Professor Elam

Making sure that   business dinner,

night out or ball   game is deductible

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Here’s an   example from a recent issue:

AO Corp   was a medical practice with a single   shareholder/professional employee. AO paid to send the   shareholder/employee on hunting trips,   because he was developing medical devices to make the ear less susceptible to damage from loud noises such   as gunfire and needed to test the devices. The expenses generally involved renting hunting lodges and camps or paying expenses for a hunting trip. The   IRS denied the deductions, claiming   that the payments were constructive dividends to the shareholder.

Held: For the IRS.   Expenses for entertainment facilities   are subject to special rules. An   entertainment facility is any item   of personal or real property owned, rented or used by a taxpayer for or in connection with entertainment, including lodges, camps and ranches. No expenses   for these facilities are deductible. So the taxpayer was denied all   deductions for renting the lodges and camps.

However,   expenses for entertainment activities that do not involve renting a lodge or   camp could be deducted   under the strict rules of §274, Disallowance of certain entertainment, etc., expenses. Such expenses must be directly related to active   conduct of the trade or business. They must   meet each of four requirements:

1.   The taxpayer must have had more than a general expectation of   deriving some income or other business   benefit at an indefinite future time;

1.   During the entertainment period, the taxpayer must have   engaged in a bona fide business transaction other than entertainment   for the purpose of obtaining such business benefit;

1.   The   principal character of the combined business and entertainment was the active conduct of the taxpayer’s trade or   business; and

1.   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.

The court   said the trips did not meet requirement #3. The equipment could have been   more easily tested at a lower cost at outdoor shooting ranges. Also, the   amount of time spent on each trip researching the devices tended to show that the trips’ primary purpose was   personal pleasure, not business.   When a corporation distributes money   or property to a shareholder or incurs expenses for the benefit of a shareholder, the amounts are   treated as dividends to the shareholder if they primarily were for the benefit of the shareholder. In this case, the   expenses primarily were for the   personal benefit of the shareholder, so they were treated as   nondeductible dividends. [Austin Otology Associates v. Commissioner,   T.C. Memo. 2013-293]

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