Combined Business and Personal Travel

1. Domestic Travel

a. General Rules for Business/Pleasure Travel

A taxpayer who engages in some personal activities during a business trip can deduct travel expenses to and from his destination only if the trip primarily relates to his business activities. 196 A taxpayer whose trip is primarily for personal activities cannot deduct any travel expenses to or from his destination. 197 Whether a taxpayer's trip is primarily for business or personal activities depends on all the facts. The amount of time the taxpayer spends on personal activities compared to the time spent on business activities is an important factor. 198

/Footnote/ 196 Regs. §1.162-2(b)(1).

/Footnote/ 197 Id. Duncan v. Comr., 30 T.C. 386 (1958), acq., 1958-2 C.B. 5; Rudolph v. U.S., 291 F.2d 841 (5th Cir. 1961), cert. dismissed, 370 U.S. 269 (1962).

/Footnote/ 198 Regs. §1.162-2(b)(2).

A taxpayer who combines business with pleasure travel can deduct expenses at his destination which are properly attributable to business activities. Similarly, expenses attributable to the taxpayer's personal activities are not deductible even if the primary purpose of the trip relates to the taxpayer's business. 199

/Footnote/ 199 Regs. §1.162-2(b)(1). Rev. Rul. 56-168, 1956-1 C.B. 93.

Example—Travel Primarily for Personal Reasons

Y travels from her Atlanta home to New Orleans. While in New Orleans, Y spends one week on business activities and three weeks on vacation. Y's trip is primarily for personal reasons and neither her airfare nor other expenses in traveling to and from New Orleans are deductible. However, Y's living expenses during the week she is engaged in business activities generally are deductible. 200

/Footnote/ 200 Id. Note that Y's business meal expenses are subject to the percentage reduction rule (§274(n)) and, if unreimbursed, the 2% floor on miscellaneous itemized deductions. §62(a)(1), §67. See discussion at ¶2310.03.B and C, infra.

Expenses which might either be for travel or entertainment (e.g., a business traveler takes his client to dinner and the theatre), generally are considered to be for entertainment. 201 In addition to satisfying the ordinary and necessary tests for all business expenses, entertainment expenses must also satisfy a business connection requirement. 202 Under the business connection requirement, the taxpayer must show that the item is either, directly related to the active conduct of his business, or associated with the active conduct of his business and directly preceded or followed a substantial and bona fide business discussion. 203

/Footnote/ 201 Regs. §1.274-2(b)(1)(iii)(a).

/Footnote/ 202 §274(a).

/Footnote/ 203 §274(a)(1)(A). See ¶2310.03.B, infra, and ¶2320 for additional discussion of the business connection requirement.

b. Domestic Conventions and Seminars

Travel to domestic conventions and seminars generally is governed by the same principles as other domestic travel. Thus, travel expenses to and from a U.S. destination are deductible if the convention is primarily a business trip, but not if the trip is primarily for pleasure. 204 Certain additional considerations apply to conventions and seminars because the taxpayer has an increased opportunity to combine pleasure with business at some meetings. Stringent rules apply to foreign conventions 205 and are discussed below. 206 Moreover, the cost of investment seminars, which relate to financial or tax planning for investors rather than to the taxpayer's trade or business, 207 is not deductible. 208

/Footnote/ 204 Regs. §1.162-2(b)(1). See discussion at ¶2310.01.F, supra.

/Footnote/ 205 §274(c).

/Footnote/ 206 See discussion at ¶2310.01.F, infra.

/Footnote/ 207 Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, p. 63.

/Footnote/ 208 §274(h)(7), §212.

A taxpayer who wishes to deduct travel costs to a convention or seminar must prove that there is a sufficient relationship between his business and the meeting so that he advances his business by attending. 209 The taxpayer can satisfy the business relationship test by showing that the meeting agenda is so related to his position that his participation is for business purposes. 210 The deduction is more likely to be allowed if the meeting is sponsored by the taxpayer's business or professional association. 211 A taxpayer who attends a convention as an appointed or elected delegate of a local group can deduct his travel costs if his attendance advances his own business interests in addition to the interests of the local group. 212

/Footnote/ 209 Regs. §1.162-2(d).

/Footnote/ 210 Rev. Rul. 59-316, 1959-2 C.B. 57, clarified by Rev. Rul. 63-266, 1963-2 C.B. 88.

/Footnote/ 211 E.g., Coffey v. Comr., 21 B.T.A. 1241 (1931), acq., X-2 C.B. 14 (1931) (Doctor attending a medical society meeting); Callinan v. Comr., T.C. Memo 1953-55, 12 T.C.M. 170 (Secretary attending a convention of the National Secretaries Association); A Finkenberg's Sons, Inc. v. Comr., 17 T.C. 973 (1951), acq., 1952-1 C.B. 2 (Furniture store buyers attending an annual furniture show).

/Footnote/ 212 Rev. Rul. 59-316, 1959-2 C.B. 57, clarified by Rev. Rul. 63-266, 1963-2 C.B. 88. See also Rev. Rul. 80-348, 1980-2 C.B. 31.

Even if the taxpayer proves that the meeting is sufficiently related to his business so that he could advance his business interests by attending, he must still show that the convention was primarily for business rather than pleasure activities. Factors relevant to this issue include:

• the amount of time devoted to business at the convention compared to the time devoted to recreational and social activities;

• the conference site, with a resort or cruise ship raising a suspicion that the meeting is for pleasure;

• an employer's view of the trip as primarily for pleasure or business; and

• whether an employee is compelled to attend the convention by the employer. 213

/Footnote/ 213 Patterson v. Thomas, 289 F.2d 108 (5th Cir. 1961), cert. denied, 368 U.S. 837 (1961).

Note: The first factor, the amount of time devoted to business as opposed to personal activities, is the most important. 214 The employer's view of the trip as for business is relevant but not dispositive, even if an employee is virtually compelled to attend the convention. 215 The convention is more likely to resemble a vacation if the taxpayer's spouse accompanies him on the trip. 216

/Footnote/ 214 See, e.g., Kadivar v. Comr., T.C. Memo. 1973-95. Rev. Rul. 79-425, 1971-2 C.B. 81; Rev. Rul. 74-292, 1974-1 C.B. 43.

/Footnote/ 215 Rudolph v. U.S., 291 F.2d 841 (5th Cir. 1961), cert. dismissed, 370 U.S. 269 (1962).

/Footnote/ 216 McCann v. U.S., 696 F.2d 1386 (Fed. Cir. 1983).

Example—Domestic Convention

Z is a lawyer and a member of the local bar association and is selected as a delegate to the annual state bar association meeting. Z and his wife attend the week-long meeting, during which Z attends two morning meetings and a formal dinner. Z and his wife spend the rest of the week sightseeing and playing golf. The state bar association meeting is sufficiently related to Z's business as a lawyer. 217 However, the greater time spent on recreational activities shows that Z's attendance is primarily for personal reasons. Thus, Z cannot deduct any travel expenses to or from the bar convention, although he can deduct the convention registration fees and any other expenses attributable to his business activities at the meeting. 218

/Footnote/ 217 Ellis v. Comr., 15 B.T.A. 1075 (1929), aff'd, 50 F.2d 343 (D.C. Cir. 1931).

/Footnote/ 218 Rudolph v. U.S., 291 F.2d 841 (5th Cir. 1961), cert. dismissed, 370 U.S. 269 (1962).

An employee whose convention trip is found to be primarily for personal activities has additional income to the extent he is reimbursed by his employer for the trip. 219

/Footnote/ 219 Id. In the example above, therefore, Z would have extra income equal to his employer's reimbursement.

5. Travel With Spouse or Family Member

a. Post-1993 Rules

For amounts paid or incurred after 1993, no deduction is permitted for travel expenses (other than for moving expenses) 288 with respect to the spouse, dependent, or other individual accompanying the taxpayer (or accompanying an officer or employee of the taxpayer), unless three requirements are satisfied: 289

• the accompanying person is an employee of the taxpayer;

• the travel of the accompanying person is for a bona fide business purpose; and

• the expenses would otherwise be deductible by the accompanying person.

/Footnote/ 288 For discussion of the moving expense deduction, see ¶2870.

/Footnote/ 289 §274(m)(3). The IRS issued regulations to apply the disallowance of a deduction for the travel of a spouse, dependent, or other individual accompanying an employee on business travel as it applies to working condition fringe benefits. See Regs. §1.132-5(t), T.D. 8666, 61 Fed. Reg. 27005 (5/30/96), discussed in ¶5960.

b. Pre-1994 Rules

For amounts paid or incurred before 1994, the only requirement for the deduction of the taxpayer's spouse or other family member accompanying the taxpayer on a business trip is that the presence of the accompanying person serve a bona fide business purpose. 290 This standard is not met if the spouse or family member performs only incidental services, such as serving as a hostess at dances and receptions 291 or providing typing and similar services. 292 The presence of the taxpayer's children increases the possibility that the trip will be characterized as a family vacation. 293

/Footnote/ 290 Regs. §1.162-2(c).

/Footnote/ 291 Sheldon v. Comr., 299 F.2d 48 (7th Cir. 1962).

/Footnote/ 292 Regs. §1.162-2(c). Rev. Rul. 56-168, 1956-1 C.B. 93.

/Footnote/ 293 See, e.g., Takahashi v. Comr., 87 T.C. 126 (1986).

Note: The Tax Court is generally skeptical of taxpayers' claims that the taxpayer's spouse serves a bona fide business purpose. Taxpayers seem to do better on this issue in the district and appellate courts, particularly if the taxpayer's employer encourages married couples to travel together and reimburses their combined expenses. 294

/Footnote/ 294 See, e.g., U.S. v. Disney, 413 F.2d 783 (9th Cir. 1969); Warwick v. U.S., 236 F. Supp. 761 (E.D. Va. 1964).

Example—Travel with Spouse

W is the president of a company that produces family entertainment. Company policy strongly encourages spouses to accompany corporate representatives when they travel to enhance the company's family image. W's wife does not perform any clerical functions or attend business meetings, except for: entertaining at various meals, movie screenings, and meetings; being interviewed by the press; and making goodwill visits to industry members. Although W's wife spends much of her trip in their hotel room or shopping, the dominant purpose of her trip is to serve W's business interests and she spends a substantial part of her time in such activities. Thus, the travel expenses for W's wife are deductible. 295

/Footnote/ 295 U.S. v. Disney, 413 F.2d 783 (9th Cir. 1969).

The travel expenses of a taxpayer's spouse or other family member are more likely to be deductible if the spouse or family member regularly works in the taxpayer's business. 296 The travel expenses of a taxpayer's spouse who accompanies the taxpayer on business trips to provide attendant care may be deductible if the taxpayer is handicapped. 297

/Footnote/ 296 Wood v. Comr., T.C. Memo 1971-125.

/Footnote/ 297 §67(b)(6), as redesigned by the 1993 RRA; §67(d). A "handicapped individual" is defined for this purpose by reference to §190(b)(3).

If there is no business purpose to justify the presence of the taxpayer's spouse on a business trip, that part of the cost attributable to the extra person is not deductible. 298 An employer is subject to the same rules unless the amount not deductible is included in the employee's gross income. 299 An employer must withhold tax on any amount which is treated as compensation because it does not serve the employer's bona fide business interests. 300

/Footnote/ 298 Rev. Rul. 56-168, 1956-1 C.B. 93.

/Footnote/ 299 Regs. §1.274-2(f)(2)(iv).

/Footnote/ 300 Peoples Life Ins. Co. v. U.S., 373 F.2d 924 (Ct. Cl. 1967). Regs. §31.3401(a)-1(b)(10). See ¶2310.04.A, below, for further discussion of the withholding requirements relating to travel and transportation expenses.

Example—Spouse's Travel Not Deductible