According to CCH, the IRS has updated the list of countries and locations included in the "North American area" for the purposes of the Code Sec. 274(h) convention expense deduction. Expenditures related to meetings and conventions in these locations generally can be deducted just as if they were held in the U.S.
Comment. In today's global business environment, conventions and meetings are frequently held outside of the U.S. The IRS traditionally has taken a hard line toward deducting foreign convention expenses. Code Sec. 274(h) disallows deductions for expenses related to conventions, seminars, or meetings that are held outside the "North American area" unless the taxpayer can establish not only a direct business purpose but also that it was reasonable to hold the meeting outside North America.
The new guidance expands the number of locations qualifying as "North America" to include countries as far away as Asia. For purposes of Code Sec. 274(h), the "North American area" includes:
- All 50 states and the District of Columbia
- U.S. possessions and territories
- Compacts of Free Association jurisdictions, including the Marshall Islands, Micronesia and the Republic of Palau; and
- Beneficiary countries and countries defined in the Caribbean Basin Economic Recovery Act of 1983.
Beneficiary countries are Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia, and Trinidad and Tobago. Beneficiary countries must have a tax information exchange agreement with the U.S. These jurisdictions are considered part of the North American area conventions that began on or after the date the tax information exchange agreement came into force. In addition, Treasury must have determined that the beneficiary country's tax law does not discriminate against conventions held in the U.S.
The Marshall Islands, Micronesia and the Republic of Palau were formerly administered by the U.S. and this accounts for their inclusion in "North America" even though they are located thousands of miles from the U.S. mainland.
Out of Bounds
To deduct expenses for conventions or meetings held outside North America taxpayers must jump some reasonableness hurdles. Conventions or meetings must be directly related to the active conduct of the taxpayer's trade or business. Taxpayers also must show that it was reasonable for the meeting to be held outside North America.
Relevant factors include:
- Purpose of the meeting and activities;
- Sponsoring organization's purpose and activities;
- Residence of active members in the sponsoring organization; and
- Locations of past and future meetings.
It is up to each taxpayer to meet his or her burden of proof for attending a foreign convention. A search of the Internal Revenue Manual reveals no formal examination guidelines for investigating whether the taxpayer has met this burden. There appears to be no single data base on which a revenue agent can check if other agents have accepted proof from other taxpayers attending the same foreign convention. This creates the possibility of one taxpayer being allowed a deduction while another taxpayer is denied the same deduction.
Deducting the cost of attending a convention on a cruise ship is even more difficult. Under Code Sec. 274(h)(5), no deduction is allowed unless the taxpayer's return has a signed written statement logging the total days of the trip and the scheduled business activities. The tax-payer must submit a statement, signed by the organizer or sponsor of the foreign convention, confirming the business activities and the number of hours the tax-payer attended the meeting.