[Code of Federal Regulations]
[Title 26, Volume 3]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.274-2]

[Page 568-579]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
COMPUTATION OF TAXABLE INCOME (Continued)--Table of Contents
 
Sec. 1.274-2  Disallowance of deductions for certain expenses for entertainment, amusement, recreation, or travel.

    (a) General rules--(1) Entertainment activity. Except as provided in 
this section, no deduction otherwise allowable under Chapter 1 of the 
Code shall be allowed for any expenditure with respect to entertainment 
unless the taxpayer establishes:
    (i) That the expenditure was directly related to the active conduct 
of the taxpayer's trade or business, or
    (ii) In the case of an expenditure directly preceding or following a 
substantial and bona fide business discussion (including business 
meetings at a convention or otherwise), that the expenditure was 
associated with the active conduct of the taxpayer's trade or business.

Such deduction shall not exceed the portion of the expenditure directly 
related to (or in the case of an expenditure described in subdivision 
(ii) of this subparagraph, the portion of the expenditure associated 
with) the active conduct of the taxpayer's trade or business.
    (2) Entertainment facilities--(i) Expenditures paid or incurred 
after December 31, 1978, and not with respect to a club. Except as 
provided in this section with respect to a club, no deduction otherwise 
allowable under chapter 1 of the Code shall be allowed for any 
expenditure paid or incurred after December 31, 1978, with respect to a 
facility used in connection with entertainment.
    (ii) Expenditures paid or incurred before January 1, 1979, with 
respect to entertainment facilities, or paid or incurred before January 
1, 1994, with respect to clubs--(a) Requirements for deduction. Except 
as provided in this section, no deduction otherwise allowable under 
chapter 1 of the Internal Revenue Code shall be allowed for any 
expenditure paid or incurred before January 1, 1979, with respect to a 
facility used in connection with entertainment, or for any expenditure 
paid or incurred before January 1, 1994, with respect to a club used in 
connection with entertainment, unless the taxpayer establishes--
    (1) That the facility or club was used primarily for the furtherance 
of the taxpayer's trade or business; and
    (2) That the expenditure was directly related to the active conduct 
of that trade or business.
    (b) Amount of deduction. The deduction allowable under paragraph 
(a)(2)(ii)(a) of this section shall not exceed the portion of the 
expenditure directly related to the active conduct of the taxpayer's 
trade or business.
    (iii) Expenditures paid or incurred after December 31, 1993, with 
respect to a club--(a) In general. No deduction otherwise allowable 
under chapter 1 of the Internal Revenue Code shall be allowed for 
amounts paid or incurred after December 31, 1993, for membership in any 
club organized for business, pleasure, recreation, or other social 
purpose. The purposes and activities of a club, and not its name, 
determine whether it is organized for business, pleasure, recreation, or 
other social purpose. Clubs organized for business, pleasure, 
recreation, or other social purpose include any membership organization 
if a principal purpose of the organization is to conduct entertainment 
activities for members of the organization or their guests or to provide 
members or their guests with access to entertainment facilities within 
the meaning of paragraph (e)(2) of this section. Clubs organized for 
business, pleasure, recreation, or other social purpose include, but are 
not limited to, country clubs, golf and athletic clubs, airline clubs, 
hotel clubs, and clubs operated to provide meals under circumstances 
generally considered to be conducive to business discussion.
    (b) Exceptions. Unless a principal purpose of the organization is to 
conduct entertainment activities for members or their guests or to 
provide members or their guests with access to entertainment facilities, 
business leagues, trade associations, chambers of commerce, boards of 
trade, real estate boards, professional organizations (such as bar 
associations and medical associations), and civic or public service 
organizations will not be treated as clubs organized for business, 
pleasure, recreation, or other social purpose.
    (3) Cross references. For definition of the term entertainment, see 
paragraph (b)(1) of this section. For the disallowance of deductions for 
the cost of admission to a dinner or program any part of the proceeds of 
which inures to

[[Page 569]]

the use of a political party or political candidate, and cost of 
admission to an inaugural event or similar event identified with any 
political party or political candidate, see Sec. 1.276-1. For rules and 
definitions with respect to:
    (i) ``Directly related entertainment'', see paragraph (c) of this 
section,
    (ii) ``Associated entertainment'', see paragraph (d) of this 
section,
    (iii) ``Expenditures paid or incurred before January 1, 1979, with 
respect to entertainment facilities or before January 1, 1994, with 
respect to clubs'', see paragraph (e) of this section, and
    (iv) ``Specific exceptions'' to the disallowance rules of this 
section, see paragraph (f) of this section.
    (b) Definitions--(1) Entertainment defined--(i) In general. For 
purposes of this section, the term entertainment means any activity 
which is of a type generally considered to constitute entertainment, 
amusement, or recreation, such as entertaining at night clubs, cocktail 
lounges, theaters, country clubs, golf and athletic clubs, sporting 
events, and on hunting, fishing, vacation and similar trips, including 
such activity relating solely to the taxpayer or the taxpayer's family. 
The term entertainment may include an activity, the cost of which is 
claimed as a business expense by the taxpayer, which satisfies the 
personal, living, or family needs of any individual, such as providing 
food and beverages, a hotel suite, or an automobile to a business 
customer or his family. The term entertainment does not include 
activities which, although satisfying personal, living, or family needs 
of an individual, are clearly not regarded as constituting 
entertainment, such as (a) supper money provided by an employer to his 
employee working overtime, (b) a hotel room maintained by an employer 
for lodging of his employees while in business travel status, or (c) an 
automobile used in the active conduct of trade or business even though 
used for routine personal purposes such as commuting to and from work. 
On the other hand, the providing of a hotel room or an automobile by an 
employer to his employee who is on vacation would constitute 
entertainment of the employee.
    (ii) Objective test. An objective test shall be used to determine 
whether an activity is of a type generally considered to constitute 
entertainment. Thus, if an activity is generally considered to be 
entertainment, it will constitute entertainment for purposes of this 
section and section 274(a) regardless of whether the expenditure can 
also be described otherwise, and even though the expenditure relates to 
the taxpayer alone. This objective test precludes arguments such as that 
entertainment means only entertainment of others or that an expenditure 
for entertainment should be characterized as an expenditure for 
advertising or public relations. However, in applying this test the 
taxpayer's trade or business shall be considered. Thus, although 
attending a theatrical performance would generally be considered 
entertainment, it would not be so considered in the case of a 
professional theater critic, attending in his professional capacity. 
Similarly, if a manufacturer of dresses conducts a fashion show to 
introduce his products to a group of store buyers, the show would not be 
generally considered to constitute entertainment. However, if an 
appliance distributor conducts a fashion show for the wives of his 
retailers, the fashion show would be generally considered to constitute 
entertainment.
    (iii) Special definitional rules--(a) In general. Except as 
otherwise provided in (b) or (c) of this subdivision, any expenditure 
which might generally be considered either for a gift or entertainment, 
or considered either for travel or entertainment, shall be considered an 
expenditure for entertainment rather than for a gift or travel.
    (b) Expenditures deemed gifts. An expenditure described in (a) of 
this subdivision shall be deemed for a gift to which this section does 
not apply if it is:
    (1) An expenditure for packaged food or beverages transferred 
directly or indirectly to another person intended for consumption at a 
later time.
    (2) An expenditure for tickets of admission to a place of 
entertainment transferred to another person if the taxpayer does not 
accompany the recipient to the entertainment unless the

[[Page 570]]

taxpayer treats the expenditure as entertainment. The taxpayer may 
change his treatment of such an expenditure as either a gift or 
entertainment at any time within the period prescribed for assessment of 
tax as provided in section 6501 of the Code and the regulations 
thereunder.
    (3) Such other specific classes of expenditure generally considered 
to be for a gift as the Commissioner, in his discretion, may prescribe.
    (c) Expenditures deemed travel. An expenditure described in (a) of 
this subdivision shall be deemed for travel to which this section does 
not apply if it is:
    (1) With respect to a transportation type facility (such as an 
automobile or an airplane), even though used on other occasions in 
connection with an activity of a type generally considered to constitute 
entertainment, to the extent the facility is used in pursuit of a trade 
or business for purposes of transportation not in connection with 
entertainment. See also paragraph (e)(3)(iii)(b) of this section for 
provisions covering nonentertainment expenditures with respect to such 
facilities.
    (2) Such other specific classes of expenditure generally considered 
to be for travel as the Commissioner, in his discretion, may prescribe.
    (2) Other definitions--(i) Expenditure. The term expenditure as used 
in this section shall include expenses paid or incurred for goods, 
services, facilities, and items (including items such as losses and 
depreciation).
    (ii) Expenses for production of income. For purposes of this 
section, any reference to trade or business shall include any activity 
described in section 212.
    (iii) Business associate. The term business associate as used in 
this section means a person with whom the taxpayer could reasonably 
expect to engage or deal in the active conduct of the taxpayer's trade 
or business such as the taxpayer's customer, client, supplier, employee, 
agent, partner, or professional adviser, whether established or 
prospective.
    (c) Directly related entertainment--(1) In general. Except as 
otherwise provided in paragraph (d) of this section (relating to 
associated entertainment) or under paragraph (f) of this section 
(relating to business meals and other specific exceptions), no deduction 
shall be allowed for any expenditure for entertainment unless the 
taxpayer establishes that the expenditure was directly related to the 
active conduct of his trade or business within the meaning of this 
paragraph.
    (2) Directly related entertainment defined. Any expenditure for 
entertainment, if it is otherwise allowable as a deduction under chapter 
1 of the Code, shall be considered directly related to the active 
conduct of the taxpayer's trade or business if it meets the requirements 
of any one of subparagraphs (3), (4), (5), or (6) of this paragraph.
    (3) Directly related in general. Except as provided in subparagraph 
(7) of this paragraph, an expenditure for entertainment shall be 
considered directly related to the active conduct of the taxpayer's 
trade or business if it is established that it meets all of the 
requirements of subdivisions (i), (ii), (iii) and (iv) of this 
subparagraph.
    (i) At the time the taxpayer made the entertainment expenditure (or 
committed himself to make the expenditure), the taxpayer had more than a 
general expectation of deriving some income or other specific trade or 
business benefit (other than the goodwill of the person or persons 
entertained) at some indefinite future time from the making of the 
expenditure. A taxpayer, however, shall not be required to show that 
income or other business benefit actually resulted from each and every 
expenditure for which a deduction is claimed.
    (ii) During the entertainment period to which the expenditure 
related, the taxpayer actively engaged in a business meeting, 
negotiation, discussion, or other bona fide business transaction, other 
than entertainment, for the purpose of obtaining such income or other 
specific trade or business benefit (or, at the time the taxpayer made 
the expenditure or committed himself to the expenditure, it was 
reasonable for the taxpayer to expect that he would have done so, 
although such was not the case solely for reasons beyond the taxpayer's 
control).

[[Page 571]]

    (iii) In light of all the facts and circumstances of the case, the 
principal character or aspect of the combined business and entertainment 
to which the expenditure related was the active conduct of the 
taxpayer's trade or business (or at the time the taxpayer made the 
expenditure or committed himself to the expenditure, it was reasonable 
for the taxpayer to expect that the active conduct of trade or business 
would have been the principal character or aspect of the entertainment, 
although such was not the case solely for reasons beyond the taxpayer's 
control). It is not necessary that more time be devoted to business than 
to entertainment to meet this requirement. The active conduct of trade 
or business is considered not to be the principal character or aspect of 
combined business and entertainment activity on hunting or fishing trips 
or on yachts and other pleasure boats unless the taxpayer clearly 
establishes to the contrary.
    (iv) The expenditure was allocable to the taxpayer and a person or 
persons with whom the taxpayer engaged in the active conduct of trade or 
business during the entertainment or with whom the taxpayer establishes 
he would have engaged in such active conduct of trade or business if it 
were not for circumstances beyond the taxpayer's control. For 
expenditures closely connected with directly related entertainment, see 
paragraph (d)(4) of this section.
    (4) Expenditures in clear business setting. An expenditure for 
entertainment shall be considered directly related to the active conduct 
of the taxpayer's trade or business if it is established that the 
expenditure was for entertainment occurring in a clear business setting 
directly in furtherance of the taxpayer's trade or business. Generally, 
entertainment shall not be considered to have occurred in a clear 
business setting unless the taxpayer clearly establishes that any 
recipient of the entertainment would have reasonably known that the 
taxpayer had no significant motive, in incurring the expenditure, other 
than directly furthering his trade or business. Objective rather than 
subjective standards will be determinative. Thus, entertainment which 
occurred under any circumstances described in subparagraph (7)(ii) of 
this paragraph ordinarily will not be considered as occurring in a clear 
business setting. Such entertainment will generally be considered to be 
socially rather than commercially motivated. Expenditures made for the 
furtherance of a taxpayer's trade or business in providing a 
``hospitality room'' at a convention (described in paragraph 
(d)(3)(i)(b) of this section) at which goodwill is created through 
display or discussion of the taxpayer's products, will, however, be 
treated as directly related. In addition, entertainment of a clear 
business nature which occurred under circumstances where there was no 
meaningful personal or social relationship between the taxpayer and the 
recipients of the entertainment may be considered to have occurred in a 
clear business setting. For example, entertainment of business 
representatives and civic leaders at the opening of a new hotel or 
theatrical production, where the clear purpose of the taxpayer is to 
obtain business publicity rather than to create or maintain the goodwill 
of the recipients of the entertainment, would generally be considered to 
be in a clear business setting. Also, entertainment which has the 
principal effect of a price rebate in connection with the sale of the 
taxpayer's products generally will be considered to have occurred in a 
clear business setting. Such would be the case, for example, if a 
taxpayer owning a hotel were to provide occasional free dinners at the 
hotel for a customer who patronized the hotel.
    (5) Expenditures for services performed. An expenditure shall be 
considered directly related to the active conduct of the taxpayer's 
trade or business if it is established that the expenditure was made 
directly or indirectly by the taxpayer for the benefit of an individual 
(other than an employee), and if such expenditure was in the nature of 
compensation for services rendered or was paid as a prize or award which 
is required to be included in gross income under section 74 and the 
regulations thereunder. For example, if a manufacturer of products 
provides a vacation trip for retailers of his products who exceed sales 
quotas as a prize or award which is includible in gross income, the

[[Page 572]]

expenditure will be considered directly related to the active conduct of 
the taxpayer's trade or business.
    (6) Club dues, etc., allocable to business meals. An expenditure 
shall be considered directly related to the active conduct of the 
taxpayer's trade or business if it is established that the expenditure 
was with respect to a facility (as described in paragraph (e) of this 
section) used by the taxpayer for the furnishing of food or beverages 
under circumstances described in paragraph (f)(2)(i) of this section 
(relating to business meals and similar expenditures), to the extent 
allocable to the furnishing of such food or beverages. This paragraph 
(c)(6) applies to club dues paid or incurred before January 1, 1987.
    (7) Expenditures generally considered not directly related. 
Expenditures for entertainment, even if connected with the taxpayer's 
trade or business, will generally be considered not directly related to 
the active conduct of the taxpayer's trade or business, if the 
entertainment occurred under circumstances where there was little or no 
possibility of engaging in the active conduct of trade or business. The 
following circumstances will generally be considered circumstances where 
there was little or no possibility of engaging in the active conduct of 
a trade or business:
    (i) The taxpayer was not present;
    (ii) The distractions were substantial, such as:
    (a) A meeting or discussion at night clubs, theaters, and sporting 
events, or during essentially social gatherings such as cocktail 
parties, or
    (b) A meeting or discussion, if the taxpayer meets with a group 
which includes persons other than business associates, at places such as 
cocktail lounges, country clubs, golf and athletic clubs, or at vacation 
resorts.

An expenditure for entertainment in any such case is considered not to 
be directly related to the active conduct of the taxpayer's trade or 
business unless the taxpayer clearly establishes to the contrary.
    (d) Associated entertainment--(1) In general. Except as provided in 
paragraph (f) of this section (relating to business meals and other 
specific exceptions) and subparagraph (4) of this paragraph (relating to 
expenditures closely connected with directly related entertainment), any 
expenditure for entertainment which is not directly related to the 
active conduct of the taxpayer's trade or business will not be allowable 
as a deduction unless:
    (i) It was associated with the active conduct of trade or business 
as defined in subparagraph (2) of this paragraph, and
    (ii) The entertainment directly preceded or followed a substantial 
and bona fide business discussion as defined in subparagraph (3) of this 
paragraph.
    (2) Associated entertainment defined. Generally, any expenditure for 
entertainment, if it is otherwise allowable under Chapter 1 of the Code, 
shall be considered associated with the active conduct of the taxpayer's 
trade or business if the taxpayer establishes that he had a clear 
business purpose in making the expenditure, such as to obtain new 
business or to encourage the continuation of an existing business 
relationship. However, any portion of an expenditure allocable to a 
person who was not closely connected with a person who engaged in the 
substantial and bona fide business discussion (as defined in 
subparagraph (3)(i) of this paragraph) shall not be considered 
associated with the active conduct of the taxpayer's trade or business. 
The portion of an expenditure allocable to the spouse of a person who 
engaged in the discussion will, if it is otherwise allowable under 
chapter 1 of the Code, be considered associated with the active conduct 
of the taxpayer's trade or business.
    (3) Directly preceding or following a substantial and bona fide 
business discussion defined--(i) Substantial and bona fide business 
discussion--(a) In general. Whether any meeting, negotiation or 
discussion constitutes a ``substantial and bona fide business 
discussion'' within the meaning of this section depends upon the facts 
and circumstances of each case. It must be established, however, that 
the taxpayer actively engaged in a business meeting, negotiation, 
discussion, or other bona fide business transaction, other than 
entertainment, for the purpose of obtaining

[[Page 573]]

income or other specific trade or business benefit. In addition, it must 
be established that such a business meeting, negotiation, discussion, or 
transaction was substantial in relation to the entertainment. This 
requirement will be satisfied if the principal character or aspect of 
the combined entertainment and business activity was the active conduct 
of business. However, it is not necessary that more time be devoted to 
business than to entertainment to meet this requirement.
    (b) Meetings at conventions, etc. Any meeting officially scheduled 
in connection with a program at a convention or similar general 
assembly, or at a bona fide trade or business meeting sponsored and 
conducted by business or professional organizations, shall be considered 
to constitute a substantial and bona fide business discussion within the 
meaning of this section provided:
    (1) Expenses necessary to taxpayer's attendance. The expenses 
necessary to the attendance of the taxpayer at the convention, general 
assembly, or trade or business meeting, were ordinary and necessary 
within the meaning of section 162 or 212;
    (2) Convention program. The organization which sponsored the 
convention, or trade or business meeting had scheduled a program of 
business activities (including committee meetings or presentation of 
lectures, panel discussions, display of products, or other similar 
activities), and that such program was the principal activity of the 
convention, general assembly, or trade or business meeting.
    (ii) Directly preceding or following. Entertainment which occurs on 
the same day as a substantial and bona fide business discussion (as 
defined in subdivision (i) of this subparagraph) will be considered to 
directly precede or follow such discussion. If the entertainment and the 
business discussion do not occur on the same day, the facts and 
circumstances of each case are to be considered, including the place, 
date and duration of the business discussion, whether the taxpayer or 
his business associates are from out of town, and, if so, the date of 
arrival and departure, and the reasons the entertainment did not take 
place on the day of the business discussion. For example, if a group of 
business associates comes from out of town to the taxpayer's place of 
business to hold a substantial business discussion, the entertainment of 
such business guests and their wives on the evening prior to, or on the 
evening of the day following, the business discussion would generally be 
regarded as directly preceding or following such discussion.
    (4) Expenses closely connected with directly related entertainment. 
If any portion of an expenditure meets the requirements of paragraph 
(c)(3) of this section (relating to directly related entertainment in 
general), the remaining portion of the expenditure, if it is otherwise 
allowable under Chapter 1 of the Code, shall be considered associated 
with the active conduct of the taxpayer's trade or business to the 
extent allocable to a person or persons closely connected with a person 
referred to in paragraph (c)(3)(iv) of this section. The spouse of a 
person referred to in paragraph(c)(3)(iv) of this section will be 
considered closely connected to such a person for purposes of this 
subparagraph. Thus, if a taxpayer and his wife entertain a business 
customer and the customer's wife under circumstances where the 
entertainment of the customer is considered directly related to the 
active conduct of the taxpayer's trade or business (within the meaning 
of paragraph (c)(3) of this section) the portion of the expenditure 
allocable to both wives will be considered associated with the active 
conduct of the taxpayer's trade or business under this subparagraph.
    (e) Expenditures paid or incurred before January 1, 1979, with 
respect to entertainment facilities or before January 1, 1994, with 
respect to clubs--(1) In general. Any expenditure paid or incurred 
before January 1, 1979, with respect to a facility, or paid or incurred 
before January 1, 1994, with respect to a club, used in connection with 
entertainment shall not be allowed as a deduction except to the extent 
it meets the requirements of paragraph (a)(2)(ii) of this section.
    (2) Facilities used in connection with entertainment--(i) In 
general. Any item of personal or real property owned, rented, or used by 
a taxpayer shall (unless otherwise provided under the rules of 
subdivision (ii) of this subparagraph)

[[Page 574]]

be considered to constitute a facility used in connection with 
entertainment if it is used during the taxable year for, or in 
connection with, entertainment (as defined in paragraph (b)(1) of this 
section). Examples of facilities which might be used for, or in 
connection with, entertainment include yachts, hunting lodges, fishing 
camps, swimming pools, tennis courts, bowling alleys, automobiles, 
airplanes, apartments, hotel suites, and homes in vacation resorts.
    (ii) Facilities used incidentally for entertainment. A facility used 
only incidentally during a taxable year in connection with 
entertainment, if such use is insubstantial, will not be considered a 
``facility used in connection with entertainment'' for purposes of this 
section or for purposes of the recordkeeping requirements of section 
274(d). See Sec. 1.274-5(c)(6)(iii).
    (3) Expenditures with respect to a facility used in connection with 
entertainment--(i) In general. The phrase expenditures with respect to a 
facility used in connection with entertainment includes depreciation and 
operating costs, such as rent and utility charges (for example, water or 
electricity), expenses for the maintenance, preservation or protection 
of a facility (for example, repairs, painting, insurance charges), and 
salaries or expenses for subsistence paid to caretakers or watchmen. In 
addition, the phrase includes losses realized on the sale or other 
disposition of a facility.
    (ii) Club dues--(a) Club dues paid or incurred before January 1, 
1994. Dues or fees paid before January 1, 1994, to any social, athletic, 
or sporting club or organization are considered expenditures with 
respect to a facility used in connection with entertainment. The 
purposes and activities of a club or organization, and not its name, 
determine its character. Generally, the phrase social, athletic, or 
sporting club or organization has the same meaning for purposes of this 
section as that phrase had in section 4241 and the regulations 
thereunder, relating to the excise tax on club dues, prior to the repeal 
of section 4241 by section 301 of Public Law 89-44. However, for 
purposes of this section only, clubs operated solely to provide lunches 
under circumstances of a type generally considered to be conducive to 
business discussion, within the meaning of paragraph (f)(2)(i) of this 
section, will not be considered social clubs.
    (b) Club dues paid or incurred after December 31, 1993. See 
paragraph (a)(2)(iii) of this section with reference to the disallowance 
of deductions for club dues paid or incurred after December 31, 1993.
    (iii) Expenditures not with respect to a facility. The following 
expenditures shall not be considered to constitute expenditures with 
respect to a facility used in connection with entertainment:
    (a) Out of pocket expenditures. Expenses (exclusive of operating 
costs and other expenses referred to in subdivision (i) of this 
subparagraph) incurred at the time of an entertainment activity, even 
though in connection with the use of facility for entertainment 
purposes, such as expenses for food and beverages, or expenses for 
catering, or expenses for gasoline and fishing bait consumed on a 
fishing trip;
    (b) Non-entertainment expenditures. Expenses or items attributable 
to the use of a facility for other than entertainment purposes such as 
expenses for an automobile when not used for entertainment; and
    (c) Expenditures otherwise deductible. Expenses allowable as a 
deduction without regard to their connection with a taxpayer's trade or 
business such as taxes, interest, and casualty losses. The provisions of 
this subdivision shall be applied in the case of a taxpayer which is not 
an individual as if it were an individual. See also Sec. 1.274-6.
    (iv) Cross reference. For other rules with respect to treatment of 
certain expenditures for entertainment-type facilities, see Sec. 1.274-
7.
    (4) Determination of primary use--(i) In general. A facility used in 
connection with entertainment shall be considered as used primarily for 
the furtherance of the taxpayer's trade or business only if it is 
established that the primary use of the facility during the taxable year 
was for purposes considered ordinary and necessary within the meaning of 
sections 162 and 212 and the regulations thereunder. All of the facts 
and circumstances of each case shall be considered in determining the 
primary use

[[Page 575]]

of a facility. Generally, it is the actual use of the facility which 
establishes the deductibility of expenditures with respect to the 
facility; not its availability for use and not the taxpayer's principal 
purpose in acquiring the facility. Objective rather than subjective 
standards will be determinative. If membership entitles the member's 
entire family to use of a facility, such as a country club, their use 
will be considered in determining whether business use of the facility 
exceeds personal use. The factors to be considered include the nature of 
each use, the frequency and duration of use for business purposes as 
compared with other purposes, and the amount of expenditures incurred 
during use for business compared with amount of expenditures incurred 
during use for other purposes. No single standard of comparison, or 
quantitative measurement, as to the significance of any such factor, 
however, is necessarily appropriate for all classes or types of 
facilities. For example, an appropriate standard for determining the 
primary use of a country club during a taxable year will not necessarily 
be appropriate for determining the primary use of an airplane. However, 
a taxpayer shall be deemed to have established that a facility was used 
primarily for the furtherance of his trade or business if he establishes 
such primary use in accordance with subdivision (ii) or (iii) of this 
subparagraph. Subdivisions (ii) and (iii) of this subparagraph shall not 
preclude a taxpayer from otherwise establishing the primary use of a 
facility under the general provisions of this subdivision.
    (ii) Certain transportation facilities. A taxpayer shall be deemed 
to have established that a facility of a type described in this 
subdivision was used primarily for the furtherance of his trade or 
business if:
    (a) Automobiles. In the case of an automobile, the taxpayer 
establishes that more than 50 percent of mileage driven during the 
taxable year was in connection with travel considered to be ordinary and 
necessary within the meaning of section 162 or 212 and the regulations 
thereunder.
    (b) Airplanes. In the case of an airplane, the taxpayer establishes 
that more than 50 percent of hours flown during the taxable year was in 
connection with travel considered to be ordinary and necessary within 
the meaning of section 162 or 212 and the regulations thereunder.
    (iii) Entertainment facilities in general. A taxpayer shall be 
deemed to have established that:
    (a) A facility used in connection with entertainment, such as a 
yacht or other pleasure boat, hunting lodge, fishing camp, summer home 
or vacation cottage, hotel suite, country club, golf club or similar 
social, athletic, or sporting club or organization, bowling alley, 
tennis court, or swimming pool, or,
    (b) A facility for employees not falling within the scope of section 
274(e) (2) or (5) was used primarily for the furtherance of his trade or 
business if he establishes that more than 50 percent of the total 
calendar days of use of the facility by, or under authority of, the 
taxpayer during the taxable year were days of business use. Any use of a 
facility (of a type described in this subdivision) during one calendar 
day shall be considered to constitute a ``day of business use'' if the 
primary use of the facility on such day was ordinary and necessary 
within the meaning of section 162 or 212 and the regulations thereunder. 
For the purposes of this subdivision, a facility shall be deemed to have 
been primarily used for such pruposes on any one calendar day if the 
facility was used for the conduct of a substantial and bona fide 
business discussion (as defined in paragraph (d)(3)(i) of this section) 
notwithstanding that the facility may also have been used on the same 
day for personal or family use by the taxpayer or any member of the 
taxpayer's family not involving entertainment of others by, or under the 
authority of, the taxpayer.
    (f) Specific exceptions to application of this section--(1) In 
general. The provisions of paragraphs (a) through (e) of this section 
(imposing limitations on deductions for entertainment expenses) are not 
applicable in the case of expenditures set forth in subparagraph (2) of 
this paragraph. Such expenditures are deductible to the extent allowable 
under chapter 1 of the Code. This paragraph shall not be construed to 
affect

[[Page 576]]

the allowability or nonallowability of a deduction under section 162 or 
212 and the regulations thereunder. The fact that an expenditure is not 
covered by a specific exception provided for in this paragraph shall not 
be determinative of the allowability or nonallowability of the 
expenditure under paragraphs (a) through (e) of this section. 
Expenditures described in subparagraph (2) of this paragraph are subject 
to the substantiation requirements of section 274(d) to the extent 
provided in Sec. 1.274-5.
    (2) Exceptions. The expenditures referred to in subparagraph (1) of 
this paragraph are set forth in subdivisions (i) through (ix) of this 
subparagraph.
    (i) Business meals and similar expenditures paid or incurred before 
January 1, 1987--(a) In general. Any expenditure for food or beverages 
furnished to an individual under circumstances of a type generally 
considered conducive to business discussion (taking into account the 
surroundings in which furnished, the taxpayer's trade, business, or 
income-producing activity, and the relationship to such trade, business 
or activity of the persons to whom the food or beverages are furnished) 
is not subject to the limitations on allowability of deductions provided 
for in paragraphs (a) through (e) of this section. There is no 
requirement that business actually be discussed for this exception to 
apply.
    (b) Surroundings. The surroundings in which the food or beverages 
are furnished must be such as would provide an atmosphere where there 
are no substantial distractions to discussion. This exception applies 
primarily to expenditures for meals and beverages served during the 
course of a breakfast, lunch or dinner meeting of the taxpayer and his 
business associates at a restaurant, hotel dining room, eating club or 
similar place not involving distracting influences such as a floor show. 
This exception also applies to expenditures for beverages served apart 
from meals if the expenditure is incurred in surroundings similarly 
conducive to business discussion, such as an expenditure for beverages 
served during the meeting of the taxpayer and his business associates at 
a cocktail lounge or hotel bar not involving distracting influences such 
as a floor show. This exception may also apply to expenditures for meals 
or beverages served in the taxpayer's residence on a clear showing that 
the expenditure was commercially rather than socially motivated. 
However, this exception, generally, is not applicable to any expenditure 
for meals or beverages furnished in circumstances where there are major 
distractions not conducive to business discussion, such as at night 
clubs, sporting events, large cocktail parties, sizeable social 
gatherings, or other major distracting influences.
    (c) Taxpayer's trade or business and relationship of persons 
entertained. The taxpayer's trade, business, or income-producing 
activity and the relationship of the persons to whom the food or 
beverages are served to such trade, business or activity must be such as 
will reasonably indicate that the food or beverages were furnished for 
the primary purpose of furthering the taxpayer's trade or business and 
did not primarily serve a social or personal purpose. Such a business 
purpose would be indicated, for example, if a salesman employed by a 
manufacturing supply company meets for lunch during a normal business 
day with a purchasing agent for a manufacturer which is a prospective 
customer. Such a purpose would also be indicated if a life insurance 
agent meets for lunch during a normal business day with a client.
    (d) Business programs. Expenditures for business luncheons or 
dinners which are part of a business program, or banquets officially 
sponsored by business or professional associations, will be regarded as 
expenditures to which the exception of this subdivision (i) applies. In 
the case of such a business luncheon or dinner it is not always 
necessary that the taxpayer attend the luncheon or dinner himself. For 
example, if a dental equipment supplier purchased a table at a dental 
association banquet for dentists who are actual or prospective customers 
for his equipment, the cost of the table would not be disallowed under 
this section. See also paragraph (c)(4) of this section relating to 
expenditures made in a clear business setting.
    (ii) Food and beverages for employees. Any expenditure by a taxpayer 
for food

[[Page 577]]

and beverages (or for use of a facility in connection therewith) 
furnished on the taxpayer's business premises primarily for his 
employees is not subject to the limitations on allowability of 
deductions provided for in paragraphs (a) through (e) of this section. 
This exception applies not only to expenditures for food or beverages 
furnished in a typical company cafeteria or an executive dining room, 
but also to expenditures with respect to the operation of such 
facilities. This exception applies even though guests are occasionally 
served in the cafeteria or dining room.
    (iii) Certain entertainment and travel expenses treated as 
compensation--(A) In general. Any expenditure by a taxpayer for 
entertainment (or for use of a facility in connection therewith) or for 
travel described in section 274(m)(3), if an employee is the recipient 
of the entertainment or travel, is not subject to the limitations on 
allowability of deductions provided for in paragraphs (a) through (e) of 
this section to the extent that the expenditure is treated by the 
taxpayer--
    (1) On the taxpayer's income tax return as originally filed, as 
compensation paid to the employee; and
    (2) As wages to the employee for purposes of withholding under 
chapter 24 (relating to collection of income tax at source on wages).
    (B) Expenses includible in income of persons who are not employees. 
Any expenditure by a taxpayer for entertainment (or for use of a 
facility in connection therewith), or for travel described in section 
274(m)(3), is not subject to the limitations on allowability of 
deductions provided for in paragraphs (a) through (e) of this section to 
the extent the expenditure is includible in gross income as compensation 
for services rendered, or as a prize or award under section 74, by a 
recipient of the expenditure who is not an employee of the taxpayer. The 
preceding sentence shall not apply to any amount paid or incurred by the 
taxpayer if such amount is required to be included (or would be so 
required except that the amount is less that $600) in any information 
return filed by such taxpayer under part III of subchapter A of chapter 
61 and is not so included. See section 274(e)(9).
    (C) Example. The following example illustrates the provisions this 
paragraph (f):

    Example. If an employer rewards the employee (and the employee's 
spouse) with an expense paid vacation trip, the expense is deductible by 
the employer (if otherwise allowable under section 162 and the 
regulations thereunder) to the extent the employer treats the expenses 
as compensation and as wages. On the other hand, if a taxpayer owns a 
yacht which the taxpayer uses for the entertainment of business 
customers, the portion of salary paid to employee members of the crew 
which is allocable to use of the yacht for entertainment purposes (even 
though treated on the taxpayer's tax return as compensation and treated 
as wages for withholding tax purposes) would not come within this 
exception since the members of the crew were not recipients of the 
entertainment. If an expenditure of a type described in this subdivision 
properly constitutes a dividend paid to a shareholder or if it 
constitutes unreasonable compensation paid to an employee, nothing in 
this exception prevents disallowance of the expenditure to the taxpayer 
under other provisions of the Internal Revenue Code.

    (iv) Reimbursed entertainment expenses--(a) Introductory. In the 
case of any expenditure for entertainment paid or incurred by one person 
in connection with the performance by him of services for another person 
(whether or not such other person is an employer) under a reimbursement 
or other expense allowance arrangement, the limitations on allowability 
of deductions provided for in paragraphs (a) through (e) of this section 
shall be applied only once, either (1) to the person who makes the 
expenditure or (2) to the person who actually bears the expense, but not 
to both. For purposes of this subdivision (iv), the term reimbursement 
or other expense allowance arrangement has the same meaning as it has in 
section 62(2)(A), but without regard to whether the taxpayer is the 
employee of a person for whom services are performed. If an expenditure 
of a type described in this subdivision properly constitutes a dividend 
paid to a shareholder, unreasonable compensation paid to an employee, or 
a personal, living or family expense, nothing in this exception prevents 
disallowance of the expenditure to the taxpayer under other provisions 
of the Code.

[[Page 578]]

    (b) Reimbursement arrangements between employee and employer. In the 
case of an expenditure for entertainment paid or incurred by an employee 
under a reimbursement or other expense allowance arrangement with his 
employer, the limitations on deductions provided for in paragraphs (a) 
through (e) of this section shall not apply:
    (1) Employees. To the employee except to the extent his employer has 
treated the expenditure on the employer's income tax return as 
originally filed as compensation paid to the employee and as wages to 
such employee for purposes of withholding under Chapter 24 (relating to 
collection of income tax at source on wages).
    (2) Employers. To the employer to the extent he has treated the 
expenditure as compensation and wages paid to an employee in the manner 
provided in (b)(1) of this subdivision.
    (c) Reimbursement arrangements between independent contractors and 
clients or customers. In the case of an expenditure for entertainment 
paid or incurred by one person (hereinafter termed ``independent 
contractor'') under a reimbursement or other expense allowance 
arrangement with another person other than an employer (hereinafter 
termed ``client or customer''), the limitations on deductions provided 
for in paragraphs (a) through (e) of this section shall not apply:
    (1) Independent contractors. To the independent contractor to the 
extent he accounts to his client or customer within the meaning of 
section 274(d) and the regulations thereunder. See Sec. 1.274-5.
    (2) Clients or customers. To the client or customer if the 
expenditure is disallowed to the independent contractor under paragraphs 
(a) through (e) of this section.
    (v) Recreational expenses for employees generally. Any expenditure 
by a taxpayer for a recreational, social, or similar activity (or for 
use of a facility in connection therewith), primarily for the benefit of 
his employees generally, is not subject to the limitations on 
allowability of deductions provided for in paragraphs (a) through (e) of 
this section. This exception applies only to expenditures made primarily 
for the benefit of employees of the taxpayer other than employees who 
are officers, shareholders on other owners who own a 10-percent or 
greater interest in the business, or other highly compensated employees. 
For purposes of the preceding sentence, an employee shall be treated as 
owning any interest owned by a member of his family (within the meaning 
of section 267(c)(4) and the regulations thereunder). Ordinarily, this 
exception applies to usual employee benefit programs such as expenses of 
a taxpayer (a) in holding Christmas parties, annual picnics, or summer 
outings, for his employees generally, or (b) of maintaining a swimming 
pool, baseball diamond, bowling alley, or golf course available to his 
employees generally. Any expenditure for an activity which is made under 
circumstances which discriminate in favor of employees who are officers, 
shareholders or other owners, or highly compensated employees shall not 
be considered made primarily for the benefit of employees generally. On 
the other hand, an expenditure for an activity will not be considered 
outside of this exception merely because, due to the large number of 
employees involved, the activity is intended to benefit only a limited 
number of such employees at one time, provided the activity does not 
discriminate in favor of officers, shareholders, other owners, or highly 
compensated employees.
    (vi) Employee, stockholder, etc., business meetings. Any expenditure 
by a taxpayer for entertainment which is directly related to bona fide 
business meetings of the taxpayer's employees, stockholders, agents, or 
directors held principally for discussion of trade or business is not 
subject to the limitations on allowability of deductions provided for in 
paragraphs (a) through (e) of this section. For purposes of this 
exception, a partnership is to be considered a taxpayer and a member of 
a partnership is to be considered an agent. For example, an expenditure 
by a taxpayer to furnish refreshments to his employees at a bona fide 
meeting, sponsored by the taxpayer for the principal purpose of 
instructing them with respect to a new procedure for conducting his 
business, would be within the provisions of this exception. A

[[Page 579]]

similar expenditure made at a bona fide meeting of stockholders of the 
taxpayer for the election of directors and discussion of corporate 
affairs would also be within the provisions of this exception. While 
this exception will apply to bona fide business meetings even though 
some social activities are provided, it will not apply to meetings which 
are primarily for social or nonbusiness purposes rather than for the 
transaction of the taxpayer's business. A meeting under circumstances 
where there was little or no possibility of engaging in the active 
conduct of trade or business (as described in paragraph (c)(7) of this 
section) generally will not be considered a business meeting for 
purposes of this subdivision. This exception will not apply to a meeting 
or convention of employees or agents, or similar meeting for directors, 
partners or others for the principal purpose of rewarding them for their 
services to the taxpayer. However, such a meeting or convention of 
employees might come within the scope of subdivisions (iii) or (v) of 
this subparagraph.
    (vii) Meetings of business leagues, etc. Any expenditure for 
entertainment directly related and necessary to attendance at bona fide 
business meetings or conventions of organizations exempt from taxation 
under section 501(c)(6) of the Code, such as business leagues, chambers 
of commerce, real estate boards, boards of trade, and certain 
professional associations, is not subject to the limitations on 
allowability of deductions provided in paragraphs (a) through (e) of 
this section.
    (viii) Items available to the public. Any expenditure by a taxpayer 
for entertainment (or for a facility in connection therewith) to the 
extent the entertainment is made available to the general public is not 
subject to the limitations on allowability of deductions provided for in 
paragraphs (a) through (e) of this section. Expenditures for 
entertainment of the general public by means of television, radio, 
newspapers and the like, will come within this exception, as will 
expenditures for distributing samples to the general public. Similarly, 
expenditures for maintaining private parks, golf courses and similar 
facilities, to the extent that they are available for public use, will 
come within this exception. For example, if a corporation maintains a 
swimming pool which it makes available for a period of time each week to 
children participating in a local public recreational program, the 
portion of the expense relating to such public use of the pool will come 
within this exception.
    (ix) Entertainment sold to customers. Any expenditure by a taxpayer 
for entertainment (or for use of a facility in connection therewith) to 
the extent the entertainment is sold to customers in a bona fide 
transaction for an adequate and full consideration in money or money's 
worth is not subject to the limitations on allowability of deductions 
provided for in paragraphs (a) through (e) of this section. Thus, the 
cost of producing night club entertainment (such as salaries paid to 
employees of night clubs and amounts paid to performers) for sale to 
customers or the cost of operating a pleasure cruise ship as a business 
will come within this exception.
    (g) Additional provisions of section 274--travel of spouse, 
dependent or others. Section 274(m)(3) provides that no deduction shall 
be allowed under this chapter (except section 217) for travel expenses 
paid or incurred with respect to a spouse, dependent, or other 
individual accompanying the taxpayer (or an officer or employee of the 
taxpayer) on business travel, unless certain conditions are met. As 
provided in section 274(m)(3), the term other individual does not 
include a business associate (as defined in paragraph (b)(2)(iii) of 
this section) who otherwise meets the requirements of sections 
274(m)(3)(B) and (C).

[T.D. 6659, 28 FR 6499, June 25, 1963, as amended by T.D. 6996, 34 FR 
835, Jan. 18, 1969; T.D. 8051, 50 FR 36576, Sept. 9, 1985; T.D. 8601, 60 
FR 36994, July 19, 1995; T.D. 8666, 61 FR 27006, May 30, 1996]