For example, if the owner of a hardware store advertises that tickets to a sports event will be provided to the first 50 people who visit the store on a particular date, or who purchase an item from the store during a sale, then the full amount of the face value of the tickets is deductible by the owner. Similarly, a wine merchant who permits members of the public who are potential customers to sample wine of the type that the merchant is offering for sale may deduct in full the cost of wine used as a sample, along with reasonable costs that are associated with the winetasting (e.g., food that is provided with the wine to demonstrate the suitability of the wine for particular types of meals.)

Sixth, expenses for attendance at a sports event, to the extent otherwise allowable as a business deduction, are not subject to the percentage reduction rule if the event meets certain requirements related to charitable fundraising. In order for such costs to be subject to the percentage reduction rule under this exception, the event must (1) be organized for the primary purpose of benefiting a tax-exempt charitable organization (described in sec. 501(c)(3)), (2) contribute 100 percent of the net proceeds to the charity, and (3) use volunteers for substantially all work performed in carrying out the event. This rule applies to the cost of a ticket package, i.e., the amount paid both for seating at the event, and for related services such as parking, use of entertainment areas, contestant positions, and meals furnished at and as part of the event.

For example, a golf tournament that donates all of the net proceeds from the event to charity is eligible to qualify under this exception. Such a tournament would not fail to qualify solely because it offered prize money to golfers who participated, or used paid concessionaires or security personnel. However, it is intended that tickets to college or high school football or basketball games or other similar scholastic events will not qualify under the exception. Such games generally do not satisfy the requirement that substantially all work be performed by volunteers, if the institution (or parties acting on its behalf) pays individuals to perform such services as coaching or recruiting.

Seventh, the cost of providing meals or entertainment is fully deductible to the extent that it is sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money's worth. For example, a restaurant or dinner theater may deduct the full amount of its ordinary and necessary expenses in providing meals or entertainment to paying customers. Similarly, assume that an employer, not otherwise in the restaurant or catering business, provides meals on the premises to its employees for which the employer can establish that it charges arm's length, fair market value prices. Since in such circumstances the employees are paying adequate and full consideration, the value of the meals does not constitute compensation includible in gross income, even if the section 132(e) exclusion does not apply. For purposes of the above exception to the percentage reduction rule, the employer in these particular circumstances is treated, in effect, like a restaurant, and can deduct in full the cost of providing the meals.

However, a taxpayer cannot avoid the percentage reduction rule, where otherwise applicable, by reason of providing meals on the taxpayer's business premises. By way of illustration, assume that,

in the above example, when an employee takes a customer of the employer to lunch on the premises, the employee's or the customer's meals, or both, are provided by the employer free of charge. Under these circumstances, only 80 percent of the cost of providing the free meals is deductible by the employer. If the employee actually paid for the cost of the meals and was not reimbursed by the employer, the percentage reduction rule would apply to the employee.

A restaurant or catering firm may deduct 100 percent (rather than 80 percent) of its costs for food and beverage items, purchased in connection with preparing and providing meals to its paying customers, that are consumed at work by employees of the restaurant or caterer. However, this rule applies only to employees who work in the employer's restaurant or catering business.

Eighth, expenses incurred in calendar year 1987 or calendar year 1988 for food or beverages that are provided as an integral part of a qualified banquet meeting are not subject to the percentage reduction rule if charges for the meal are not separately stated from other meeting expenses.41 In the case of expenses incurred on or after January 1, 1989, the 80-percent reduction rule will apply to qualified banquet meeting meals in the same manner as to other business meals.

For purposes of this two-year exception, the term banquet meeting means a convention, seminar, annual meeting, or similar business program that includes the meal. The exception applies only if more than 50 percent of the participants at the banquet meeting are away from home (within the meaning of sec. 162(a)(2)), i.e., can deduct travel expenses under the "overnight" rule; (2) at least 40 persons attend the banquet meeting; and (3) the meal event is part of the banquet meeting and includes a speaker.42 If a business program or other banquet meeting includes (for example) three meals, but there is a speaker only at one of the meals, only the one meal at which there is a speaker is eligible for the banquet meeting exception to the percentage reduction rule.

b. Additional requirements relating to meals

The Act also makes certain changes in the legal and substantiation requirements applicable to deductions for business meals; these changes apply independently of and prior to the percentage reduction rule (where applicable).

First, under the Act, deductions for meal expenses are subject to the same business-connection requirement as applied to deductions for other entertainment expenses under prior law (and continues to

41 Thus, this exception to the percentage reduction rule does not apply if a charge is made to persons consuming the meal for an amount for the meal separate from the charge for the program of which the meal is an integral part, or if program attendees who do not have the meal are refunded a separate amount for not having the meal. However, the exception does not become inapplicable merely because the hotel, caterer, or other business that is unrelated to the taxpayer and that provides the food or beverages may state to the taxpayer as program sponsor a separate amount that represents the food and beverage charges to the taxpayer, which amount the taxpayer then may factor into the total fee for the program that includes the meal. 42 In order to qualify for this exception to the percentage reduction rule, it is not necessary that the speaker be paid an honorarium for speaking at the meal. This exception can apply to meals served at an employee training facility if the requirements (such as a bona fide speaker) for the exception are met.

apply under present law).43 Accordingly, an expense for food or beverages is not deductible unless (in addition to generally applicable deduction requirements) the taxpayer (1) establishes that the item was directly related to the active conduct of the taxpayer's trade or business, or, in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that the item was associated with the active conduct of the taxpayer's trade or business, and (2) substantiates the deduction as required by section 274(d) and Treas. Reg. sec. 1.274-5(b)(4).

Under this requirement, a business meal expense generally is not deductible unless there is a substantial and bona fide business discussion during, directly preceding, or directly following the meal. However, the absence of a business discussion does not preclude satisfying the "directly related" or "associated with" requirement in the case of an individual who is away from home in the pursuit of a trade or business and who has a meal alone or with persons, such as family members, who are not business-connected, and a deduction is claimed only for the meal of such individual, or in the case of a meal expense allowable as a moving expense.

For purposes of deducting food or beverage expenses, the business discussion requirement is deemed not to have been met if neither the taxpayer nor any employee of the taxpayer is present when the food or beverages are provided. Thus, for example, if the taxpayer reserves a table at a business dinner but neither the taxpayer nor an employee of the taxpayer attends the dinner, no deduction is allowed for the taxpayer's expenditures. Similarly, if one party to a contract negotiation buys dinner for other parties involved in the negotiations, but does not attend the dinner, the deduction is denied even if the other parties engage in a business discussion. 44

For purposes of this rule, an independent contractor who renders significant services to the taxpayer (other than attending meals on the taxpayer's behalf, or providing services relating to meals) is treated as an employee, if he or she attends the meal in connection with such performance of services. Thus, for example, an attorney who was retained by a taxpayer to represent the taxpayer in a particular legal proceeding is to be treated as an employee of the taxpayer, for purposes of this rule, if the attorney represented the taxpayer at a business meal at which the legal proceeding was discussed.

The requirement for deductibility that the taxpayer must be present at the meal does not apply where an individual traveling away from home on business has a meal alone or with persons, such as family members, who are not business-connected, and a deduction is claimed only for the meal of such individual. Also, the taxpayer-presence requirement is subject to the same exceptions as apply under the Act to the percentage reduction rule.

43 Thus, the statutory exceptions to the business-connection requirement that apply in the case of other entertainment expenses also apply in the case of business meal expenses.

** However, the requirement that the taxpayer be present does not apply in the case of a transfer for business purposes of a packaged food or beverage item, such as a holiday turkey, ham, fruitcake, or bottle of wine.

Second, the Act explicitly provides, apart from the prior-law and present-law statutory rule (sec. 162(a)(2)) disallowing deductions for certain lavish and extravagant travel expenses (including meals), that no deduction is allowed for any food or beverage expense unless the expense is not lavish or extravagant under the circumstances (new sec. 274(k)(1)(A)). This additional provision reflects the intent of the Congress that this standard is to be enforced by the Internal Revenue Service and the courts.

This disallowance rule applies whether or not the expense is incurred while the taxpayer is away from home, and whether the taxpayer incurs the expense alone or with others. Since the percentage reduction is applied only after determining the otherwise allowable deduction under sections 162, 212, and 274, if a taxpayer incurs otherwise deductible business lunch expenses of (for example) $80 for himself and if $30 of that amount is not allowable as lavish or extravagant, the remaining $50 is then reduced by 20 percent, leaving a deduction of $40. This new disallowance rule (but not the sec. 162(a)(2) disallowance rule) is subject to the same exceptions as apply under the Act to the percentage reduction rule (e.g., where the full value of the food or beverages is treated as compensation to the recipient).

The rules of the Act reflect concerns of the Congress about deductions claimed under prior law for meals that did not clearly serve business purposes or were not adequately substantiated. Since the Act provides that deductions for meals are subject to the same business-connection requirement as applies under prior and present law for other entertainment expenses, the substantiation requirements for such entertainment expenses (e.g., in Treas. Reg. sec. 1.274-5(b)(4) with respect to the directly related or associated with requirement for deductibility) also apply to all meal expenses. In addition, the Treasury is instructed to adopt stricter substantiation requirements for business meals, except that the prior-law rule relating to certain expenditures of less than $25 is to be retained.

Under the Act, as under prior law, the Internal Revenue Service and the courts are not to apply the Cohan approximation rule to allow deductibility of any food or beverage expense, other entertainment expense, or other expenditure subject to substantiation pursuant to section 274(d) if the expenditure is not substantiated in accordance with section 274(d) and the regulations thereunder. c. Deductions for tickets limited to face value

Under the Act, a deduction (if otherwise allowable) for the cost of a ticket for an entertainment activity is limited (prior to application of the percentage reduction rule) to the face value of the ticket. The face value of a ticket includes any amount of Federal, State, or local ticket tax on the ticket. Under this rule, a payment to a "scalper" for a ticket is not deductible (even if not disallowed as an illegal payment) to the extent that the amount paid exceeds the face value of the ticket. Similarly, a payment to a ticket agency or broker for a ticket is not deductible to the extent it exceeds the face value of the ticket.

However, the face value limitation does not apply to an expense that is excepted under the Act from the percentage reduction rule

because it relates to a sports event that meets certain requirements related to charitable fundraising (see description above).

d. Disallowance of deductions for certain "skybox" rentals

The Act generally disallows any deductions relating to rental or similar payments for use of a "skybox" if the skybox is used by the taypayer (or related party) for more than one event during a taxable year. The term "skybox" means any private luxury box or other facility at a sports arena that is separated from other seating, and is available at a higher price (counting all applicable expenses, e.g., rental of the facility, as well as separate charges for food and seating) than the price generally applicable to other seating.

The disallowance rule applies if the taypayer (or a related party, including one engaged in a reciprocal rental arrangement with the taxpayer) rents a skybox at the same sports arena for more than one event. For purposes of this rule, a single game or other performance counts as one event. Thus, for example, a taxpayer who rents a skybox for two World Series games in the same stadium is treated as renting a skybox for two events. The deductibility of a single-event rental is determined under the rules generally applicable to entertainment activities, including the percentage reduction rule.

In determining whether a taypayer has rented a skybox for more than one event, all skybox rentals by the taypayer in the same arena, along with any related rentals, are considered together. For example, rentals of different skyboxes in the same stadium, or rentals by the same taxpayer pursuant to separate rental agreements, constitute related rentals. In addition, rentals by related parties are considered related rentals. For example, this rule applies where members of the same family, corporations or other entities with common ownership, or taxpayers who have made a reciprocal arrangement involving sharing skyboxes, respectively lease skyboxes for different events.

If the disallowance rule applies (i.e., if the taypayer rents a skybox for more than one event), the amount allowable as a deduction with respect to such events (including the first such rental) cannot exceed the face value of luxury box seat tickets generally held for sale to the public multiplied by the number of seats in the luxury box (subject, however, to further reduction under the percentage reduction rule). In addition, if expenses for food and beverages incurred by the taxpayer are separately stated, such expenses also may be deducted, subject to the rules generally applicable to business meal expenses, including the business-connection requirement, the prohibition on deducting lavish and extravagant expenses, the requirement of taxpayer presence, and the percentage reduction rule.

For example, in a stadium where box seats (other than in luxury boxes) are sold for between $8 and $12, a taypayer who rents a skybox for three events (and meets generally applicable deduction rules) may treat the deductible amount for the three events as equal to $12 multiplied by the number of seats in the luxury box, multiplied by three. This method applies whether or not the luxury box is occupied fully during the event, and without regard to