How to Use Investment-Related Tax Breaks
Allowable deductions for investors include the cost of travel. But the line isn't always clear on what kinds of travel qualify.
Investment seminars. Internal Revenue Code Section 274(h)(7) forbids investors from deducting costs incurred attending conventions, seminars, or similar meetings at which they obtain information that helps them plot investment strategies. Disallowed expenses include air fares and other travel costs to the meeting site, attendance fees, meals, lodging, and local travel while attending the meeting.
Note, though, that Section 274(h)(7) applies solely to outlays made for investment reasons—for instance, those of an investor seeking to obtain information about whether to acquire or unload particular stocks. It doesn't apply to costs incurred for business reasons that are deductible as ordinary and necessary expenses under Section 162—for instance, those of a financial adviser who meets with prospective clients as part of his or her job.
An example: National Investors holds a convention at which stock market investors pay for the opportunity to discuss strategies with representatives of brokerage firms and listen to presentations from executives about their companies. Result: Section 274(h)(7) bars deductions of expenses by investors, but leaves unchanged the Section 162 rules governing deductions of expenses by stock brokers and others who are at the convention for business reasons.
Shareholders' meetings. These kinds of meetings come under different rules. Back in 1956, the IRS issued Revenue Ruling 56-11. It spelled out the agency's guidelines for persons who attend stockholders' meetings of companies in which they own stock but have no other interest. The ruling bars any deduction for travel expenses when such stockholders attend merely to get information that would help in making future investments. It makes no difference that their major sources of income are dividends and profits on stock transactions.
Subsequently, however, the IRS yielded on a deduction for expenses incurred by the leader of a stockholders' revolt. It seems that John Hickey owned a substantial number of shares in Icarus Airlines. His shares had dropped in value because the company had issued new shares to the public at prices below book value. To stop such sales, an irate John stormed off to Icarus' annual meeting and persuaded the company to poll its shareholders about joining an association. Assuming sufficient support materialized for his proposal, there would be an organizational meeting at which John expected to be a mover and a shaker. An obliging IRS linked the travel to protection of his investment.
Ruling 8042071 held that John was entitled to deduct what he spent for travel, including lodging and 50 percent of meal expenses, to the annual and organizational meetings, provided two requirements were satisfied:
- He must be "one of the main organizers of the association, so that his presence at the meeting would be required."
- The primary purpose of the trips must be to "form the association to prevent or reduce the dilution of his stock."
Protection of an investment also justified a deduction for Robert Montesi, who traveled to an annual shareholders' meeting of Procrustes Furniture. Robert introduced and maneuvered to pass a resolution requiring the company to halt its practice of issuing shares at below book value through dividend reinvestment and stock purchase plans. In Ruling 8220084, the IRS distinguished his case from its 1956 ruling, which disallowed deductions for shareholders who attend annual gathering mainly to pick up information for future investment moves. Here, Robert's pilgrimage was prompted primarily by his desire to safeguard his sizable stake in Procrustes.
Frequently, the courts interpret the law far more liberally than the IRS. Consider, as an example, some observations made by the U.S. Tax Court. It rejected travel expenses claimed by William Kinney, who frequently bought and sold substantial blocks of stock in several listed companies. He based his investment decisions, in part, on onsite investigations of factories and retail outlets of these companies. The court sided with the feds because of the large amount of time William spent with relatives on some 15 trips for the year in issue and his failure to link the disputed trips with his investment activities.
But the court noted that William might have prevailed had he produced evidence to satisfy four requirements:
- The trip is part of a rationally planned, systematic investigation of investment opportunities.
- The costs are reasonable in relation to the size of the investment and value of the information the investor expects to derive from the trip.
- Personal benefits are secondary, that is, the trip isn't a disguised vacation.
- The information gained on the trip is used in investment decisions.
About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from "Julian Block's Tax Deductible Travel and Moving Expenses," available for Kindle at Amazon.com and as a print copy at julianblocktaxexpert.com.