is arguably unambiguous, any regulations purporting to interpret it are invalid as a matter of law.

In this case, the plain meaning of the text is clear and unambiguous: “[n]o deduction shall be allowed… for any food or beverages” unless it is “not lavish” and “the taxpayer… is present” coupled with the 50% cap in Paragraph (n). The clear and unambiguous extrapolation from this is that, if the meal is not lavish and the taxpayer is present, a deduction shall be allowed.

Statutory History of Section 274

Because even federal judges have incorrectly interpreted Section 274 for decades,[8] this author believes it’s critical to briefly examine the statutory history and development of Section 274.

The first mention of “business meals” appeared in the original enactment of Section 274 in the Revenue Act of 1962.[9] In that newly enacted statute, Congress created an outright exception under Section 274(e) that stated “expenses for food and beverages furnished to any individual under circumstances which… are of a type generally considered to be conducive to business discussions.” Even a historical analysis of the statutory development of Section 274 makes it clear that “business means” were never intended to be covered by Section 274(a)’s coverage over entertainment, amusement, and recreation.

Conclusion

Any expenses for meals during regular business hours that are conducive to business or work-related discussions that are not lavish and at which the taxpayer is physically present are deductible. The classification of said expenses as “workplace goodwill development” meet the adequate disclosure requirements.


[1] See Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1, 19 n.14 (1981) (quoting U.S. v. Oregon & California R.R., 164 U.S. 526, 541 (1896) and Cornell v. Coyne, 192 U.S. 418, 430 (1904), and citing U.S. v. Fisher, 2 Cranch 358, 386 (1805) and Yazoo & Mississippi Valley R.R. v. Thomas, 132 U.S. 174, 188 (1889)).

[2] See INS v. National Center for Immigrants’ Rights, 502 U.S. 183, 189-90 (1991) (citing Mead Corp. v. Tilley, 490 U.S. 714, 723 (1989); and FTC v. Mandel Bros., Inc., 359 U.S. 385, 388-89 (1959)).

[3] See U.S. v. Fisher, 6 U.S. (2 Cranch) 358, 386 (1805).

[4] See Trainmen v. Baltimore & Ohio R.R., 331 U.S. 519, 528 (1947).

[5] See, e.g., Almendarez-Torres v. U.S., 523 U.S. 224, 234 (1998) (the words “criminal penalties” in section heading relied on as one indication that the section does not define a separate crime, but instead sets out penalties for recidivists); INS v. National Center for Immigrants’ Rights, 502 U.S. 183, 189 (1991) (“text’s generic reference to ‘employment’ should be read as a reference to the ‘unauthorized employment’ identified in the paragraph’s title”).

[6] See Trainmen v. Baltimore & Ohio R.R., 331 U.S. 519, 529 (1947); Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 256 (2004) (quoting Trainmen).

[7] See Demore v. Kim, 538 U.S. 510, 535 (2003) (O’Connor, J., concurring) (citing INS v. St. Cyr, 533 U.S. 289, 308-09 (2001)).

[8] Bruns v. C.I.R., 98 T.C.M. (CCH) 30 (T.C. 2009) (“food and beverage expense deductions are further limited by section 274(k) and (n).”); Corrigan v. C.I.R., 89 T.C.M. (CCH) 1313 (T.C. 2005) (“A deduction is allowed for meals only if such expenses are not lavish and the taxpayer is present when such meals are furnished. Sec. 274(k)(1). In addition, section 274(d) limits such deductions to those that can be substantiated by adequate records or other evidence corroborating the amount of the expenditure, the time and place of the travel, entertainment, etc., the business purpose, and the business relationship of persons being entertained.”); Stroff v. C.I.R., 101 T.C.M. (CCH) 1359 (T.C. 2011) (“Section 274(d) provides more stringent substantiation requirements in the case of expenditures or the use of property that may readily serve personal as well as business purposes. Such expenditures or property use include those for entertainment, including meals, or automobile use.”); Westby v. C.I.R., T.C.M. (RIA) 2004-179 (T.C. 2004) (“Section 274 supersedes the Cohan rule... and imposes more stringent substantiation requirements for travel, meals and entertainment, gifts, and with respect to any listed property as defined in section 280F(d)(4).”); Hefti v. C.I.R., 65 T.C.M. (CCH) 2241 (T.C. 1993) (“In order to take a deduction under section 162 for travel or entertainment, petitioners must meet the requirements set out in section 274(d) and (k). Section 274(d) requires that the taxpayer have adequate records or sufficient evidence corroborating the taxpayer’s own statement of the amount of the expense, the time and place of the expense, the business purpose of the expense, and business relationship. Petitioners have met these requirements. Section 274(k) requires that the expense not be lavish and that the taxpayer be present at the furnishing of the food or beverage.”); Dunkelberger v. C.I.R., 64 T.C.M. (CCH) 1567 (T.C. 1992) (“In addition to meeting substantiation requirements, we must also consider the impact of section 274(k) and (n).”).

[9] See Revenue Act of 1962, Pub. L. 87-834 (Oct. 16, 1962)

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