All the Food That's Fit to Deduct.

Editor's Note: One feature of the Internet -- at least for those more technologically more savvy than we are -- is the ability to send anonymous e-mail messages. One such message recently found its way to The Tax Executive. It is reprinted below.

My friend Seymour sent me an e-mail message the other day that ended up consuming more time than I thought it would. "Did you see," his message began, "that item in Sunday's New York Times on the Caucus Room?" He was talking about a short story in the September 3rd issue of "A Week in Review" concerning a new steak house in Washington whose investors list reads like a "Bipartisan Who's Who Among the Biggest and Best (and Beefiest) Lobbyists." Seymour's message continued:

   The restaurant apparently consists primarily of private dining rooms. One
   sentence in the story reads: "Not so incidentally, lobbyists can deduct as
   much of their visits as possible -- 100 percent for a banquet, but only 50
   percent for a regular meal." I know that there used to be a qualified
   meeting, or banquet, exception to section 274(n), but didn't that expire a
   long time ago? And I know that there's an argument that certain meals can
   qualify as a de minimis fringe. But a de minimis three-martini lunch? Is
   there a "private dinning room" exception that I've missed for these years?
   Hurry, because my boss is getting ready to hold all his meetings at the
   Caucus Room. And he's even hinted about filing amended returns for all the
   "banquets" he's attended in the past.

My first response to Seymour was pretty simple. I told him to calm down. "Marian Burros does a good job writing about food for the Times," I replied, "but I don't think she even has a subscription to Tax Notes or RIA." Then I told him that his recollection of the tax law was correct. "The banquet exception," I wrote, "came in with the 50-percent disallowance in 1986 (it was only 20 percent initially), but from the outset it was set to expire at the end of 1988. Besides, meals at the Caucus Room couldn't possibly qualify under the old statutory rule. Section 274(n) provided that the program had to include the meal, the meal's cost could not be separately stated, the program had to have more than 40 participants, more than half of whom were traveling away from home, and there had to be a bona fide speaker."

My answer seemed to satisfy Seymour, who apparently told his boss that The New York Times was all wet. His boss, who never much cared for the Times's editorial positions (or its restaurant reviews), accepted Seymour's demurrer. At least until the September 18 issue of Legal Times landed on his desk. There on page 30 was a restaurant review of the Caucus Room. Half-way down was this teaser:

   At the back of the restaurant are several private dining rooms of varying
   size. The rooms, which also are used by regular diners, feature French
   doors with glass panes. The doors apparently are critical to help patrons
   comply with the specific tax regulations that allow for 100 percent
   deductibility for functions in a private dining room.

Well, you can imagine what Seymour's first thoughts were after he finished listening to his boss s voice mail message. "But you told me I had nothing to worry about." "And you don't," I tried to assure him. "I don't think." I told him that I would look into the issue more thoroughly.

Specific tax regulations. Specific tax regulations. Specific tax regulations? What in the heck could Legal Times be referring to? Flipping open volume I of my RIA regulations, the only thing I could find was Treas. Reg. [sections] 1.132-6(e)(1), which provides that the exclusion for de minimis fringes includes "occasional cocktail parties, group meals, or picnics for employees and their guests." Could that be what the owners of the Caucus Room are hanging their hat on, I wondered. Could a $10 bowl of lobster bisque ever be de minimis?

I decided to call my friend Jean-Baptiste Oie, who had spent the early part of his career working for Frank Perdue. "You are on the right track, my friend," he began. "Some taxpayers seeking to avoid the 50-percent disallowance rule read the `group meal' exception to be a `regulatory substitute' for the banquet exception in the old statute. But many tax professionals, not just this old chicken plucker, thinks the argument proves too much. Some of us wonder whether the IRS was even authorized to extend the group meal exception, especially since Congress specified that it should sunset as of January 1, 1989. The better interpretation of this regulation is that the exception applies only to meals that are really `de minimis.' Some `group meals' might be, but others are clearly not. The rule is governed by a facts-and-circumstances test.

"Remember this, section 132(e) states that `de minimis fringe' means any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable. Based on the Legal Times story, the Caucus Room's prices are much higher than most of the restaurants on K Street, and since you'll get a receipt at the end of the meal, how difficult will it be to keep track of the meals?"

"But," I pressed, "the people involved in this deal are all really smart, at least if intelligence is measured by hourly billing rate. With due respect, couldn't we be missing something?"

"Mon ami, mon ami. Do you remember that exchange on TEI OnLine a little more than a year ago? Someone posted a question that went something like this: An outside consulting firm has proposed to come in and do an audit of our t&e accounts and identify all the business meals that fall within one of the exceptions of the 50-percent disallowance. The firm says its fee will be calculated by how large a refund it secures for my company. What do you think?"

"I remember the question," I hedged, "but what was the answer?"

"The answer was, `If the deal sounds too good to be true, it probably is.' Listen, I'm not saying that there aren't opportunities for tax savings. If you scrub your t&e records, you are bound to find some expenses in the 274(n) basket that shouldn't be there. But saying that and distending the de minimis and group meal exceptions to exclude high-priced restaurant meals consumed in a private room with French doors ... that's another thing entirely.

"It's just plain silly," Jean-Baptiste continued, clearly on a roll. "How on earth can meals identified as part of an after-the-fact audit be `de minimis' when it wasn't unreasonable or administratively impractical to keep track of them. They were kept track of for goodness' sake! To substantiate its deduction (even without regard to the 50-percent disallowance), employers have for years been keeping meticulous records that identify date, place, amount, diners and their titles, and the cost of meals. Unreasonable or administratively impractical? Please. Indeed, I submit that it's per se not a de minimis meal if it's one previously subjected to such record keeping."

Jean-Baptiste finally took a breath. "Well," I said coyly, "I think I know why you never made it in public practice."

"Very funny. Ha. Ha. Again, I'm not saying there are some expenses that are mistakenly subjected to the 50-percent disallowance, but someone who takes advantage of these `tax-reduction opportunities' should know he or she may be buying trouble ... even if on a contingency fee basis."

I didn't disagree with what Jean-Baptiste was telling me, but I was perplexed. "The people who are running the Caucus Room -- who are proudly touting the purported tax benefits of consuming meals at their venue compared with others -- they aren't dumb, are they?"

"I don't know what `specific tax regulations' the Caucus Room is relying on. My guess is that they are trying to shoehorn their entitlement to 100-percent deductibility into the circumscribed language of section 274(n)(2). That provision excepts from the 50-percent disallowance items enumerated in certain paragraphs of section 274(e), as well as food and beverage expenses excludable under section 132(e) as de minimis fringes. Maybe they are guilty of nothing more than not staying current. In June, an article in the Journal of Accountancy suggested that meals 'directly related to business meetings' are not subject to the 50-percent haircut by virtue of section 274(n)(2)(A). But this month the same publication ran a correction, acknowledging that its analysis overreached. Interestingly, the meal involved in the pertinent example in the article -- a box lunch -- might well be 100-percent deductible by virtue of section 274(n)(2)(B), which excepts de minimis food and beverage costs from the 50-percent limitation."

I interrupted. "Wait a minute. You're losing me with all the Code references. Are you saying that there's room for argument?"

"There's always room for argument, but in my view you would have to be a tax alchemist to have any of the exceptions apply to meals at the Caucus Room. First, in TAM 200030001 (April 6, 2000), the IRS ruled that a $109 value (in terms of fired and beverages provided during the course of a multi-day conference) would exceed an amount that would reasonably be considered de minimis. Second, although section 274(e)(5) provides that expenses directly related to `business meetings of ... employees, stockholders, agents, or directors' are not subject to the general disallowance rule of section 274, that exception is not included in the items listed in section 274(n)(2). In other words, the 50-percent limitation still applies to expenses falling within section 274(e)(5)."

Not being able to shake Jean-Baptiste from his conclusion, I thanked him for his thorough analysis and told him to have some chicken nuggets at his favorite fast food restaurant and send me the bill. I'd reimburse him for half the cost, I teased him. Then I called Seymour to tell him to stand behind his original advice. He seemed relieved, and muttered something about how he bated it when his boss caught him in a mistake. A few days later I ran into Seymour at the health club. "How did your boss take the news?" I inquired.

"You know," he responded as he turned up the speed on the treadmill and no doubt silently thanked Congress for section 132(j)(4). "I decided that he would only be confused by myriad references to exceptions and then exceptions to the exceptions, and to TAMs, and the like."

"So what did you tell him?" I pressed.

"Nothing really. I simply sent his wife a copy of the Caucus Room's all-beef, all-the-time menu. With his cholesterol approaching 250, it's going to be quite a while before he's making a reservation there."