When the IRS audited Winter Corporation\'s current year tax return, the IRS disa
ID: 2508117 • Letter: W
Question
When the IRS audited Winter Corporation's current year tax return, the IRS disallowed $10,000 of travel and entertainment expenses incurred by Charles, an officer-shareholder, because of inadequate documentation. The IRS asserted that the $10,000 expenditure was a constructive dividend to Chrles, who mairlaincd hai the: expm: was buin re lated. Charle argued that he derived no personal benefit from the expenditure and therefore received no constructive dividend. Prepare a memorandum for your tax manager explaining whether the IRS's asserti assertion is correct. Your manager has suggested that, at a minimum, you consult the following resources: C:4-63 IRC Secs. 162 and 274 - Reg. Secs. 1.274-1 and -2Explanation / Answer
As per sec.162.(a)In generalThere shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
(1)
a reasonable allowance for salaries or other compensation for personal services actually rendered;
(2)
traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and
(3)
rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
In addition there should be proper evidence for the expense incurred.
1.274-1 Disallowance of certain entertainment, gift and travel expenses.
Section 274 disallows in whole, or in part, certain expenditures for entertainment, gifts and travel which would otherwise be allowable under Chapter 1 of the Code. The requirements imposed by section 274 are in addition to the requirements for deductibility imposed by other provisions of the Code. If a deduction is claimed for an expenditure for entertainment, gifts, or travel, the taxpayer must first establish that it is otherwise allowable as a deduction under Chapter 1 of the Code before the provisions of section 274 become applicable. An expenditure for entertainment, to the extent it is lavish or extravagant, shall not be allowable as a deduction. The taxpayer should then substantiate such an expenditure in accordance with the rules under section 274(d). See § 1.274-5. Section 274 is a disallowance provision exclusively, and does not make deductible any expense which is disallowed under any other provision of the Code. Similarly, section 274 does not affect the includability of an item in, or the excludability of an item from, the gross income of any taxpayer. For specific provisions with respect to the deductibility of expenditures: for an activity of a type generally considered to constitute entertainment, amusement, or recreation, and for a facility used in connection with such an activity, as well as certain travel expenses of a spouse, etc.,
With the help of these provisions we can conclude that IRS’s assertion is correct.
This is because it is clearly given that IRS disallowed due to inadequate documentation.
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