whether amounts paid for the luxury box nominally constitute payments for the seats or rentals for the luxury box.

However, in determining the amount charged for nonluxury box seats, only prices charged for a genuine category of such seats are taken into account. Consider, for example, the case of a sports arena that, in order to increase the deductions allowable with respect to skyboxes, reserved a small group of seats for which it charged $50 even though those seats were not significantly better than the seats that it offered for $12. In such a case, the $50 price would be disregarded as not bona fide. Similarly, the skybox disallowance rule cannot be circumvented by charging inflated amounts for food and beverages provided in the skybox.

Under the Act, the skybox deduction disallowance rule is phased in. Under the phase-in provision, amounts disallowed for taxable years beginning in 1987 and 1988 are, respectively, one-third and two-thirds of the amounts that otherwise would be disallowed under the skybox provision if the provision were fully effective in those years. Assume, for example, that a calendar-year taxpayer rents a stadium skybox with 10 seats for eight events during 1987 at a total cost of $15,000 (with no additional separate charge for tickets), that the face value of a nonluxury box seat (determined as stated above) is $12, that all seats are occupied by business customers of the taypayer and the taypayer is present at each event, and that the total cost otherwise would be allowable as a business deduction. Under the Act as in effect following the phase-in, the taxpayer could deduct 80 percent of the face value ticket amounts (i.e., 80 percent of $960). For 1987, only one-third of the nonticket amount ($15,000 less $960) is disallowed, pursuant to the phase-in; i.e., $4,680 is disallowed. Thus, the taxpayer could deduct 80 percent of $9,360 ($14,040 less $4,680), or $7,488, plus 80 percent of the ticket amount, or $768. The total 1987 deduction for ticket and nonticket amounts would be $8,256.

For taxable years beginning after 1989, the Act generally disallows deductions for any costs of rental or other use of a skybox at a sports arena if the taxpayer (or a related party) uses the skybox for more than one event.

e. Travel as a form of education

Under the Act, no deduction is allowed for expenses for travel as a form of education. This rule applies when a travel deduction otherwise would be allowable only on the ground that the travel itself constitutes a form of education. Thus, for example, this provision disallows deductions for transportation or other travel expenses (including meals and lodging) incurred by a teacher of French who travels to and in France in order to maintain general familiarity with the French language and culture.

This disallowance rule does not apply to otherwise allowable deductions claimed with respect to travel that is a necessary adjunct to engaging in an activity that gives rise to a business deduction relating to education. For example, this disallowance rule does not apply where a scholar of French literature travels to Paris in order to do specific library research that cannot be done elsewhere, or to take courses that are offered only at the Sorbonne, in circum

stances such that the nontravel research or course costs are deductible.

f. Charitable deductions for travel expenses

The Act places limitations on charitable deductions for the cost of travel away from home, effective for taxable years beginning after December 31, 1986.45 Under this rule (sec. 170(k)), no charitable deduction is allowed for transportation and other travel expenses (including costs for meals and lodging) incurred in performing services away from home for a charitable organization unless there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. The same limitation applies under prior and present law with respect to medical deductions for lodging costs away from home (sec. 213(d)(2)(B)).

This rule applies only with respect to expenses relating to travel by a taxpayer or by a person associated with the taxpayer (e.g., a family member). The rule does not apply to the extent that the taxpayer pays for travel by third parties who are participants in the charitable activity. For example, this disallowance rule does not apply to travel expenditures personally incurred by a troop leader for a tax-exempt youth group who takes children (unrelated to the taxpayer) belonging to the group on a camping trip. Similarly, the disallowance rule does not apply where an officer of a local branch of a national charitable organization travels to another city for the organization's annual meeting and spends the day attending meetings, even if the individual's evening is free for sightseeing or entertainment activities. However, the disallowance rule applies in the case of any reciprocal arrangement (e.g., when two unrelated taxpayers pay each other's travel expenses, or members of a group contribute to a fund that pays for all of their travel expenses).

The disallowance rule applies whether the travel expenses are paid directly by the taxpayer, or indirectly through reimbursement by the charitable organization. For this purpose, any arrangement whereby a taxpayer makes a payment to a charitable organization and the organization pays for his or her travel expenses is treated as a reimbursement.

In determining whether travel away from home involves a significant element of personal pleasure, recreation, or vacation, the fact that a taxpayer enjoys providing services to the charitable organization will not lead to denial of the deduction. For example, a troop leader for a tax-exempt youth group who takes children belonging to the group on a camping trip may qualify for a charitable deduction with respect to his or her own travel expenses if he or she is on duty in a genuine and substantial sense throughout the trip, even if he or she enjoys the trip or enjoys supervising children. By contrast, a taxpayer who only has nominal duties relating to the performance of services for the charity, who for significant portions of the trip is not required to render services, or who performs activities similar to activities that many individuals perform while on

45 A taxpayer cannot circumvent this effective date by "setting aside" amounts, or paying amounts, prior to January 1, 1987, to a fund or account that is to be used to finance travel costs after December 31, 1986 that would be nondeductible expenditures under the Act.

vacations paid out of after-tax dollars, is not allowed any charitable deduction for travel costs.

The disallowance rule in the Act has no effect on deductions other than charitable deductions that may be claimed with respect to travel on behalf of a charitable organization. For example, the rule does not affect the eligibility for deduction under section 162 of an employee business expense incurred by an employee of a charitable organization.

g. Expenses for nonbusiness conventions, etc.

Under the Act, no deduction is allowed for expenses related to attending a convention, seminar, or similar meeting unless such expenses qualify under section 162 as ordinary and necessary expenses of carrying on a trade or business of the taxpayer. Thus, the Act disallows deductions for expenses of attending a convention, etc. where the expenses, but for the provision in the Act, would be deductible under section 212 (relating to expenses of producing income) rather than section 162.

The disallowed expenses to which the provision relates typically include such items as travel to the site of such a convention, registration or other fees for attending the convention, and personal living expenses, such as meals, lodging, and local travel, that are incurred while attending the convention or other meeting. This disallowance rule does not apply to expenses incurred by a taxpayer in attending a convention, seminar, sales meeting, or similar meeting relating to the trade or business of the taxpayer that are deductible under section 162.

In adopting this provision, the Congress also was concerned that some taxpayers may be claiming deductions under section 162 for travel and other costs of attending a convention, seminar, or similar meeting ("convention") at which each convention participant is furnished individually with video tapes of lectures, etc. on topics related to the taxpayer's trade or business, to be viewed at the convenience of the participant, and at which no other significant business-related activities occur during the time allotted for the convention. In such situations, the taxpayer does not participate in activities normally conducted at a business-related convention, such as participating in meetings, discussions, workshops, lectures, or exhibits held during the day, and simply views the tapes at his or her own convenience. Because permitting deductions for travel, meal, or entertainment costs associated with such minimal business-related activities would allow taxpayers to treat expenditures that essentially are for vacation, recreation, or other personal purpose as business expenses, the Congress clarified that no deduction is allowable under section 162 for travel or related costs (such as meals, lodging, or local transportation) of attending such a convention.

This clarification does not disallow deductions for the travel and other costs of attending a convention that involves activities otherwise deductible under present law which are related to the taxpayer's trade or business merely because the convention utilizes videotaped or televised materials where the participants must attend a convention session in person to view the video-taped materials, assuming that the generally applicable requirements for deducting

expenses of attending a convention are satisfied.46 Under those requirements, traveling expenses to and from the convention destination are deductible only if the trip is related primarily to the taxpayer's trade or business. If the trip is primarily personal in nature, deductions are allowable only for expenses (if any) incurred while at the destination that are properly allocable to the taxpayer's trade or business.

The determination of whether a trip is related primarily to the taxpayer's trade or business, rather than being primarily personal in nature, depends on the facts and circumstances in each case. An important factor in determining whether the trip is primarily personal is the amount of time during the period of the trip that is spent on personal activities compared to the amount of time spent on activities directly relating to the taxpayer's trade or business (Treas. Reg. sec. 1.162-2(b)).

By way of illustration, assume that a four-day convention is held at a resort or vacation location, that the convention sessions (whether or not utilizing video-taped materials) are scheduled solely for two hours each evening, and that the taxpayer does not engage in any nonconvention business activities during the day. In such a case, a taxpayer could not deduct any away-from-home expenses (travel, lodging, or meals) incurred on his or her trip because the travel is not related primarily to the taxpayer's trade or business, but could deduct any expenses properly allocable to the convention sessions, subject to the rule described above relating to furnished video-taped materials.

h. Luxury water travel

The Act places limitations on the amount of any otherwise allowable deduction for costs of travel by ocean liner, cruise ship, or other form of luxury water transportation. This rule applies, for example, in the case of a taxpayer who has business reasons for traveling from New York City to London and who travels by ocean liner.

Under the Act, the deduction allowable in the case of luxury water travel cannot exceed twice the highest amount generally allowable with respect to a day of travel to employees of the executive branch of the Federal Government while away from home but serving in the United States, multiplied by the number of days the taxpayer was engaged in luxury water travel. For example, if during a particular taxable year the highest applicable Federal per diem amount is $126 for travel in the United States, a taxpayer's deduction for a six-day trip cannot exceed $1,512 ($252 per day times six days). The applicable per diem amount generally is the highest travel amount applying for an area in the conterminous United States; however, any limited special exception to this amount (e.g., a higher limit that applied only to high-ranking executive personnel) would be disregarded.

If the portion of the expenses of luxury water travel that are for meals or entertainment are separately stated, the amounts so sepa

46 Also, this clarification does not disallow deductions for costs, other than travel, meal, or entertainment expenses, of renting or using business-related video-taped materials that are deductible trade or business expenses under section 162.

rately stated are reduced by 20 percent, under the percentage reduction rule, prior to application of this per diem limitation. However, in the absence of separately stated meal or entertainment charges, taxpayers are not required to allocate a portion of the total amount charged for luxury water travel to meals or entertainment unless the amounts to be allocated are clearly identifiable. This special rule, applicable only in the case of luxury water travel, applies in light of the fact that the Act imposes a flat dollar limitation on deductibility of all travel-for transportation, lodging, and meals-incurred in luxury water transportation.

The per diem limitation for luxury water travel does not apply in the case of any expense allocable to a convention, seminar, or other meeting that is held on any cruise ship. Thus, the per diem limitation does not alter the application of the rule (sec. 274(h)(2)) under which deductions for conventions held aboard cruise ships are wholly denied or, in certain special cases, allowed to the extent not in excess of $2,000 per individual. Under the Act, the statutory exceptions to the business meal percentage reduction rule (described above) are also exceptions to the per diem rule with respect to luxury water travel.

Effective Date

The provisions are effective for taxable years beginning after December 31, 1986.

Revenue Effect

The provisions are estimated to increase fiscal year budget receipts by $1,180 million in 1987, $2,068 million in 1988, $2,397 million in 1989 $2,787 million in 1990, and $3,070 million in 1991.

2. Floor on deductibility of miscellaneous itemized deductions; modifications to certain employee business expense deductions (sec. 132 of the Act and sec. 62 and new sec. 67 of the Code) 47

In general

Prior Law

The list of itemized deductions on Schedule A of Form 1040 inciudes a category labeled miscellaneous deductions, following the listings for medical expenses, charitable donations, interest, taxes, and casualty and theft losses. Under prior law, this category generally included four types of deductions: (1) certain employee business expenses (sec. 162); (2) expenses of producing income (sec. 212); (3) expenses related to filing tax returns (sec. 212); and (4) expenses of adopting children with special needs (sec. 222).

Employee business expenses

An employee business expense is a cost incurred by an employee in the course of performing his or her job. Examples of such costs

47 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 132; H. Rep. 99-426, pp. 108-111; H.R 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 132-33; S. Rep. 99313, pp. 77-80; and H. Rep. 99-841, Vol. II (September 18, 1986) pp. 32-34 (Conference Report).