These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2021–2

January 11, 2021

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

T.D. 9940, page 311.

The final regulations describe the procedures used by the IRS

to handle misdirected direct deposits of tax refunds. The procedures describe the reporting, identification, and recovery

processes used for misdirected direct deposit refunds. The

procedures described in the final regulations may be used by

any taxpayer whose refund was disbursed as a direct deposit

but the taxpayer believes is missing.

EMPLOYEE PLANS

Notice 2021-03, page 316.

This notice provides a 6-month extension of the relief provided in Notice 2020-42. For the period from January 1, 2021,

through June 30, 2021, this notice extends two types of relief

from the physical presence requirement in § 1.401(a)-21(d)

(6)(i) for participant elections required to be witnessed by a

plan representative or a notary public: (1) temporary relief

from the physical presence requirement for any participant

election witnessed by a notary public in a state that permits

remote notarization (either by law or through an executive

order), and (2) temporary relief from the physical presence

requirement for any participant election witnessed by a plan

representative. This temporary relief is extended in order to

further accommodate local shutdowns and social distancing

practices in response to the Coronavirus Disease 2019 pandemic (COVID-19 Emergency). This notice also solicits comments on the relief.

EXCISE TAX

Notice 2021-04, page 319.

Notice 2021-04 provides the final extension of the temporary

dyed fuel relief provided in section 3.02 of Notice 2017-30,

2017-21 I.R.B. 1248. The temporary relief was extended

Finding Lists begin on page ii.

through December 31, 2018, by section 3 of Notice 201839, 2018-20, I.R.B. 582, then extended through December

31, 2019, by section 3 of Notice 2019-04, 2019-02 I.R.B.

282, and further extended through December 31, 2020, by

section 3 of Notice 2020-04, 2020-04 I.R.B. 380. A claimant

may submit a refund claim for the § 4081(a)(1) tax imposed

on undyed diesel fuel and kerosene for fuel that is (1) removed from a Milwaukee or Madison terminal; (2) entered

into a Green Bay terminal within 24 hours; and (3) subsequently dyed and removed from that Green Bay terminal. The

relief provided in this notice takes effect beginning January

1, 2021, and ending December 31, 2021.

REG-130081-19, page 321.

These final rules regarding grandfathered group health plans

and grandfathered group health insurance coverage amend

the current rules to provide greater flexibility for certain

grandfathered health plans to make changes to certain types

of cost-sharing requirements without causing a loss of grandfather status.

EXEMPT ORGANIZATIONS

Notice 2021-01, page 315.

This notice provides that, while subject to a delay, private

foundations must electronically file Form 4720, Return of

Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, as required by section 3101 of the Taxpayer First Act of 2019 (Pub. L. No. 116-25) amendments to

section 6033 of the Internal Revenue Code. Private foundations may no longer rely on Treas. Reg. § 53.6011-1(c) as a

result of this electronic filing mandate.

INCOME TAX

Rev. Rul. 2021-01, page 294.

Federal rates; adjusted federal rates; adjusted federal longterm rate, and the long-term tax exempt rate. For purposes

of sections 382, 1274, 1288, 7872 and other sections of

the Code, tables set forth the rates for January 2021.

the elimination of the deduction under section 274 for entertainment expenses paid or incurred in taxable years beginning after December 31, 2017. The final regulations provide guidance to distinguish entertainment expenses from

meal and beverage expenses and address the application

of certain exceptions under section 274(e) that may allow

such expenses to be deductible. These final regulations

affect taxpayers who pay or incur expenses for meal and

entertainment expenses.

T.D. 9925, page 296.

These final regulations provide guidance under section

274 of the Internal Revenue Code (Code) regarding certain amendments made to section 274 by the Tax Cuts and

Jobs Act of 2017 (TCJA). These final regulations address

January 11, 2021

2

Bulletin No. 2021–2

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 11, 2021 

Bulletin No. 2021–2

Part I

Section 1274.—

Determination of Issue

Price in the Case of Certain

Debt Instruments Issued for

Property

(Also Sections 42, 280G, 382, 467, 468, 482, 483,

1288, 7520, 7872.)

Rev. Rul. 2021-1

This revenue ruling provides various

prescribed rates for federal income tax

purposes for January 2021 (the current

Annual

AFR

110% AFR

120% AFR

130% AFR

0.14%

0.15%

0.17%

0.18%

AFR

110% AFR

120% AFR

130% AFR

150% AFR

175% AFR

0.52%

0.57%

0.62%

0.68%

0.78%

0.91%

AFR

110% AFR

120% AFR

130% AFR

1.35%

1.50%

1.63%

1.77%

Short-term adjusted AFR

Mid-term adjusted AFR

Long-term adjusted AFR

January 11, 2021

month). Table 1 contains the short-term,

mid-term, and long-term applicable federal rates (AFR) for the current month for

purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the

short-term, mid-term, and long-term adjusted applicable federal rates (adjusted

AFR) for the current month for purposes

of section 1288(b). Table 3 sets forth the

adjusted federal long-term rate and the

long-term tax-exempt rate described in

section 382(f). Table 4 contains the appropriate percentages for determining the

low-income housing credit described in

section 42(b)(1) for buildings placed in

service during the current month. Howev-

er, under section 42(b)(2), the applicable

percentage for non-federally subsidized

new buildings placed in service after July

30, 2008, shall not be less than 9%. Table

5 contains the federal rate for determining

the present value of an annuity, an interest

for life or for a term of years, or a remainder or a reversionary interest for purposes

of section 7520. Finally, Table 6 contains

the deemed rate of return for transfers

made during calendar year 2021 to pooled

income funds described in section 642(c)

(5) that have been in existence for less

than 3 taxable years immediately preceding the taxable year in which the transfer

was made.

REV. RUL. 2021-1 TABLE 1

Applicable Federal Rates (AFR) for January 2021

Period for Compounding

Semiannual

Quarterly

Short-term

0.14%

0.14%

0.15%

0.15%

0.17%

0.17%

0.18%

0.18%

Mid-term

0.52%

0.52%

0.57%

0.57%

0.62%

0.62%

0.68%

0.68%

0.78%

0.78%

0.91%

0.91%

Long-term

1.35%

1.35%

1.49%

1.49%

1.62%

1.62%

1.76%

1.76%

Annual

0.11%

0.39%

1.03%

REV. RUL. 2021-1 TABLE 2

Adjusted AFR for January 2021

Period for Compounding

Semiannual

0.11%

0.39%

1.03%

294

Quarterly

0.11%

0.39%

1.03%

Monthly

0.14%

0.15%

0.17%

0.18%

0.52%

0.57%

0.62%

0.68%

0.78%

0.91%

1.35%

1.49%

1.61%

1.75%

Monthly

0.11%

0.39%

1.03%

Bulletin No. 2021–2

REV. RUL. 2021-1 TABLE 3

Rates Under Section 382 for January 2021

Adjusted federal long-term rate for the current month

Long-term tax-exempt rate for ownership changes during the current month (the highest of

the adjusted federal long-term rates for the current month and the prior two months.)

1.03%

1.03%

REV. RUL. 2021-1 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for January 2021

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July

30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit

7.21%

Appropriate percentage for the 30% present value low-income housing credit

3.09%

REV. RUL. 2021-1 TABLE 5

Rate Under Section 7520 for January 2021

Applicable federal rate for determining the present value of an annuity, an interest for life or a

term of years, or a remainder or reversionary interest

REV. RUL. 2021-1 TABLE 6

Deemed Rate for Transfers to New Pooled Income Funds During 2021

Deemed rate of return for transfers during 2021 to pooled income funds that have been in

existence for less than 3 taxable years

Section 42.—Low-Income

Housing Credit

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2021. See Rev. Rul. 2021-1, page 294.

Section 280G.—Golden

Parachute Payments

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2021. See Rev. Rul. 2021-1, page 294.

Section 382.—Limitation

on Net Operating Loss

Carryforwards and

Certain Built-In Losses

Following Ownership

Change

The adjusted applicable federal long-term rate

is set forth for the month of January 2021. See

Rev. Rul. 2021-1, page 294.

Section 467.—Certain

Payments for the Use of

Property or Services

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2021. See Rev. Rul. 2021-1, page 294.

Section 468.—Special

Rules for Mining and Solid

Waste Reclamation and

Closing Costs

The applicable federal short-term rates are set

forth for the month of January 2021. See Rev. Rul.

2021-1, page 294.

Section 482.—Allocation

of Income and Deductions

Among Taxpayers

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2021. See Rev. Rul. 2021-1, page 294.

.6%

2.2%

Section 483.—Interest on

Certain Deferred Payments

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2021. See Rev. Rul. 2021-1, page 294.

Section 1288.—Treatment

of Original Issue Discount

on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of

January 2021. See Rev. Rul. 2021-1, page 294.

Section 7520.—Valuation

Tables

The applicable federal mid-term rates are set

forth for the month of January 2021. See Rev. Rul.

2021-1, page 294.

Section 7872.—Treatment

of Loans With BelowMarket Interest Rates

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2021. See Rev. Rul. 2021-1, page 294.

Bulletin No. 2021–2

295

January 11, 2021

Announcement Correcting

TD 9925

26 CFR 1.274-11; 26 CFR 1.274-12

T.D. 9925

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Meals and Entertainment

Expenses Under Section

274; Correction

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations; correction.

SUMMARY: This document contains

corrections to the final regulations (Treasury Decision 9925) that published in the

Federal Register on October 9, 2020. The

final regulations provide guidance under

section 274 of the Internal Revenue Code

(Code) regarding certain recent amendments made to that section. Specifically,

the final regulations address the elimination of the deduction under section 274

for expenditures related to entertainment,

amusement, or recreation activities, and

provide guidance to determine whether an

activity is of a type generally considered

to be entertainment.

DATES: These corrections are effective

on December 18, 2020 and applicable for

taxable years that begin on or after October 9, 2020.

FOR FURTHER INFORMATION CONTACT: Patrick Clinton of the Office of the

Associate Chief Counsel (Income Tax and

Accounting), (202) 317–7005 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations (TD 9925) that

are the subject of this correction are issued

January 11, 2021

under section 274 of the Internal Revenue

Code.

Need for Correction

As published the final regulations (TD

9925) contain errors that need to be corrected.

Correction of Publication

Accordingly, the final regulations (TD

9925), that are the subject of FR Doc.

2020–21990, published on October 9,

2020 (85 FR 64026), are corrected as follows:

1. On page 64031, third column, the

second line, the language “in Sutherland

Lumber” is corrected to read “in Sutherland Lumber-Southwest”.

2. On page 64031, third column, the

ninth line of the second full paragraph, the

language “§ 1.274–10(a)(2)(ii)(C)(2)” is

corrected to read “§ 1.274–10(a)(2)(ii)(C)

(2)”.

3. On page 64032, second column, the

second line, the language “or gross income is zero, whether zero is” is corrected to read “or gross income is zero (other

than due to a reimbursement by the recipient), whether zero is”.

4. On page 64032, second column, the

thirteenth line from the top of the page, the

language “(e)(9) do not apply.” is corrected to read “(e)(9) generally do not apply.”.

5. On page 64032, second column, the

thirteenth line from the top of the page,

the language “Similarly, the exceptions

in section 274(e)(2) and (e)(9) do not apply if” is corrected to read “However, the

exceptions in section 274(e)(2) and (e)

(9) will apply if the recipient reimburses the taxpayer for a portion of the value of the food or beverages even if the

value exceeding the reimbursed amount

is properly excluded from the recipient’s

compensation and wages or gross income. In this case, however, the taxpayer

must apply the dollar-for-dollar rule as

described in §1.274-12(c)(2)(i)(D). In

cases in which”.

6. On page 64032, second column, the

second and last sentence from the bottom

of the first partial paragraph, remove the

language “. In that case, however,”.

7. On page 64032, third column, the

third line of the second full paragraph, the

296

language “regulations confirm” is corrected to read “regulations confirmed”.

8. On page 64032, third column, the

twelfth line of the second full paragraph,

the language “demonstrates” is corrected

to read “demonstrated”.

Crystal Pemberton,

Senior Federal Register Liaison,

Publications and Regulations Branch,

Legal Processing Division,

Associate Chief Counsel,

(Procedure and Administration).

(Filed by the Office of the Federal Register on December 17, 2020, 8:45 a.m., and published in the issue of the Federal Register for December 18, 2020,

85 F.R. 82355)

Section 274. —

Disallowance of Certain

Entertainment, Gift and

Travel Expenses

26 CFR 1.274-1-11, 12: Meals and Entertainment

Expenses.

T.D. 9925

DEPARTMENT OF

TREASURY

Internal Revenue Service

26 CFR Part 1

Meals and Entertainment

Expenses

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final rule.

SUMMARY: This document contains

final regulations that provide guidance

under section 274 of the Internal Revenue Code (Code) regarding certain recent

amendments made to that section. Specifically, the final regulations address the

elimination of the deduction under section

274 for expenditures related to entertainment, amusement, or recreation activities,

and provide guidance to determine whether an activity is of a type generally consid-

Bulletin No. 2021–2

ered to be entertainment. The final regulations also address the limitation on the

deduction of food and beverage expenses

under section 274(k) and (n), including

the applicability of the exceptions under

section 274(e)(2), (3), (4), (7), (8), and (9).

The final regulations affect taxpayers who

pay or incur expenses for meals or entertainment.

DATES: Effective Date: These regulations

are effective on October 9, 2020.

Applicability Date: These regulations apply for taxable years that begin on or after

October 9, 2020.

FOR FURTHER INFORMATION CONTACT: Patrick Clinton of the Office of the

Associate Chief Counsel (Income Tax and

Accounting), (202) 317-7005 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations under section 274 of the Code that

amend the Income Tax Regulations (26

CFR part 1). In general, section 274 limits

or disallows deductions for certain meal

and entertainment expenditures that otherwise would be allowable under chapter 1

of the Code (chapter 1), primarily under

section 162(a), which allows a deduction

for ordinary and necessary expenses paid

or incurred during the taxable year in carrying on any trade or business.

On December 22, 2017, section 274

was amended by section 13304 of Public

Law 115-97 (131 Stat. 2054), commonly

referred to as the Tax Cuts and Jobs Act,

(TCJA) to revise the rules for deducting

expenditures for meals and entertainment,

effective for amounts paid or incurred after December 31, 2017.

On February 26, 2020, the Department

of the Treasury (Treasury Department)

and the IRS published a notice of proposed rulemaking (REG-100814-19) in

the Federal Register (85 FR 11020) containing proposed regulations under section

274 to implement certain of the TCJA’s

amendments to section 274 (proposed regulations). The proposed regulations would

update existing regulations in §1.274-2

Bulletin No. 2021–2

by adding a new section at §1.274-11 for

entertainment expenditures. The proposed

regulations would also add a new section

at §1.274-12 to address the limitations on

food or beverage expenses under section

274(k) and (n), including the application

of the exceptions in section 274(e)(2), (3),

(4), (7), (8), and (9). Pending the issuance

of these final regulations, taxpayers were

permitted to rely upon the proposed regulations for entertainment and food or

beverage expenses, as applicable, paid or

incurred after December 31, 2017.

The Treasury Department and the IRS

did not receive any requests to speak at

a public hearing on the proposed regulations. Therefore, the scheduled public

hearing was cancelled. The Treasury Department and the IRS received 14 written

and electronic comments in response to

the proposed regulations. All comments

were considered and are available at

https://www.regulations.gov or upon request. The comments addressing the proposed regulations are summarized in the

Summary of Comments and Explanation

of Revisions section. However, comments

recommending statutory revisions or addressing issues outside the scope of these

final regulations are not discussed in this

preamble. After full consideration of the

comments, this Treasury decision adopts

the proposed regulations with modifications in response to certain comments, as

described in the Summary of Comments

and Explanation of Revisions section.

1. Business Meals and Entertainment

Section 274(a)(1)(A) generally disallows a deduction for any item with respect to an activity of a type considered to

constitute entertainment, amusement, or

recreation (entertainment expenditures).

However, prior to the amendment by the

TCJA, section 274(a)(1)(A) provided exceptions to that disallowance if the taxpayer established that: (1) the item was

directly related to the active conduct of

the taxpayer’s trade or business (directly

related exception); or (2) 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), the item was

associated with the active conduct of the

taxpayer’s trade or business (business

297

discussion exception). Section 274(e)(1)

through (9) also provide exceptions to

the rule in section 274(a) that disallows a

deduction for entertainment expenditures.

The TCJA did not change the application

of the section 274(e) exceptions to entertainment expenditures.

Section 274(a)(1)(B) disallows a deduction for any item with respect to a facility used in connection with an activity

referred to in section 274(a)(1)(A). Section 274(a)(2) provides that, for purposes

of applying section 274(a)(1), dues or fees

to any social, athletic, or sporting club or

organization shall be treated as items with

respect to facilities. Section 274(a)(3) disallows a deduction for amounts paid or

incurred for membership in any club organized for business, pleasure, recreation, or

other social purpose.

Prior to amendment by the TCJA, section 274(n)(1) generally limited the deduction of food or beverage expenses and

entertainment expenditures to 50 percent

of the amount that otherwise would have

been allowable. Thus, under prior law,

taxpayers could deduct 50 percent of meal

expenses, and 50 percent of entertainment

expenditures that met the directly related

or business discussion exception. Distinguishing between meal expenses and entertainment expenditures was unnecessary

for purposes of the 50 percent limitation.

Section 13304(a)(1) of the TCJA repealed the directly related and business

discussion exceptions to the general prohibition on deducting entertainment expenditures in section 274(a)(1)(A). Also, section 13304(a)(2)(D) of the TCJA amended

the 50 percent limitation in section 274(n)

(1) to remove the reference to entertainment expenditures. Thus, entertainment

expenditures are no longer deductible unless one of the nine exceptions to section

274(a) in section 274(e) applies.

While the TCJA eliminated the deduction for entertainment expenses, Congress

did not amend the provisions relating to

the deductibility of business meals. Thus,

taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating

their trade or business, including meals

consumed by employees on work travel. See H.R. Rep. No. 115-466, at 407

(2017) (Conf. Rep.). However, as before

the TCJA, no deduction is allowed for the

January 11, 2021

expense of any food or beverages unless

(a) the expense is not lavish or extravagant under the circumstances, and (b) the

taxpayer (or an employee of the taxpayer)

is present at the furnishing of the food or

beverages. See section 274(k).

Prior to amendment by the TCJA,

section 274(d) provided substantiation

requirements for deductions under section 162 or 212 for any traveling expense

(including meals and lodging while away

from home), and for any item with respect

to an activity of a type considered to constitute entertainment, amusement, or recreation or with respect to a facility used

in connection with such activity. Section

13304(a)(2)(A) of the TCJA repealed the

substantiation requirements for entertainment expenditures. Traveling expenses

(including meals and lodging while away

from home), however, remain subject to

the section 274(d) substantiation requirements. Food and beverage expenses are

subject to the substantiation requirements

under section 162 and the requirement to

maintain books and records under section

6001.

On October 15, 2018, the Treasury Department and the IRS published Notice

2018-76, 2018-42 I.R.B. 599, providing

transitional guidance on the deductibility

of expenses for certain business meals and

requesting comments for future guidance

to further clarify the treatment of business

meal expenses and entertainment expenditures under section 274. Under the notice, taxpayers may deduct 50 percent of

an otherwise allowable business meal expense if: (1) the expense is an ordinary and

necessary expense under section 162(a)

paid or incurred during the taxable year

in carrying on any trade or business; (2)

the expense is not lavish or extravagant

under the circumstances; (3) the taxpayer,

or an employee of the taxpayer, is present

at the furnishing of the food or beverages;

(4) the food and beverages are provided

to a current or potential business customer, client, consultant, or similar business

contact; and (5) in the case of food and

beverages provided at or during an entertainment activity, the food and beverages

are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost

of the entertainment on one or more bills,

invoices, or receipts. The notice provides

January 11, 2021

that the entertainment disallowance rule

may not be circumvented through inflating the amount charged for food and beverages.

2. Travel Meals

Section 274(n)(1) generally limits the

deduction of food or beverage expenses,

including expenses for food or beverages consumed while away from home, to

50 percent of the amount that otherwise

would have been allowable, unless one

of the six exceptions to section 274(n) in

section 274(e) applies. However, no deduction is allowed for the expense of any

food or beverages unless: (1) the expense

is not lavish or extravagant under the circumstances; and (2) the taxpayer (or an

employee of the taxpayer) is present at the

furnishing of the food or beverages. See

section 274(k). Section 274(d) provides

substantiation requirements for traveling

expenses, including food and beverage expenses incurred while on business travel

away from home.

Section 274(m) provides additional

limitations on travel expenses, including expenses for meals consumed while

away from home. Section 274(m)(1) generally limits the deduction for luxury water transportation expenses to twice the

highest federal per diem rate allowable

at the time of travel, and section 274(m)

(2) generally disallows a deduction for

expenses for travel as a form of education. Section 274(m)(3) provides that

no deduction is allowed under chapter

1 (other than section 217) for travel expenses paid or incurred with respect to

a spouse, dependent, or other individual

accompanying the taxpayer (or an officer

or employee of the taxpayer) on business

travel, unless: (1) the spouse, dependent,

or other individual is an employee of the

taxpayer; (2) the travel of the spouse,

dependent, or other individual is for a

bona fide business purpose; and (3) such

expenses would otherwise be deductible

by the spouse, dependent, or other individual.

3. Employer-Provided Meals

Prior to amendment by the TCJA,

section 274(n)(1) generally limited the

deduction for food or beverage expenses

298

to 50 percent of the amount that otherwise would have been allowable, subject to an exception in section 274(n)(2)

(B) in the case of an expense for food

or beverages that is excludable from

the gross income of the recipient under

section 132 by reason of section 132(e),

relating to de minimis fringes. Section

132(e)(1) defines “de minimis fringe”

as any property or service the value of

which is, after taking into account the

frequency with which similar fringes are

provided by the employer to its employees, so small as to make accounting for

it unreasonable or administratively impracticable. Section 132(e)(2) provides

that the operation by an employer of any

eating facility for employees is treated as

a de minimis fringe if (1) the facility is

located on or near the business premises

of the employer, and (2) revenue derived

from the facility normally equals or exceeds the direct operating costs of the facility. Thus, under prior law, employers

generally were allowed to fully deduct

an expense for food or beverages provided to their employees if the amount was

excludable from the gross income of the

employee as a de minimis fringe. However, the TCJA repealed section 274(n)

(2)(B), meaning that expenses for food

or beverages that are de minimis fringes

under section 132(e) are no longer excepted from section 274(n)(1). As a result, these expenses, like other food or

beverage expenses generally, are subject

to the 50 percent limitation unless one of

the six exceptions to section 274(n) in

section 274(e) applies.

The TCJA also added section 274(o)

that, effective for amounts paid or incurred after December 31, 2025, disallows a deduction for (1) any expense for

the operation of an employer-operated

facility described in section 132(e)(2),

and any expense for food or beverages,

including under section 132(e)(1), associated with such facility, or (2) any expense for meals provided to an employee

for the convenience of the employer, as

described in section 119(a). Thus, beginning with amounts paid or incurred

in 2026, expenses for food or beverages

provided to employees, as well as expenses for the operation of certain eating facilities for employees, will be fully

nondeductible.

Bulletin No. 2021–2

4. Section 274(e) Exceptions to Section

274(k) and (n)

Section 274(k)(2)(A) and (n)(2)(A)

provide that the limitations on the deduction of food or beverage expenses in

section 274(k)(1) and (n)(1), respectively,

do not apply if the expense is described

in paragraph (2), (3), (4), (7), (8), or (9)

of section 274(e). Expenses described

in paragraph (1), (5), and (6) of section

274(e) are not exceptions to the limitations on the deduction of food or beverage

expenses in section 274(k)(1) and (n)(1).

However, they are exceptions to the disallowance of the deduction of entertainment

expenses in section 274(a).

Section 274(e)(2) applies to expenses for goods, services, and facilities to

the extent that the expenses are treated

as compensation to the recipient. Section

274(e)(3) applies to expenses incurred

by a taxpayer in connection with the performance of services for an employer or

other person under a reimbursement or

other expense allowance arrangement.

Section 274(e)(4) applies to expenses for

recreational, social, or similar activities

for employees. Section 274(e)(7) applies

to expenses for goods, services, and facilities made available to the general public.

Section 274(e)(8) applies to expenses for

goods or services that are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or

money’s worth. Section 274(e)(9) applies

to expenses for goods, services, and facilities to the extent that the expenses are

treated as income to a person other than

an employee.

Summary of Comments and

Explanation of Revisions

1. Entertainment Expenditures

The final regulations restate the statutory rules under section 274(a), at §1.27411(a), including the application of the entertainment deduction disallowance rule

to dues or fees to any social, athletic, or

sporting club or organization. The existing

definition of entertainment in §1.274-2(b)

(1), with minor modifications to remove

outdated language, is incorporated into

the final regulations, at §1.274-11(b)(1).

The final regulations provide that for pur-

Bulletin No. 2021–2

poses of section 274(a), the term “entertainment” does not include food or beverages unless the food or beverages are

provided at or during an entertainment

activity and the costs of the food or beverages are not separately stated from the

entertainment costs. The final regulations

do not affect the application of the special

rules in §1.274-10 to expenses related to

aircraft used for entertainment.

A. Section 274(e) Exceptions to Section

274(a)

The final regulations, at § 1.274-11(c),

confirm the continued application of the

nine exceptions in section 274(e) to entertainment expenditures otherwise disallowed by section 274(a). The application

of section 274(e) to food or beverage

expenses is discussed in part 2.E. of this

Summary of Comments and Explanation

of Revisions section, which discusses the

exceptions under section 274(e) to section

274(k) and (n).

A commenter on the proposed regulations requested that the Treasury Department and the IRS clarify that for purposes

of the section 274(e)(8) exception to the

entertainment deduction limitations in

section 274(a) for goods or services sold

by the taxpayer, the goods or services may

be sold to an employee of the taxpayer in

a bona fide transaction for an adequate

and full consideration in money or money’s worth. The Treasury Department and

the IRS decline to adopt this suggestion

because the section 274(e)(8) exception

to the entertainment disallowance is outside the scope of these regulations. The

proposed regulations and these final regulations were initiated in response to the

changes made to section 274 by the TCJA

and generally are limited to addressing

those changes. In particular, with regard

to entertainment expenditures, the final

regulations under §1.274-11 primarily

distinguish between meals and entertainment, as that distinction is now relevant,

for purposes of determining whether the

deduction of a particular expense is disallowed entirely or is limited to 50 percent.

However, the TCJA did not change the

application of the section 274(e) exceptions to entertainment expenditures. Thus,

other than confirming that the section

274(e) exceptions continue to apply to

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entertainment expenditures, the final regulations do not provide rules addressing

how the section 274(e) exceptions apply

to entertainment expenditures. Taxpayers

may, however, continue to rely upon the

existing rules and examples in §1.274-2 to

the extent they are not superseded by the

TCJA or other legislation and are not inconsistent with the final regulations.

B. Separately Stated Food or Beverages

not Entertainment

The final regulations substantially incorporate the guidance in Notice 2018-76

to distinguish between entertainment expenditures and food or beverage expenses

in the context of business meals provided

at or during an entertainment activity. In

addition, the final regulations generally apply the guidance in Notice 2018-76

to all food or beverages, including travel meals and employer-provided meals,

provided at or during an entertainment

activity. The final regulations also clarify

the rules applicable to food or beverages

provided at or during an entertainment activity.

Notice 2018-76 explains that in the

case of food and beverages provided at

or during an entertainment activity, the

taxpayer may deduct 50 percent of an otherwise allowable business expense if the

food and beverages are purchased separately from the entertainment, or if the cost

of the food and beverages is stated separately from the cost of the entertainment

on one or more bills, invoices, or receipts.

The notice provides that the entertainment

disallowance rule may not be circumvented through inflating the amount charged

for food and beverages. The final regulations clarify this requirement by providing

that the amount charged for food or beverages on a bill, invoice, or receipt must

reflect the venue’s usual selling cost for

those items if they were to be purchased

separately from the entertainment, or must

approximate the reasonable value of those

items.

The final regulations provide that in

cases where the food or beverages provided at or during an entertainment activity are not purchased separately from the

entertainment, and where the cost of the

food or beverages is not stated separately from the cost of the entertainment on

January 11, 2021

one or more bills, invoices, or receipts,

no allocation can be made and the entire

amount is a nondeductible entertainment

expenditure. Finally, in accordance with

the TCJA’s amendments to section 274(a)

(1) specifically repealing the “directly

related” and “business discussion” exceptions to the general disallowance rule

for entertainment expenditures, the final

regulations clarify that the entertainment

disallowance rule applies whether or not

the expenditure for the activity is related

to or associated with the active conduct of

the taxpayer’s trade or business.

A commenter suggested that the final

regulations provide that the consumption

of food and beverages is not entertainment

in the case of both business and nonbusiness activities and include an example of

a specified individual consuming food

and beverages while traveling on an employer-provided aircraft to visit family

members for nonbusiness purposes. The

specific question presented in this comment relates to whether air travel is an

entertainment activity and is addressed in

the existing rules in §1.274-10. Therefore,

this question is not addressed in the final

regulations. In addition, §1.274-11(b)(1)

(ii) provides that the term entertainment

does not include food or beverages unless

the food or beverages are provided at or

during an entertainment activity and are

not purchased separately from the entertainment.

2. Food or Beverage Expenses

A. Business Meal Expenses

The final regulations substantially incorporate the guidance in Notice 2018-76

addressing business meals provided at or

during an entertainment activity. The final

regulations also incorporate other statutory requirements taxpayers must meet

to deduct 50 percent of an otherwise allowable food or beverage expense. Specifically, the expense must not be lavish or

extravagant under the circumstances, and

the taxpayer, or an employee of the taxpayer, must be present at the furnishing of

the food or beverages.

The final regulations also address the

general requirement in Notice 2018-76

that the food and beverages be provided to

a business contact, which was described in

January 11, 2021

the notice as a “current or potential business customer, client, consultant, or similar business contact.” This requirement

is to ensure that the meal expenses are directly connected with or pertaining to the

taxpayer’s trade or business, as required

under section 162. One commenter on

Notice 2018-76 requested a definition of

“potential business contact,” suggesting

that the term could be interpreted broadly to include almost anyone. In response

to the comment, and to conform the rule

more closely to the trade or business requirement in section 162, the proposed

regulations follow the definition of “business associate” as currently provided in

§1.274-2(b)(2)(iii). The final regulations

adopt this definition of “business associate” in §1.274-12(b)(3). Thus, the final

regulations provide that the food or beverages must be provided to a “person with

whom the taxpayer could reasonably expect to engage or deal in the active conduct

of the taxpayer’s trade or business such as

the taxpayer’s customer, client, supplier,

employee, agent, partner, or professional

adviser, whether established or prospective.” Accordingly, the final regulations

apply this definition to employer-provided

food or beverage expenses by considering

employees as a type of business associate

as well as to the deduction for expenses

for meals provided by a taxpayer to both

employees and non-employee business associates at the same event.

A commenter on the proposed regulations asked whether the Treasury Department and the IRS have legal authority to

allow taxpayers to claim deductions for

business meal expenses that have been

considered part of entertainment since the

enactment of section 274. The commenter acknowledged that the legislative history of the TCJA provides that taxpayers

may still generally deduct 50 percent of

the food and beverage expenses associated with operating their trade or business

(e.g., meals consumed by employees on

work travel). H.R. Rep No. 115-466 at

407. However, the commenter argued that

the legislative history merely recognizes

that travel meals remain 50 percent deductible. The commenter further argued

that the term “entertainment” clearly encompasses many business meals and that

the proposed regulations unsettle the longstanding position that expenditures for the

300

personal enjoyment of an individual fall

within the ordinary meaning of “entertainment.”

The Treasury Department and the IRS

believe that Congress, in amending section 274 in the TCJA, intended that expenses for business meals be considered

food or beverage expenses associated with

operating a taxpayer’s trade or business,

and therefore generally remain 50 percent

deductible. The Treasury Department and

the IRS acknowledge that, prior to the

TCJA, some meals were considered to

be entertainment. However, prior to the

TCJA, neither section 274 nor the regulations under section 274 attempted to define meal expenses or to distinguish meal

expenses from entertainment expenses. In

considering the comment, the Treasury

Department and the IRS believe that the

proposed regulations are consistent with

the plain reading of section 274 after the

TCJA, which clearly contemplates different treatment for meal expenses and

entertainment expenses. In addition, the

existing regulatory definition of entertainment relies upon an objective test to

determine whether an activity is of a type

generally considered to constitute entertainment. Providing that business meals

are not of a type generally considered to

constitute entertainment results in an administrable rule that does not depend on

subjective factors such as whether the taxpayer enjoys the business meal. Thus, the

final regulations adopt the proposed rule

providing that business meals generally

remain 50 percent deductible. The Treasury Department and the IRS believe that

the final regulations provide a rule that is

legally supportable and that draws a clear

line between meals and entertainment that

taxpayers can understand and the IRS can

administer.

One commenter also asked whether

the proposed regulations were intended

to provide new guidance under section

162(a), specifically as to the definition of

“ordinary and necessary expense.” The

proposed regulations provide guidance

only under section 274 and are not intended to provide guidance under section

162. In response to the comment, the final

regulations modify Examples 1 and 2 in

proposed §1.274-12(a)(3) by removing

any mention of a discussion that takes

place during lunch because the facts al-

Bulletin No. 2021–2

ready explain that in each example, the

food or beverage expenses are assumed

to be ordinary and necessary expenses

under section 162(a). In addition, the final regulations clarify, as necessary, in the

introductory language to the examples in

§1.274-11 and §1.274-12 that the examples assume that the underlying expenses

are deductible under section 162.

Two commenters requested that the

final regulations add an example addressing the treatment of expenses for food

and beverages provided to attendees at

a business meeting, such as a conference

for clients or a training seminar for employees. In response to these comments,

the final regulations add two new examples to §1.274-12(a)(3) to address these

scenarios.

A commenter also asked whether under

proposed §1.274-12(a), a taxpayer may

claim a 50 percent deduction for food or

beverages provided to the taxpayer (or an

employee of the taxpayer), as well as food

or beverages provided to a business associate. The commenter noted that proposed

§1.274-12(a)(1) refers to “food or beverages provided to a business associate,”

raising a question about whether the rule

applies to food or beverages provided to

the taxpayer or the taxpayer’s employees.

In addition, §1.274-12(a)(1) of the proposed regulations refers to food or beverages provided “to another person or persons.” It was intended that the 50 percent

deduction applies to food and beverages

provided to the taxpayer (or an employee

of the taxpayer), as well as a business associate or another person. In response to

the comment, the final regulations revise

§1.274-12(a)(1) to remove the reference

to food or beverages being provided “to

another person or persons.” In addition, as

discussed in part 2.A. of this Summary of

Comments and Explanation of Revisions,

the final regulations include employees in

the definition of “business associate” (as

defined in §1.274-12(b)(3)). Finally, to

make clear that the rules in §1.274-12(a)

(1) also apply to food or beverages provided to a taxpayer such as a sole proprietor

or other business owner, the final regulations revise §1.274-12(a)(1)(iii) to refer

to food or beverages provided “to the taxpayer or a business associate.”

One commenter asked whether a sole

proprietor can deduct the cost of meals

Bulletin No. 2021–2

when working throughout the day. As explained in the Background section of this

preamble, section 274 limits or disallows

deductions for certain meal and entertainment expenditures that otherwise would

be allowable under chapter 1, primarily

under section 162(a), which allows a deduction for ordinary and necessary expenses paid or incurred during the taxable

year in carrying on any trade or business.

The requirements imposed by section 274

are in addition to the requirements for deductibility imposed by other provisions of

the Code. If a taxpayer intends to claim

a deduction for an expenditure for meals

or entertainment, the taxpayer must first

establish that the expenditure is otherwise

allowable as a deduction under chapter 1

before the provisions of section 274 become applicable. Therefore, the sole proprietor must first establish that the food

or beverage expense is deductible under

chapter 1 before section 274 would apply.

For example, if the sole proprietor can establish that the food or beverage expenses

are ordinary and necessary expenses under section 162(a) that are paid or incurred

during the taxable year in carrying on a

trade or business, the sole proprietor may

deduct 50 percent of the food or beverage

expenses under section 274(k) and (n) and

§1.274-12(a) of the final regulations if: (1)

the expenses are not lavish or extravagant;

(2) the sole proprietor, or an employee of

the sole proprietor, is present at the furnishing of the food or beverages; and (3)

the food or beverages are provided to the

sole proprietor or a business associate (as

defined in §1.274-12(b)(3)).

B. Travel Meal Expenses

Although the TCJA did not specifically

amend the rules for travel expenses, the

final regulations are intended to provide

comprehensive rules for food and beverage expenses and thus, apply the general rules for meal expenses from Notice

2018-76 and the proposed regulations, to

travel meals. In addition, the final regulations incorporate the substantiation requirements in section 274(d), unchanged

by the TCJA, to travel meals. Finally, the

final regulations apply the limitations in

section 274(m)(3) to expenses for food or

beverages paid or incurred while on travel

for spouses, dependents or other individ-

301

uals accompanying the taxpayer (or an

officer or employee of the taxpayer) on

business travel. These limitations do not

apply to deductions for moving expenses

under section 217. However, the TCJA

amended section 217 to suspend the deduction for moving expenses for taxable

years beginning after December 31, 2017,

and before January 1, 2026, except with

respect to certain members of the Armed

Forces. Thus, the final regulations revise

the reference to section 217 to reflect that

amendment.

One commenter asked how the proposed regulations affect employees that

are paid a per diem rate for travel expenses and are subject to the hours of service

limitations of the Department of Transportation. The proposed regulations describe

and clarify the statutory requirements of

section 274(a), 274(k), and 274(n) for entertainment and food or beverage expenses, as well as the applicability of certain

exceptions under section 274(e) to food

or beverage expenses. The TCJA did not

change the rules for using a per diem rate

to substantiate, under section 274(d), the

amount of ordinary and necessary business expenses paid or incurred while traveling away from home. Thus, neither the

proposed regulations nor the final regulations address the substantiation rules.

C. Other Food or Beverage Expenses

The final regulations apply the business meal guidance in Notice 2018-76,

as revised in the proposed regulations,

to food or beverage expenses generally.

Under section 274(n)(1), the deduction

for food or beverage expenses generally is limited to 50 percent of the amount

that would otherwise be allowable. Prior

to the TCJA, under section 274(n)(2)(B),

expenses for food or beverages that were

excludable from employee income as

de minimis fringe benefits under section

132(e) were not subject to the 50 percent deduction limitation under section

274(n)(1) and could be fully deducted.

The TCJA repealed section 274(n)(2)(B)

so that expenses for food or beverages

excludable from employee income under

section 132(e) are subject to the section

274(n)(1) deduction limitation unless another exception under section 274(n)(2)

applies.

January 11, 2021

Under section 274(k)(1), in order for

food or beverage expenses to be deductible the food or beverages must not be

lavish or extravagant under the circumstances and the taxpayer or an employee

of the taxpayer must be present at the furnishing of the food or beverages. However, as discussed in the Background section

of this preamble, section 274(e) provides

six exceptions to the limitations on the

deduction of food or beverages in section

274(k)(1) and (n)(1). The final regulations

explain how those exceptions apply. The

Background section of this preamble also

explains that the exceptions in section

274(e)(1), (e)(5), and (e)(6) do not apply

to food or beverages expenses. Section

1.274-12(a)(3) of the final regulations

adds an example illustrating that the exception in section 274(e)(5) does not apply to food or beverage expenses that are

directly related to business meetings of a

taxpayer’s employees.

In response to comments that the

Treasury Department and the IRS received after enactment of the TCJA, the

final regulations address several scenarios involving the deductibility of food

or beverage expenses. For example,

commenters requested guidance on the

deductibility of expenses for: (1) food

or beverages provided to food service

workers who consume the food or beverages while working in a restaurant or

catering business; (2) snacks available

to employees in a pantry, break room, or

copy room; (3) refreshments provided

by a real estate agent at an open house;

(4) food or beverages provided by a seasonal camp to camp counselors; (5) food

or beverages provided to employees at a

company cafeteria; and (6) food or beverages provided at company holiday parties and picnics.

D. Definitions

The final regulations provide that the

deduction limitation rules generally apply

to all food and beverages, whether characterized as meals, snacks, or other types of

food or beverage items. In addition, unless

one of six exceptions under section 274(e)

applies, the deduction limitations apply

regardless of whether the food or beverages are treated as de minimis fringe benefits

under section 132(e).

January 11, 2021

The final regulations define food or

beverage expenses to mean the cost of

food or beverages, including any delivery fees, tips, and sales tax. In the case

of employer-provided meals at an eating

facility, food or beverage expense do not

include expenses for the operation of the

eating facility such as salaries of employees preparing and serving meals and other

overhead costs.

A commenter requested clarification

that the cost of transportation to a meal is

not included in food or beverage expenses. The Treasury Department and the IRS

considered this comment and note that

food or beverage expenses under §1.27412(b)(2) of the final regulations means the

full cost of food or beverages, including

any delivery fees, tips, and sales tax. Indirect expenses, including the cost of transportation to a meal, are not included in the

definition.

E. Section 274(e) Exceptions to Section

274(k) and (n)

Section 274(k)(2)(A) and (n)(2)(A)

provide that the limitations on deductions

in section 274(k)(1) and (n)(1), respectively, do not apply to any expense described in section 274(e)(2), (3), (4), (7),

(8), and (9). Section 1.274-12(c) of the

final regulations, therefore, provides that

the deduction limitations are not applicable to expenditures for business meals,

travel meals, or other food or beverages

that fall within one of these exceptions.

i. Expenses Treated as Compensation

under Section 274(e)(2) or (e)(9)

Pursuant to section 274(e)(2), the final

regulations provide that the limitations in

section 274(k)(1) and (n)(1) do not apply

to expenditures for food or beverages provided to an employee of the taxpayer to

the extent the taxpayer treats the expenses

as compensation to the employee on the

taxpayer’s income tax return as originally filed, and as wages to the employee for

purposes of withholding under chapter 24

of the Code, relating to collection of income tax at source on wages.

Pursuant to section 274(e)(9), the final

regulations provide that the limitations in

section 274(k)(1) and (n)(1) do not apply

to expenses for food or beverages provid-

302

ed to a person who is not an employee of

the taxpayer to the extent the expenses are

includible in the gross income of the recipient of the food or beverages as compensation for services rendered or as a

prize or award under section 74.

The exceptions in section 274(e)(2) related to employees and in section 274(e)

(9) related to non-employees have been

interpreted as allowing a taxpayer to deduct the full amount of an expense if the

expense has properly been included in

the compensation and wages of the employee, or gross income of the recipient,

even if the amount of the expense exceeds

the amount included in compensation or

income. See Sutherland Lumber–Southwest Inc. v. Commissioner, 114 T.C. 197

(2000), affd., 255 F.3d 495 (8th Cir. 2001),

acq., AOD 2002-02 (February 11, 2002).

In 2004, Congress reversed the result in

the Sutherland Lumber-Southwest case by

enacting section 274(e)(2)(B) with regard

to specified individuals. Thus, with regard

to employees or non-employees who are

specified individuals, section 274(e)(2)

(B) provides an exception to the section

274(n) limitation only “to the extent that

the expenses do not exceed the amount of

the expenses which” are treated as compensation and wages to the employee or as

income to a non-employee. This methodology is also referred to in this preamble

as the “dollar-for-dollar” methodology.

The Treasury Department and the

IRS are aware that some taxpayers may

attempt to claim a full deduction under

section 274(e)(2) or (e)(9) by including a

value that is less than the amount required

to be included under §1.61-21, which provides the rules for valuation of fringe benefits, or by purportedly including a value

of zero, as compensation and wages to

the employee, or as includible in gross income by a person who is not an employee

of the taxpayer. As a result, the proposed

regulations provide that expenses for food

or beverages for which the taxpayer calculates a value that is less than the amount

required to be included in gross income

under §1.61-21, or for which the amount

required to be included in gross income

is zero, will not be considered as having been treated as compensation and as

wages to the employee, or as includible in

gross income by a recipient of the food or

beverages who is not an employee of the

Bulletin No. 2021–2

taxpayer, for purposes of section 274(e)

(2) and (e)(9).

Commenters argued that the proposed

rule disallowing the application of section

274(e)(2) and (e)(9) to expenses for which

an improper amount is included in compensation and wages or in gross income,

as applicable, is unduly harsh given the

difficulty in determining the value of food

or beverages under §1.61-21 and the possibility of good faith errors. In addition, a

commenter noted that neither the “to the

extent that” language in section 274(e)(2)

(A) nor the holding in Sutherland Lumber-Southwest support applying an “all or

nothing” rule against the taxpayer.

The Treasury Department and the IRS

agree that the “all or nothing” rule included in the proposed regulations may

lead to unduly harsh results. Therefore,

in response to these comments, the Treasury Department and the IRS revised the

rules in proposed §1.274-12(c)(2)(i) to

allow a taxpayer to apply section 274(e)

(2) and (e)(9), as applicable, in cases

where the taxpayer includes an improper amount in compensation and wages,

or gross income, of the recipient. However, if a taxpayer includes less than the

proper amount in compensation and wages or gross income, the final regulations

provide that the taxpayer must apply the

dollar-for-dollar methodology that applies

in the case of a specified individual. Under that dollar-for-dollar methodology, the

taxpayer may deduct meal expenses to the

extent that the expenses do not exceed the

amount of the expenses that are treated

as compensation and wages, or gross income, as applicable.

The Treasury Department and the IRS

believe the rules provided in the final regulations avoid the unduly harsh result that

could arise by prohibiting application of

section 274(e)(2) or (e)(9) in cases where

the taxpayer includes some, but not all, of

the value of a food or beverage expense

in the recipient’s income. In addition, the

rules maintain consistency with the IRS’s

acquiescence in Sutherland Lumber,

which provides that the IRS will no longer

litigate application of section 274(e)(2) in

cases in which a taxpayer demonstrates

that it has “properly” included in compensation and wages the value of an employee vacation flight in accordance with

§1.61-21(g). See AOD-2002-02. The rules

Bulletin No. 2021–2

are also consistent with §1.274-10(a)(2)

(ii)(A), which applies the section 274(e)

(2) exception to entertainment air travel

and provides that a taxpayer must “properly” treat expenses as compensation and

wages to an employee and treat the proper

amount as compensation under §1.61-21.

For administrability, a commenter suggested that the rule apply to the amounts

included on the employee’s Form W-2 or

other recipient’s Form 1099-MISC instead

of amounts reported as compensation on

the service provider’s return. The language in the proposed regulations refers

to the treatment of the amount on the “taxpayer’s income tax return as originally

filed,” meaning the tax return of the employer, not the employee or service provider. However, to further clarify the rule,

§1.274-12(c)(2)(i)(A) of the final regulations no longer references the treatment of

the amount on the taxpayer’s income tax

return, but instead refers to the treatment

of the expense as compensation and wages, consistent with the language in §1.27410(a)(2)(ii)(A).

A commenter suggested the final regulations address the effect of reimbursements by employees, specified individuals, or other recipients of the food or

beverages on the amount excepted from

the limitations under section 274(k)(1)

and (n)(1) by section 274(e)(2) and (e)(9).

The commenter explained that §1.27410(a)(2)(ii)(C)(2) treats reimbursements

in the same manner as compensation and

wages for specified individuals, and a similar rule should be provided for reimbursements from non-specified individuals. The

commenter pointed out that without a similar rule, expenses for food or beverages

provided to specified individuals may be

accorded more favorable treatment than

expenses provided to non-specified individuals. The Treasury Department and the

IRS agree that in cases in which expenditures for food and beverages are reimbursed to the taxpayer, similar treatment

should be provided under section 274, regardless of whether the food or beverages

are provided to a specified or non-specified individual.

With regard to non-specified individuals, the final regulations provide that a

taxpayer may deduct its food or beverage expenses under the exception in section 274(e)(2)(A) or section 274(e)(9) if

303

the taxpayer includes the proper amount

in compensation and wages, or gross income, as applicable. Section 1.61-21(b)

(1) provides rules for the valuation of

fringe benefits and requires that an employee must include in gross income the

amount by which the fair market value of

the fringe benefit exceeds the sum of the

amount paid for the benefit by or on behalf

of the recipient and the amount, if any,

specifically excluded from gross income

under the Code. Thus, in the case of reimbursements by a recipient, the amount of

the reimbursement is taken into account in

determining the amount properly includible in the recipient’s income and does not

affect the taxpayer’s ability to use the exception in section 274(e)(2)(A) or section

274(e)(9).

With regard to improper inclusions in

compensation and wages or gross income,

the final regulations provide that the taxpayer must apply the dollar-for-dollar

methodology as described in §1.274-12(c)

(2)(i)(D). Under that rule, food and beverage expenses are deductible to the extent

that the expenses do not exceed the sum of

the amount of the expenses that are treated as compensation and wages or gross income, and any amount the recipient reimburses the taxpayer. This dollar-for-dollar

rule is the same methodology that applies

under section 274(e)(2)(B) for food or

beverages provided to specified individuals.

The final regulations also include a provision for specified individuals providing

that the exceptions of section 274(e)(2)

and (e)(9) generally apply only to the extent that the food or beverage expenses do

not exceed the amount of the food or beverage expenses treated as compensation

(under section 274(e)(2)) or as income

(under section 274(e)(9)) to the specified

individual. The final regulations provide,

however, that amounts reimbursed to the

taxpayer by the specified individual, will

reduce the amount subject to the limitations under section 274(k)(1) and (n)

(1). This rule conforms to the statutory

language in section 274(e)(2)(B) and the

regulatory language in §1.274-10. Thus,

the final regulations address the comment

asking for clarification of the effect of reimbursements by employees, specified individuals, and other recipients of the food

or beverages on the amount excepted from

January 11, 2021

the limitations under section 274(k)(1)

and (n)(1) by section 274(e)(2) and (e)(9).

The Treasury Department and the IRS

continue to believe that if the amount to

be included in compensation and wages

or gross income is zero, whether zero is a

proper or improper amount, the exceptions

in section 274(e)(2) and section 274(e)(9)

do not apply because no amount has been

included in compensation and wages or

gross income. For example, if the amount

to be included is zero because the value

of the food or beverages is excluded as a

fringe benefit under section 132, the exceptions in section 274(e)(2) and (e)(9)

do not apply. Similarly, the exceptions in

section 274(e)(2) and (e)(9) do not apply

if the amount to be included is zero solely

because the recipient has fully reimbursed

the taxpayer for the food or beverages. In

that case, however, the exception in section

274(e)(8) may apply if the food or beverages are sold to the recipient in a bona fide

transaction for an adequate and full consideration in money or money’s worth.

ii. Food or Beverage Expenses Provided

under Reimbursement Arrangements

Pursuant to section 274(e)(3), the final

regulations provide that in the case of expenses for food or beverages paid or incurred by one person in connection with

the performance of services for another

person (whether or not the other person

is an employer) under a reimbursement

or other expense allowance arrangement,

the limitations on deductions in section

274(k)(1) and (n)(1) apply either to the

person who makes the expenditure or to

the person who actually bears the expense,

but not to both. Section 274(e)(3)(B) provides that if the services are performed for

a person other than an employer, such as

by an independent contractor, the exception in section 274(e)(3) applies only if

the taxpayer, in this case, the independent

contractor, accounts, to the extent provided by section 274(d), to such person. The

final regulations therefore provide that the

deduction limitations in section 274(k)(1)

and (n)(1) apply to an independent contractor unless, under a reimbursement or

other expense allowance arrangement, the

contractor accounts to its client or customer with substantiation that satisfies the requirements of section 274(d).

January 11, 2021

iii. Recreational Expenses for Employees

Pursuant to section 274(e)(4), the final

regulations provide that any food or beverage expense paid or incurred by a taxpayer for a recreational, social, or similar

activity, primarily for the benefit of the

taxpayer’s employees, is not subject to

the deduction limitations in section 274(k)

(1) and (n)(1). However, activities that

discriminate in favor of highly compensated employees, officers, shareholders

or others who own a 10-percent or greater

interest in the business are not considered

paid or incurred primarily for the benefit

of employees.

Many of the comments received after

enactment of the TCJA requested confirmation that food or beverage expenses for

company holiday parties and picnics that

do not discriminate in favor of highly compensated employees are not subject to the

deduction limitations in section 274(k)(1)

and (n)(1) because the exception in section 274(e)(4) applies. These comments

also suggested that expenses for snacks

and beverages available to all employees

in a pantry, break room, or copy room are

not subject to the deduction limitations in

section 274(k)(1) and (n)(1) because the

exception in section 274(e)(4) applies.

In response to the questions and comments received, the proposed regulations

confirm the rules in the existing regulations at §1.274-2(f)(2)(v) that the exception in section 274(e)(4) applies to food

or beverage expenses for company holiday parties, annual picnics, or summer

outings that do not discriminate in favor

of highly compensated employees. However, an example in the proposed regulations demonstrates that the section 274(e)

(4) exception does not apply to free food

or beverages available to all employees in

a pantry, break room, or copy room because the mere provision or availability

of food or beverages is not a recreational,

social, or similar activity, despite the fact

that employees may incidentally socialize

while they are in the break room. The final

regulations adopt the proposed regulations

with respect to the application of section

274(e)(4) in this context.

In addition, the final regulations provide that the exception in section 274(e)

(4) does not apply to food or beverage expenses that are excludable from employ-

304

ees’ income under section 119 as meals

provided for the convenience of the employer. Because these food or beverages

are, by definition, furnished for the employer’s convenience, they cannot also be

primarily for the benefit of the employees,

even if some social activity occurs during

the provision of the food or beverages.

iv. Items Available to the Public

Pursuant to section 274(e)(7), the final

regulations provide that food or beverage

expenses of a taxpayer are not subject to

the deduction limitations in section 274(k)

(1) and (n)(1) to the extent the food or

beverages are made available to the general public. In addition, the final regulations

provide that this exception applies to expenses for food or beverages provided to

employees if similar food or beverages are

provided by the employer to, and are primarily consumed by, the general public.

For this purpose, “primarily consumed”

means greater than 50 percent of actual

or reasonably estimated consumption, and

“general public” includes, but is not limited to, customers, clients, and visitors. The

final regulations also provide that the general public does not include employees,

partners, 2-percent shareholders of S corporations (as defined in section 1372(b)),

or independent contractors of the taxpayer. Further, an exclusive list of guests also

is not considered the general public. See

Churchill Downs, Inc. v. Commissioner,

307 F.3d 423 (6th Cir. 2002).

Comments received in response to

Notice 2018-76 requested guidance as to

whether the exception in section 274(e)

(7) for food or beverages made available

by the taxpayer to the general public

applies in various situations. The Treasury Department and the IRS considered

these comments and included examples

in the proposed regulations to illustrate

that the exception in section 274(e)(7)

generally applies to the entire food or

beverage expense if the food or beverages are primarily consumed by the general

public. The final regulations retain these

examples.

v. Goods or Services Sold to Customers

Pursuant to section 274(e)(8), the final

regulations provide that any expense for

Bulletin No. 2021–2

food or beverages that are sold to customers in a bona fide transaction for an adequate and full consideration in money or

money’s worth is not subject to the deduction limitations in section 274(k)(1) and

(n)(1). The final regulations clarify that

money or money’s worth does not include

payment through services provided.

The Treasury Department and the IRS

are aware of concerns raised by commenters that it is a common business practice

for employers of restaurant and food

service workers to provide food or beverages at no cost or at a discount to their

employees. The Joint Committee on Taxation’s Bluebook on the TCJA explains

that amendments made by the TCJA to

limit the deduction for expenses of the

employer associated with providing food

or beverages to employees through an employer-operated eating facility that meets

the requirements of section 132(e)(2) do

not affect other exceptions to the 50-percent limitation on deductions for food or

beverage expenses. For example, a restaurant or catering business may continue to

deduct 100 percent of its costs for food

or beverage items, purchased in connection with preparing and providing meals

to its paying customers, which are also

consumed at the worksite by employees

who work in the employer’s restaurant

or catering business. Joint Committee on

Taxation, General Explanation of Public

Law 115-97 (JCS-1-18), at 186 n.940 and

at 188 n.956, December 2018. The final

regulations adopt this interpretation of the

exception in section 274(e)(8).

Finally, the final regulations provide

that for purposes of the section 274(e)(8)

exception to the deduction limitations in

section 274(k)(1) and (n)(1), the term “customer” includes anyone who is sold food or

beverages in a bona fide transaction for an

adequate and full consideration in money

or money’s worth. For example, employees

of the taxpayer are customers when they

purchase food or beverages from the taxpayer in a bona fide transaction for arm’s

length, fair market value prices.

Statement of Availability of IRS

Documents

Notices cited in this preamble are published in the Internal Revenue Bulletin (or

Cumulative Bulletin) and are available

from the Superintendent of Documents,

Bulletin No. 2021–2

U.S. Government Publishing Office,

Washington, DC 20402, or by visiting the

IRS web site at http://www.irs.gov.

Applicability Date

These regulations apply to taxable years

that begin on or after October 9, 2020.

Special Analyses

These final regulations are not subject

to review under section 6(b) of Executive

Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the

Office of Management and Budget regarding review of tax regulations.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby

certified that this final rule will not have a

significant economic impact on a substantial number of small entities. Although

the rule may affect a substantial number

of small entities, the economic impact of

the regulations is not likely to be significant. Data are not readily available about

the number of taxpayers affected, but the

number is likely to be substantial for both

large and small entities because the rule

may affect entities that incur meal and entertainment expenses. The economic impact of these regulations is not likely to be

significant, however, because these final

regulations substantially incorporate prior

guidance and otherwise clarify the application of the TCJA changes to section 274

related to meals and entertainment. These

final regulations will assist taxpayers in

understanding the changes to section 274

and make it easier for taxpayers to comply with those changes. Accordingly, the

Secretary of the Treasury’s delegate certifies that the rule will not have a significant

economic impact on a substantial number

of small entities. Notwithstanding this

certification, the Treasury Department and

the IRS welcome comments on the impact

of these regulations on small entities.

Pursuant to section 7805(f), these final

regulations have been submitted to the

Chief Counsel for the Office of Advocacy of the Small Business Administration

for comment on their impact on small

business. No comments on the proposed

regulations were received from the Chief

Counsel for the Office of Advocacy of the

Small Business Administration.

305

Effect on Other Documents

The following publications are obsolete as of October 9, 2020.

Notice 2018-76 (2018-42 I.R.B. 599).

Drafting Information

The principal author of these final regulations is Patrick Clinton, Office of the

Associate Chief Counsel (Income Tax &

Accounting). Other personnel from the

Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

Income Taxes, Reporting and recordkeeping requirements

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR Part 1 is amended as follows:

Part 1—INCOME TAX

Paragraph 1. The authority citation

for part 1 is amended by adding entries

in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 1.274-11 also issued under 26

U.S.C. 274.

Section 1.274-12 also issued under 26

U.S.C. 274.

Par. 2. Section 1.274-11 is added to

read as follows:

§1.274-11 Disallowance of deductions

for certain entertainment, amusement, or

recreation expenditures paid or incurred

after December 31, 2017.

(a) In general. Except as provided in

this section, no deduction otherwise allowable under chapter 1 of the Internal

Revenue Code (Code) is allowed for any

expenditure with respect to an activity that

is of a type generally considered to be entertainment, or with respect to a facility

used in connection with an entertainment

activity. For this purpose, dues or fees to

any social, athletic, or sporting club or

organization are treated as items with respect to facilities and, thus, are not deductible. In addition, no deduction otherwise

January 11, 2021

allowable under chapter 1 of the Code is

allowed for amounts paid or incurred for

membership in any club organized for

business, pleasure, recreation, or other social purpose.

(b) Definitions—(1) Entertainment—

(i) In general. For section 274 purposes,

the term entertainment means any activity

which is of a type generally considered to

constitute entertainment, amusement, or

recreation, such as entertaining at bars,

theaters, country clubs, golf and athletic

clubs, sporting events, and on hunting,

fishing, vacation and similar trips, including such activity relating solely to the

taxpayer or the taxpayer’s family. These

activities are treated as entertainment under this section, subject to the objective

test, regardless of whether the expenditure

for the activity is related to or associated

with the active conduct of the taxpayer’s

trade or business. The term entertainment

may include an activity, the cost of which

otherwise is a business expense of the taxpayer, which satisfies the personal, living,

or family needs of any individual, such as

providing a hotel suite or an automobile

to a business customer or the customer’s

family. The term entertainment does not

include activities which, although satisfying personal, living, or family needs of an

individual, are clearly not regarded as constituting entertainment, such as the providing of a hotel room maintained by an

employer for lodging of employees while

in business travel status or an automobile

used in the active conduct of a trade or

business even though used for routine personal purposes such as commuting to and

from work. On the other hand, the providing of a hotel room or an automobile by an

employer to an employee who is on vacation would constitute entertainment of the

employee.

(ii) Food or beverages. Under this

section, the term entertainment does not

include food or beverages unless the food

or beverages are provided at or during

an entertainment activity. Food or beverages provided at or during an entertainment activity generally are treated as part

of the entertainment activity. However,

in the case of food or beverages provided at or during an entertainment activity,

the food or beverages are not considered

entertainment if the food or beverages

are purchased separately from the enter-

January 11, 2021

tainment, or the cost of the food or beverages is stated separately from the cost

of the entertainment on one or more bills,

invoices, or receipts. The amount charged

for food or beverages on a bill, invoice,

or receipt must reflect the venue’s usual

selling cost for those items if they were

to be purchased separately from the entertainment or must approximate the reasonable value of those items. If the food

or beverages are not purchased separately

from the entertainment, or the cost of the

food or beverages is not stated separately

from the cost of the entertainment on one

or more bills, invoices, or receipts, no allocation between entertainment and food

or beverage expenses may be made and,

except as further provided in this section

and section 274(e), the entire amount is a

nondeductible entertainment expenditure

under this section and section 274(a).

(iii) Objective test. An objective test

is used to determine whether an activity is of a type generally considered to

be entertainment. Thus, if an activity

is generally considered to be entertainment, it will be treated as entertainment

for purposes of this section and section

274(a) regardless of whether the expenditure can also be described otherwise,

and even though the expenditure relates

to the taxpayer alone. This objective test

precludes arguments that entertainment

means only entertainment of others or

that an expenditure for entertainment

should be characterized as an expenditure for advertising or public relations.

However, in applying this test the taxpayer’s trade or business is considered.

Thus, although attending a theatrical performance generally would be considered

entertainment, it would not be so considered in the case of a professional theater

critic attending in a professional capacity. Similarly, if a manufacturer of dresses

conducts a fashion show to introduce its

products to a group of store buyers, the

show generally would not be considered

entertainment. However, if an appliance

distributor conducts a fashion show, the

fashion show generally would be considered to be entertainment.

(2) Expenditure. The term expenditure

as used in this section includes amounts

paid or incurred for goods, services, facilities, and other items, including items such

as losses and depreciation.

306

(3) Expenditures for production of income. For purposes of this section, any

reference to trade or business includes an

activity described in section 212.

(c) Exceptions. Paragraph (a) of this

section does not apply to any expenditure

described in section 274(e)(1), (2), (3),

(4), (5), (6), (7), (8), or (9).

(d) Examples. The following examples

illustrate the application of paragraphs (a)

and (b) of this section. In each example,

assume that the taxpayer is engaged in a

trade or business for purposes of section

162 and that neither the taxpayer nor any

business associate is engaged in a trade or

business that relates to the entertainment

activity. Also assume that none of the exceptions under section 274(e) and paragraph (c) of this section apply.

(1) Example 1. Taxpayer A invites, B, a business

associate, to a baseball game to discuss a proposed

business deal. A purchases tickets for A and B to attend the game. The baseball game is entertainment as

defined in §1.274-11(b)(1) and thus, the cost of the

game tickets is an entertainment expenditure and is

not deductible by A.

(2) Example 2. The facts are the same as in paragraph (d)(1) of this section (Example 1), except that

A also buys hot dogs and drinks for A and B from

a concession stand. The cost of the hot dogs and

drinks, which are purchased separately from the

game tickets, is not an entertainment expenditure and

is not subject to the disallowance under §1.274-11(a)

and section 274(a)(1). Therefore, A may deduct 50

percent of the expenses associated with the hot dogs

and drinks purchased at the game if the expenses

meet the requirements of section 162 and §1.274-12.

(3) Example 3. Taxpayer C invites D, a business

associate, to a basketball game. C purchases tickets

for C and D to attend the game in a suite, where they

have access to food and beverages. The cost of the

basketball game tickets, as stated on the invoice, includes the food or beverages. The basketball game

is entertainment as defined in §1.274-11(b)(1), and,

thus, the cost of the game tickets is an entertainment

expenditure and is not deductible by C. The cost of

the food and beverages, which are not purchased

separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and

beverages is an entertainment expenditure that is

subject to disallowance under section 274(a)(1) and

paragraph (a) of this section, and C may not deduct

the cost of the tickets or the food and beverages associated with the basketball game.

(4) Example 4. The facts are the same as in

paragraph (d)(3) of this section (Example 3), except

that the invoice for the basketball game tickets separately states the cost of the food and beverages and

reflects the venue’s usual selling price if purchased

separately. As in paragraph (d)(3) of this section

(Example 3), the basketball game is entertainment

as defined in §1.274-11(b)(1), and, thus, the cost of

the game tickets, other than the cost of the food and

beverages, is an entertainment expenditure and is not

deductible by C. However, the cost of the food and

Bulletin No. 2021–2

beverages, which is stated separately on the invoice

for the game tickets and reflects the venue’s usual

selling price of the food and beverages if purchased

separately, is not an entertainment expenditure and is

not subject to the disallowance under section 274(a)

(1) and paragraph (a) of this section. Therefore, C

may deduct 50 percent of the expenses associated

with the food and beverages provided at the game

if the expenses meet the requirements of section 162

and §1.274-12.

(e) Applicability date. This section applies for taxable years that begin on or after October 9, 2020.

Par. 3. Section 1.274-12 is added to

read as follows:

§1.274-12 Limitation on deductions for

certain food or beverage expenses paid

or incurred after December 31, 2017.

(a) Food or beverage expenses—(1) In

general. Except as provided in this section, no deduction is allowed for the expense of any food or beverages provided

by the taxpayer (or an employee of the

taxpayer) unless—

(i) The expense is not lavish or extravagant under the circumstances;

(ii) The taxpayer, or an employee of

the taxpayer, is present at the furnishing

of such food or beverages; and

(iii) The food or beverages are provided to the taxpayer or a business associate.

(2) Only 50 percent of food or beverage

expenses allowed as deduction. Except as

provided in this section, the amount allowable as a deduction for any food or

beverage expense described in paragraph

(a)(1) of this section may not exceed 50

percent of the amount of the expense that

otherwise would be allowable.

(3) Examples. The following examples

illustrate the application of paragraph (a)

(1) and (2) of this section. In each example,

assume that the food or beverage expenses are ordinary and necessary expenses

under section 162(a) that are paid or incurred during the taxable year in carrying

on a trade or business and are not lavish

or extravagant under the circumstances.

Also assume that none of the exceptions

in paragraph (c) of this section apply.

(i) Example 1. Taxpayer A takes client B out to

lunch. Under section 274(k) and (n) and paragraph

(a) of this section, A may deduct 50 percent of the

food or beverage expenses.

(ii) Example 2. Taxpayer C takes employee D out

to lunch. Under section 274(k) and (n) and paragraph

(a) of this section, C may deduct 50 percent of the

food or beverage expenses.

Bulletin No. 2021–2

(iii) Example 3. Taxpayer E holds a business

meeting at a hotel during which food and beverages

are provided to attendees. Expenses for the business

meeting, other than the cost of food and beverages,

are not subject to the deduction limitations in section

274 and are deductible if they meet the requirements

for deduction under section 162. Under section

274(k) and (n) and paragraph (a) of this section, E

may deduct 50 percent of the food and beverage expenses.

(iv) Example 4. The facts are the same as in paragraph (a)(3)(iii) of this section (Example 3), except

that all the attendees of the meeting are employees of

E. Expenses for the business meeting, other than the

cost of food and beverages, are not subject to the deduction limitations in section 274 and are deductible

if they meet the requirements for deduction under

section 162. Under section 274(k) and (n) and paragraph (a) of this section, E may deduct 50 percent

of the food and beverage expenses. The exception in

section 274(e)(5) does not apply to food and beverage expenses under section 274(k) and (n).

(4) Special rules for travel meals. (i)

In general. Food or beverage expenses

paid or incurred while traveling away

from home in pursuit of a trade or business generally are subject to the deduction limitations in section 274(k) and

(n) and paragraph (a)(1) and (2) of this

section, as well as the substantiation requirements in section 274(d). In addition,

travel expenses generally are subject to

the limitations in section 274(m)(1), (2),

and (3).

(ii) Substantiation. Except as provided

in this section, no deduction is allowed for

the expense of any food or beverages paid

or incurred while traveling away from

home in pursuit of a trade or business unless the taxpayer meets the substantiation

requirements in section 274(d).

(iii) Travel meal expenses of spouse,

dependent or others. No deduction is allowed under chapter 1 of the Internal Revenue Code (Code), except under section

217 for certain members of the Armed

Forces of the United States, for the expense of any food or beverages paid or

incurred with respect to a spouse, dependent, or other individual accompanying

the taxpayer, or an officer or employee of

the taxpayer, on business travel, unless—

(A) The spouse, dependent, or other individual is an employee of the taxpayer;

(B) The travel of the spouse, dependent, or other individual is for a bona fide

business purpose of the taxpayer; and

(C) The expenses would otherwise be

deductible by the spouse, dependent or

other individual.

307

(D) Example. The following example

illustrates the application of paragraph (a)

(4)(iii) of this section:

(1 ) Example. Taxpayer F, a sole proprietor, and

Taxpayer F’s spouse travel from New York to Boston

to attend a series of business meetings related to F’s

trade or business. F’s spouse is not an employee of

F, does not travel to Boston for a bona fide business

purpose of F, and the expenses would not otherwise

be deductible. While in Boston, F and F’s spouse go

out to dinner. Under section 274(m)(3) and paragraph (a)(4)(iii) of this section, the expenses associated with the food and beverages consumed by F’s

spouse are not deductible. Therefore, the cost of F’s

spouse’s dinner is not deductible. F may deduct 50

percent of the expense associated with the food and

beverages F consumed while on business travel if F

meets the requirements in sections 162 and 274, including section 274(k) and (d).

(2) [Reserved]

(b) Definitions. Except as otherwise

provided in this section, the following

definitions apply for purposes of section

274(k) and (n), §1.274-11(b)(1)(ii) and

(d), and this section:

(1) Food or beverages. Food or beverages means all food and beverage items,

regardless of whether characterized as

meals, snacks, or other types of food and

beverages, and regardless of whether the

food and beverages are treated as de minimis fringes under section 132(e).

(2) Food or beverage expenses. Food

or beverage expenses mean the full cost

of food or beverages, including any delivery fees, tips, and sales tax. In the case of

employer-provided meals furnished at an

eating facility on the employer’s business

premises, food or beverage expenses do

not include expenses for the operation of

the eating facility such as salaries of employees preparing and serving meals and

other overhead costs.

(3) Business associate. Business associate means a person with whom the taxpayer could reasonably expect to engage

or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee,

agent, partner, or professional adviser,

whether established or prospective.

(4) Independent contractor. For purposes of the reimbursement or other expense allowance arrangements described

in paragraph (c)(2)(ii) of this section, independent contractor means a person who

is not an employee of the payor.

(5) Client or customer. For purposes

of the reimbursement or other expense

allowance arrangements described in

January 11, 2021

paragraph (c)(2)(ii) of this section, client

or customer of an independent contractor means a person who receives services

from an independent contractor and enters

into a reimbursement or other expense

allowance arrangement with the independent contractor.

(6) Payor. For purposes of the reimbursement or other expense allowance arrangements described in paragraph (c)(2)

(ii) of this section, payor means a person

that enters into a reimbursement or other

expense allowance arrangement with an

employee and may include an employer,

its agent, or a third party.

(7) Reimbursement or other expense

allowance arrangement. For purposes of

the reimbursement or other expense allowance arrangements described in paragraph

(c)(2)(ii) of this section, reimbursement

or other expense allowance arrangement

means—

(i) For purposes of paragraph (c)(2)(ii)

(B) of this section, an arrangement under

which an employee receives an advance,

allowance, or reimbursement from a payor

for expenses the employee pays or incurs;

and

(ii) For purposes of paragraph (c)(2)(ii)

(C) of this section, an arrangement under

which an independent contractor receives

an advance, allowance, or reimbursement

from a client or customer for expenses the

independent contractor pays or incurs if

either—

(A) A written agreement between the

parties expressly states that the client or

customer will reimburse the independent

contractor for expenses that are subject to

the limitations on deductions described in

paragraph (a) of this section; or

(B) A written agreement between the

parties expressly identifies the party subject to the limitations.

(8) Primarily consumed. For purposes

of paragraph (c)(2)(iv) of this section, primarily consumed means greater than 50

percent of actual or reasonably estimated

consumption.

(9) General public. For purposes of

paragraph (c)(2)(iv) of this section, the

general public includes, but is not limited to, customers, clients, and visitors.

The general public does not include employees, partners, 2-percent shareholders

of S corporations (as defined in section

1372(b)), or independent contractors of

January 11, 2021

the taxpayer. Also, the guests on an exclusive list of guests are not the general

public.

(c) Exceptions—(1) In general. The

limitations on the deduction of food or

beverage expenses in paragraph (a) of this

section do not apply to any expense described in paragraph (c)(2) of this section.

These expenses are deductible to the extent allowable under chapter 1 of the Code

(chapter 1).

(2) Exceptions—(i) Expenses treated

as compensation—(A) Expenses includible in income of persons who are employees and are not specified individuals.

In accordance with section 274(e)(2)(A),

and except as provided in paragraph (c)(2)

(i)(D) of this section, an expense paid or

incurred by a taxpayer for food or beverages, if an employee who is not a specified

individual is the recipient of the food or

beverages, is not subject to the deduction

limitations in paragraph (a) of this section

to the extent that the taxpayer—

(1) Properly treats the expense relating to the recipient of food or beverages

as compensation to an employee under

chapter 1 and as wages to the employee

for purposes of chapter 24 of the Code

(chapter 24); and

(2) Treats the proper amount as compensation to the employee under §1.61-21.

(B) Expenses includible in income of

persons who are not employees and are

not specified individuals. In accordance

with section 274(e)(9), and except as provided in paragraph (c)(2)(i)(D) of this section, an expense paid or incurred by a taxpayer for food or beverages is not subject

to the deduction limitations in paragraph

(a) of this section to the extent that the expenses are properly included in income as

compensation for services rendered by, or

as a prize or award under section 74 to, a

recipient of the expense who is not an employee of the taxpayer and is not a specified individual. The preceding sentence

does not apply to any amount paid or

incurred by the taxpayer if the amount is

required to be included, or would be so required except that the amount is less than

$600, in any information return filed by

such taxpayer under part III of subchapter

A of chapter 61 of the Code and is not so

included.

(C) Specified Individuals. In accordance with section 274(e)(2)(B), in the

308

case of a specified individual (as defined

in section 274(e)(2)(B)(ii)), the deduction

limitations in paragraph (a) of this section do not apply to an expense for food

or beverages of the specified individual to

the extent that the amount of the expense

does not exceed the sum of—

(1) The amount treated as compensation to the specified individual under

chapter 1 and as wages to the specified

individual for purposes of chapter 24 (if

the specified individual is an employee) or

as compensation for services rendered by,

or as a prize or award under section 74 to,

a recipient of the expense (if the specified

individual is not an employee); and

(2) Any amount the specified individual reimburses the taxpayer.

(D) Expenses for which an amount is

excluded from income or is less than the

proper amount. Notwithstanding paragraphs (c)(2)(i)(A) and (B) of this section,

in the case of an expense paid or incurred

by a taxpayer for food or beverages for

which an amount is wholly or partially

excluded from a recipients’ income under

any section of subtitle A of the Code (other than because the amount is reimbursed

by the recipient), or for which an amount

included in compensation and wages to an

employee (or as income to a nonemployee) is less than the amount required to be

included under §1.61-21, the deduction

limitations in paragraph (a) of this section

do not apply to the extent that the amount

of the expense does not exceed the sum

of—

(1) The amount treated as compensation to the employee under chapter 1 (or

as income to a nonemployee) and as wages to the employee for purposes of chapter

24; and

(2) Any amount the recipient reimburses the taxpayer.

(E) Examples. The following examples

illustrate the application of paragraph (c)

(2)(i) of this section. In each example, assume that the food or beverage expenses

are ordinary and necessary expenses under section 162(a) that are paid or incurred

during the taxable year in carrying on a

trade or business.

(1) Example 1. Employer G provides food and

beverages to its non-specified individual employees

without charge at a company cafeteria on its premises. The food and beverages do not meet the definition

of a de minimis fringe under section 132(e). Thus, G

treats the full fair market value of the food and bever-

Bulletin No. 2021–2

age expenses as compensation and wages, and properly determines this amount under §1.61-21. Under

section 274(e)(2) and paragraph (c)(2)(i)(A) of this

section, the expenses associated with the food and

beverages provided to the employees are not subject

to the 50 percent deduction limitation in paragraph

(a) of this section. Thus, G may deduct 100 percent

of the food and beverage expenses.

(2) Example 2. The facts are the same as in (c)(2)

(i)(E)(1) of this section (Example 1), except that each

employee pays $8 per day for the food and beverages. The fair market value of the food and beverages

is $10 per day, per employee. G incurs $9 per day,

per employee for the food and beverages. G treats

the food and beverage expenses as compensation

and wages, and properly determines the amount of

the inclusion under §1.61-21 to be $2 per day, per

employee ($10 fair market value - $8 reimbursed by

the employee = $2). Therefore, under paragraph (c)

(2)(i)(A) of this section, G may deduct 100 percent

of the food and beverage expenses, or $9 per day,

per employee.

(3) Example 3. Employer H provides meals to its

employees without charge. The meals are properly

excluded from the employees’ income under section

119 as meals provided for the convenience of the

employer. Under §1.61-21(b)(1), an employee must

include in gross income the amount by which the

fair market value of a fringe benefit exceeds the sum

of the amount, if any, paid for the benefit by or on

behalf of the recipient, and the amount, if any, specifically excluded from gross income by some other

section of subtitle A of the Code. Because the entire

value of the employees’ meals is excluded from the

employees’ income under section 119, the fair market value of the fringe benefit does not exceed the

amount excluded from gross income under subtitle

A of the Code, so there is nothing to be included in

the employees’ income under §1.61-21. Thus, the

exception in section 274(e)(2) and paragraph (c)(2)

(i) of this section does not apply and, assuming no

other exceptions provided under section 274(n)(2)

and paragraph (c)(2) of this section apply, H may

deduct only 50 percent of the expenses for the food

and beverages provided to employees. In addition,

the limitations in section 274(k)(1) and paragraph (a)

(1) of this section apply because none of the exceptions in section 274(k)(2) and paragraph (c)(2) of this

section apply.

(ii) Reimbursed food or beverage expenses—(A) In general. In accordance

with section 274(e)(3), in the case of expenses for food or beverages paid or incurred by one person in connection with

the performance of services for another

person, whether or not the other person

is an employer, under a reimbursement or

other expense allowance arrangement, the

deduction limitations in paragraph (a) of

this section apply either to the person who

makes the expenditure or to the person

who actually bears the expense, but not to

both. If an expense of a type described in

paragraph (c)(2)(ii) of this section properly constitutes a dividend paid to a share-

Bulletin No. 2021–2

holder, unreasonable compensation paid

to an employee, a personal expense, or

other nondeductible expense, nothing in

this exception prevents disallowance of

the deduction to the taxpayer under other

provisions of the Code.

(B) Reimbursement arrangements involving employees. In the case of expenses

paid or incurred by an employee for food

or beverages in performing services as an

employee under a reimbursement or other expense allowance arrangement with

a payor, the limitations on deductions in

paragraph (a) of this section apply—

(1) To the employee to the extent the

employer treats the reimbursement or other payment of the expense on the employer’s income tax return as originally filed

as compensation paid to the employee and

as wages to the employee for purposes of

withholding under chapter 24 relating to

collection of income tax at source on wages; or

(2) To the payor to the extent the reimbursement or other payment of the expense is not treated as compensation and

wages paid to the employee in the manner

provided in paragraph (c)(2)(ii)(B)(1) of

this section. However, see paragraph (c)

(2)(ii)(C) of this section if the payor receives a payment from a third party that

may be treated as a reimbursement arrangement under that paragraph.

(C) Reimbursement arrangements involving persons that are not employees. In

the case of expenses for food or beverages

paid or incurred by an independent contractor in connection with the performance

of services for a client or customer under

a reimbursement or other expense allowance arrangement with the independent

contractor, the limitations on deductions

in paragraph (a) of this section apply to

the party expressly identified in an agreement between the parties as subject to the

limitations. If an agreement between the

parties does not expressly identify the

party subject to the limitations, then the

deduction limitations in paragraph (a) of

this section apply—

(1) To the independent contractor

(which may be a payor) to the extent the

independent contractor does not account

to the client or customer within the meaning of section 274(d); or

(2) To the client or customer if the

independent contractor accounts to the

309

client or customer within the meaning of

section 274(d).

(D) Section 274(d) substantiation. If

the reimbursement or other expense allowance arrangement involves persons

who are not employees and the agreement

between the parties does not expressly

identify the party subject to the limitations

on deductions in paragraph (a) of this section, the limitations on deductions in paragraph (a) of this section apply to the independent contractor unless the independent

contractor accounts to the client or customer with substantiation that satisfies the

requirements of section 274(d).

(E) Examples. The following examples

illustrate the application of paragraph (c)

(2)(ii) of this section.

(1) Example 1. (i) Employee I performs services

under an arrangement in which J, an employee leasing company, pays I a per diem allowance of $10x

for each day that I performs services for J’s client,

K, while traveling away from home. The per diem

allowance is a reimbursement of travel expenses for

food or beverages that I pays in performing services

as an employee. J enters into a written agreement

with K under which K agrees to reimburse J for any

substantiated reimbursements for travel expenses,

including meal expenses, that J pays to I. The agreement does not expressly identify the party that is

subject to the limitations on deductions in paragraph

(a) of this section. I performs services for K while

traveling away from home for 10 days and provides J

with substantiation that satisfies the requirements of

section 274(d) of $100x of meal expenses incurred

by I while traveling away from home. J pays I $100x

to reimburse those expenses pursuant to their arrangement. J delivers a copy of I’s substantiation to

K. K pays J $300x, which includes $200x compensation for services and $100x as reimbursement of

J’s payment of I’s travel expenses for meals. Neither

J nor K treats the $100x paid to I as compensation

or wages.

(ii) Under paragraph (b)(7)(i) of this section,

I and J have established a reimbursement or other

expense allowance arrangement for purposes of

paragraph (c)(2)(ii)(B) of this section. Because the

reimbursement payment is not treated as compensation and wages paid to I, under section 274(e)(3)(A)

and paragraph (c)(2)(ii)(B)(1) of this section, I is not

subject to the limitations on deductions in paragraph

(a) of this section. Instead, under paragraph (c)(2)(ii)

(B)(2) of this section, J, the payor, is subject to limitations on deductions in paragraph (a) of this section

unless J can meet the requirements of section 274(e)

(3)(B) and paragraph (c)(2)(ii)(C) of this section.

(iii) Because the agreement between J and K

expressly states that K will reimburse J for substantiated reimbursements for travel expenses that J

pays to I, under paragraph (b)(7)(ii)(A) of this section, J and K have established a reimbursement or

other expense allowance arrangement for purposes

of paragraph (c)(2)(ii)(C) of this section. J accounts

to K for K’s reimbursement in the manner required

by section 274(d) by delivering to K a copy of the

January 11, 2021

substantiation J received from I. Therefore, under

section 274(e)(3)(B) and paragraph (c)(2)(ii)(C)(2)

of this section, K and not J is subject to the deduction

limitations in paragraph (a) of this section.

(2) Example 2. (i) The facts are the same as in

paragraph (c)(2)(ii)(E)(1) of this section (Example 1)

except that, under the arrangements between I and J

and between J and K, I provides the substantiation of

the expenses directly to K, and K pays the per diem

directly to I.

(ii) Under paragraph (b)(7)(i) of this section, I

and K have established a reimbursement or other expense allowance arrangement for purposes of paragraph (c)(2)(ii)(C) of this section. Because I substantiates directly to K and the reimbursement payment

was not treated as compensation and wages paid to I,

under section 274(e)(3)(A) and paragraph (c)(2)(ii)

(C)(1) of this section, I is not subject to the limitations on deductions in paragraph (a) of this section.

Under paragraph (c)(2)(ii)(C)(2) of this section, K,

the payor, is subject to the limitations on deductions

in paragraph (a) of this section.

(3) Example 3. (i) The facts are the same as in

paragraph (c)(2)(ii)(E)(1) of this section (Example 1), except that the written agreement between J

and K expressly provides that the limitations of this

section will apply to K.

(ii) Under paragraph (b)(7)(ii)(B) of this section, J and K have established a reimbursement or

other expense allowance arrangement for purposes

of paragraph (c)(2)(ii)(C) of this section. Because

the agreement provides that the 274 deduction limitations apply to K, under section 274(e)(3)(B) and

paragraph (c)(2)(ii)(C) of this section, K and not J is

subject to the limitations on deductions in paragraph

(a) of this section.

(4) Example 4. (i) The facts are the same as in (c)

(2)(ii)(E)(1) of this section (Example 1), except that

the agreement between J and K does not provide that

K will reimburse J for travel expenses.

(ii) The arrangement between J and K is not a

reimbursement or other expense allowance arrangement within the meaning of section 274(e)(3)(B) and

paragraph (b)(7)(ii) of this section. Therefore, even

though J accounts to K for the expenses, J is subject

to the limitations on deductions in paragraph (a) of

this section.

(iii) Recreational expenses for employees—(A) In general. In accordance with

section 274(e)(4), any food or beverage

expense paid or incurred by a taxpayer for

a recreational, social, or similar activity,

primarily for the benefit of a taxpayer’s

employees (other than employees who

are highly compensated employees (within the meaning of section 414(q))) is not

subject to the deduction limitations in

paragraph (a) of this section. For purposes

of this paragraph (c)(2)(iii), an employee

owning less than a 10-percent interest in

the taxpayer’s trade or business is not considered a shareholder or other owner, and

for such purposes an employee is treated

as owning any interest owned by a member of the employee’s family (within the

January 11, 2021

meaning of section 267(c)(4)). Any expense for food or beverages that is made

under circumstances which discriminate

in favor of highly compensated employees is not considered to be made primarily for the benefit of employees generally.

An expense for food or beverages is not to

be considered outside of the exception of

this paragraph (c)(2)(iii) merely because,

due to the large number of employees involved, the provision of food or beverages

is intended to benefit only a limited number of employees at one time, provided the

provision of food or beverages does not

discriminate in favor of highly compensated employees. This exception applies

to expenses paid or incurred for events

such as holiday parties, annual picnics, or

summer outings. This exception does not

apply to expenses for meals the value of

which is excluded from employees’ income under section 119 because the meals

are provided for the convenience of the

employer and are therefore not primarily

for the benefit of the taxpayer’s employees.

(B) Examples. The following examples

illustrate the application of this paragraph

(c)(2)(iii). In each example, assume that

the food or beverage expenses are ordinary and necessary expenses under section 162(a) that are paid or incurred during

the taxable year in carrying on a trade or

business.

(1) Example 1. Employer L invites all employees

to a holiday party in a hotel ballroom that includes a

buffet dinner and an open bar. Under section 274(e)

(4), this paragraph (c)(2)(iii), and §1.274-11(c), the

cost of the party, including food and beverage expenses, is not subject to the deduction limitations

in paragraph (a) of this section because the holiday

party is a recreational, social, or similar activity primarily for the benefit of non-highly compensated

employees. Thus, L may deduct 100 percent of the

cost of the party.

(2) Example 2. The facts are the same as in paragraph (c)(2)(iii)(B)(1) of this section (Example 1),

except that Employer L invites only highly-compensated employees to the holiday party, and the invoice

provided by the hotel lists the costs for food and beverages separately from the cost of the rental of the

ballroom. The costs reflect the venue’s usual selling

price for food or beverages. The exception in this

paragraph (c)(2)(iii) does not apply to the rental of

the ballroom or the food and beverage expenses because L invited only highly-compensated employees

to the holiday party. However, under §1.274-11(b)

(1)(ii), the food and beverage expenses are not treated as entertainment. Therefore, L is not subject to

the full disallowance for its separately stated food

and beverage expense under section 274(a)(1) and

§1.274-11(a). Unless another exception in section

310

274(n)(2) and paragraph (c)(2) of this section applies, L may deduct only 50 percent of the food and

beverage costs under paragraph (a)(2) of this section.

In addition, the limitations in section 274(k)(1) and

paragraph (a)(1) of this section apply because none

of the exceptions in section 274(k)(2) and paragraph

(c)(2) of this section apply.

(3) Example 3. Employer M provides free coffee,

soda, bottled water, chips, donuts, and other snacks

in a break room available to all employees. A break

room is not a recreational, social, or similar activity

primarily for the benefit of the employees, even if

some socializing related to the food and beverages provided occurs. Thus, the exception in section

274(e)(4) and this paragraph (c)(2)(iii) does not apply and unless another exception in section 274(n)

(2) and paragraph (c)(2) of this section applies, M

may deduct only 50 percent of the expenses for food

and beverages provided in the break room under

paragraph (a)(2) of this section. In addition, the limitations in section 274(k)(1) and paragraph (a)(1) of

this section apply because none of the exceptions in

section 274(k)(2) and paragraph (c)(2) of this section

apply.

(4) Example 4. Employer N has a written policy

that employees in a certain medical services-related position must be available for emergency calls

due to the nature of the position that requires frequent emergency responses. Because these emergencies can and do occur during meal periods, N

furnishes food and beverages to employees in this

position without charge in a cafeteria on N’s premises. N excludes food and beverage expenses from

the employees’ income as meals provided for the

convenience of the employer excludable under

section 119. Because these food and beverages

are furnished for the employer’s convenience, and

therefore are not primarily for the benefit of the

employees, the exception in section 274(e)(4) and

this paragraph (c)(2)(iii) does not apply, even if

some socializing related to the food and beverages

provided occurs. Further, the exception in section

274(e)(2) and paragraph (c)(2)(i) of this section

does not apply. Thus, unless another exception in

section 274(n)(2) and paragraph (c)(2) of this section applies, N may deduct only 50 percent of the

expenses for food and beverages provided to employees in the cafeteria under paragraph (a)(2) of

this section. In addition, the limitations in section

274(k)(1) and paragraph (a)(1) of this section apply

because none of the exceptions in section 274(k)(2)

and paragraph (c)(2) of this section apply.

(5) Example 5. Employer O invites an employee and a client to dinner at a restaurant. Because it

is the birthday of the employee, O orders a special

dessert in celebration. Because the meal is a business

meal, and therefore not primarily for the benefit of

the employee, the exception in section 274(e)(4) and

this paragraph (c)(2)(iii) does not apply, even though

an employee social activity in the form of a birthday

celebration occurred during the meal. Thus, unless

another exception in section 274(n)(2) and paragraph

(c)(2) of this section applies, O may deduct only 50

percent of the meal expense. In addition, the limitations in section 274(k)(1) and paragraph (a)(1) of

this section apply because none of the exceptions in

section 274(k)(2) and paragraph (c)(2) of this section

apply.

Bulletin No. 2021–2

(iv) Items available to the public—(A)

In general. In accordance with section

274(e)(7), any expense paid or incurred by

a taxpayer for food or beverages to the extent the food or beverages are made available to the general public is not subject to

the deduction limitations in paragraph (a)

of this section. If a taxpayer provides food

or beverages to employees, this exception

applies to the entire amount of expenses

for those food or beverages if the same

type of food or beverages is provided to,

and are primarily consumed by, the general public.

(B) Examples. The following examples

illustrate the application of this paragraph

(c)(2)(iv). In each example, assume that

the food and beverage expenses are ordinary and necessary expenses under section 162(a) that are paid or incurred during

the taxable year in carrying on a trade or

business.

(1) Example 1. Employer P is a real estate agent

and provides refreshments at an open house for a

home available for sale to the public. The refreshments are consumed by P’s employees, potential

buyers of the property, and other real estate agents.

Under section 274(e)(7) and this paragraph (c)(2)

(iv), the expenses associated with the refreshments

are not subject to the deduction limitations in paragraph (a) of this section if P determines that over 50

percent of the food and beverages are actually or

reasonably estimated to be consumed by potential

buyers and other real estate agents. If more than 50

percent of the food and beverages are not actually or

reasonably estimated to be consumed by the general public, only the costs attributable to the food and

beverages provided to the general public are excepted under section 274(e)(7) and this paragraph (c)(2)

(iv). In addition, the limitations in section 274(k)(1)

and paragraph (a)(1) of this section apply to the expenses associated with the refreshments that are not

excepted under section 274(e)(7) and this paragraph

(c)(2)(iv).

(2) Example 2. Employer Q is an automobile service center and provides refreshments in its waiting

area. The refreshments are consumed by Q’s employees and customers, and Q reasonably estimates

that more than 50 percent of the refreshments are

consumed by customers. Under section 274(e)(7)

and this paragraph (c)(2)(iv), the expenses associated

with the refreshments are not subject to the deduction limitations provided for in paragraph (a) of this

section because the food and beverages are primarily

consumed by customers. Thus, Q may deduct 100

percent of the food and beverage expenses.

(3) Example 3. Employer R operates a summer

camp open to the general public for children and provides breakfast and lunch, as part of the fee to attend

camp, both to camp counselors, who are employees,

and to camp attendees, who are customers. There are

20 camp counselors and 100 camp attendees. The

same type of meal is available to each counselor and

attendee, and attendees consume more than 50 per-

Bulletin No. 2021–2

cent of the food and beverages. Under section 274(e)

(7) and this paragraph (c)(2)(iv), the expenses associated with the food and beverages are not subject

to the deduction limitations in paragraph (a) of this

section, because over 50 percent of the food and beverages are consumed by camp attendees and the food

and beverages are therefore primarily consumed by

the general public. Thus, R may deduct 100 percent

of the food and beverage expenses.

(4) Example 4. Employer S provides food and

beverages to its employees without charge at a company cafeteria on its premises. Occasionally, customers or other visitors also eat without charge in the

cafeteria. The occasional consumption of food and

beverages at the company cafeteria by customers and

visitors is less than 50 percent of the total amount

of food and beverages consumed at the cafeteria.

Therefore, the food and beverages are not primarily

consumed by the general public, and only the costs

attributable to the food and beverages provided to

the general public are excepted under section 274(e)

(7) and this paragraph (c)(2)(iv). In addition, the limitations in section 274(k)(1) and paragraph (a)(1) of

this section apply to the expenses associated with the

food and beverages that are not excepted under section 274(e)(7) and this paragraph (c)(2)(iv).

(v) Goods or services sold to customers—(A) In general. In accordance with

section 274(e)(8), an expense paid or incurred for food or beverages, to the extent

the food or beverages are sold to customers in a bona fide transaction for an adequate and full consideration in money

or money’s worth, is not subject to the

deduction limitations in paragraph (a) of

this section. However, money or money’s

worth does not include payment through

services provided. Under this paragraph

(c)(2)(v), a restaurant or catering business may deduct 100 percent of its costs

for food or beverage items, purchased in

connection with preparing and providing

meals to its paying customers, which are

also consumed at the worksite by employees who work in the employer’s restaurant or catering business. In addition, for

purposes of this paragraph (c)(2)(v), the

term customer includes anyone, including

an employee of the taxpayer, who is sold

food or beverages in a bona fide transaction for an adequate and full consideration

in money or money’s worth.

(B) Example. The following example

illustrates the application of this paragraph (c)(2)(v):

Example. Employer T operates a restaurant.

T provides food and beverages to its food service

employees before, during, and after their shifts for

no consideration. Under section 274(e)(8) and this

paragraph (c)(2)(v), the expenses associated with the

food and beverages provided to the employees are

not subject to the 50 percent deduction limitation in

paragraph (a) of this section because the restaurant

311

sells food and beverages to customers in a bona fide

transaction for an adequate and full consideration in

money or money’s worth. Thus, T may deduct 100

percent of the food and beverage expenses.

(d) Applicability date. This section applies for taxable years that begin on or after October 9, 2020.

Sunita Lough,

Deputy Commissioner for Services

and Enforcement.

Approved September 25, 2020.

David J. Kautter,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on October 2, 2020, 4:15 p.m., and published in the issue

of the Federal Register for October 9, 2020, 85 F.R.

64026)

26 CFR 301.6402-2(g)

T.D. 9940

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 301

Misdirected Direct Deposit

Refunds

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: These final regulations provide the procedures under section 6402(n)

of the Internal Revenue Code (Code) for

identification and recovery of a misdirected direct deposit refund. The final regulations reflect changes to the law made by

the Taxpayer First Act. The final regulations affect taxpayers who have made a

claim for refund, requested the refund be

issued as a direct deposit, but did not receive a refund in the account designated

on the claim for refund.

DATES: Effective date: These regulations

are effective on December 22, 2020.

January 11, 2021

Applicability date: These regulations apply to reports to the IRS made after December 22, 2020 that a taxpayer never

received a direct deposit refund.

FOR FURTHER INFORMATION

CONTACT: Mary C. King at (202) 3175433 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments

to 26 CFR part 301 under section 6402(n)

of the Code and provides guidance on the

procedures used to identify and recover tax

refunds issued by electronic funds transfer

(direct deposit) that were not delivered

to the account designated to receive the

direct deposit refund on the federal tax

return or other claim for refund. Section

6402(n) was added to the Code by section

1407 of the Taxpayer First Act, Public

Law 116-25, 133 Stat. 981 (2019) (TFA)

on July 1, 2019. On December 23, 2019,

the Department of the Treasury (Treasury

Department) and the IRS published in the

Federal Register (84 FR 70462) a notice

of proposed rulemaking (REG-11616319) providing the procedures under section

6402(n) for reporting, identification, and

recovery of a misdirected direct deposit

refund. The Treasury Department and the

IRS received one comment responding to

the proposed regulations. The comment is

available at www.regulations.gov or upon

request. No public hearing was requested

or held on the proposed regulations.

After consideration of the written comment, this Treasury Decision adopts the

proposed regulations as final regulations

with minor modifications, as described in

the Summary of Comments and Explanation of Provisions. A detailed explanation

of these regulations can be found in the

preamble to the proposed regulations.

Summary of Comments and

Explanation of Provisions

The Treasury Department and the IRS

received one comment regarding the proposed regulations. After consideration of

the comment, the proposed regulations are

adopted as final regulations without any

substantive changes.

January 11, 2021

I. Applicability Date

A commenter expressed a concern that

the procedures in these regulations would

not apply to claims for refund from taxable years before the applicability date

of the final regulations. The commenter

requested that the procedures should be

applied to refund claims for prior years.

Consistent with the comment, the final

regulations clarify that these procedures

apply to any report of a misdirected direct

deposit refund for a current or prior year

submitted after the publication of the final

regulations in the Federal Register.

II. Coordination with Financial

Institutions

Section 301.6402-2(g)(1) of the proposed regulations defines “misdirected

direct deposit refund” as any refund of an

overpayment of tax that is disbursed as

a direct deposit but is not deposited into

the account designated on the claim for

refund to receive the direct deposit refund. The proposed regulations include

in the definition of a misdirected direct

deposit refund only those refunds which

are actually issued as a direct deposit. A

misdirected direct deposit refund does

not include an overpayment that is credited against another outstanding tax liability of the taxpayer pursuant to section

6402(a) or that is offset pursuant to the

law. An overpayment that is offset or applied as mandated by law is not a misdirected direct deposit refund because

these actions are mandated by law. Section 301.6402-2(g)(1) of the final regulations clarifies this by striking the last sentence from the proposed regulations, as

it is not needed to define a “misdirected

direct deposit refund.” Instead, the final

regulations clarify in section 301.64022(g)(3)(i) that the offset or setoff of an

overpayment occurs prior to the issuance of a direct deposit. The IRS will

determine if a reported missing refund is

setoff or offset as part of the procedure

for the identification of the account that

received the misdirected direct deposit

refund. This reorganization simplifies the

definition of a misdirected direct deposit

refund and more accurately describes the

process of identification of a misdirected

direct deposit refund.

312

The final regulations reflect this clarification to the definition of a misdirected

direct deposit refund and the identification

procedure, but the proposed regulations

are otherwise adopted without change.

Special Analyses

This regulation is not subject to review

under section 6(b) of Executive Order

12866 pursuant to the Memorandum of

Agreement (April 11, 2018) between the

Treasury Department and the Office of

Management and Budget regarding review of tax regulations.

These regulations do not impose any

additional information collection requirements in the form of reporting, recordkeeping requirements, or third-party

disclosure requirements related to tax

compliance. However, because a taxpayer

or a taxpayer’s representative may elect to

report a missing refund using the procedures described in §301.6402-2(g)(2)(ii)

(B), some taxpayers may use a form to

report a missing refund. The collection of

information in §301.6402-2(g)(2)(ii)(B)

is through use of a Form 3911, “Taxpayer

Statement Regarding Refund,” and is the

sole collection of information requirement

established by the final regulations.

For the purposes of the Paperwork

Reduction Act, 44 U.S.C. §§3501-3520,

the reporting burden associated with the

collection of information with respect to

section 6402(n) will be reflected in Paperwork Reduction Act submissions for IRS

Form 3911 (OMB Control Number 15451384). The estimated average time to complete Form 3911 is five minutes. However, use of a form is not required in every

case. There are certain situations in which

a taxpayer may instead elect to investigate

a missing refund over the telephone or in

person at the Office of the Taxpayer Advocate and, after the IRS identifies the tax

refund and informs the taxpayer that the

refund was issued as a direct deposit, orally report that the already-identified refund

is missing. An agency may not conduct

or sponsor, and a person is not required

to respond to, a collection of information

unless it displays a valid control number

assigned by the Office of Management

and Budget.

It is hereby certified that these regulations will not have a significant economic

Bulletin No. 2021–2

impact on a substantial number of small

entities within the meaning of section

601(6) of the Regulatory Flexibility Act

(5 U.S.C. chapter 6). The certification is

based on the information that follows.

There is no significant impact from these

regulations on any small entity utilizing

the procedures prescribed by these regulations to report a missing refund because

there is no significant cost associated with

reporting a missing refund. There is no

fee charged in connection with reporting a

missing refund, and the estimated time to

complete a Form 3911, “Taxpayer Statement Regarding Refund,” is five minutes.

There are no tax consequences associated

with the final rule, as it merely sets forth

the procedures for reporting a missing

refund and describes the process the IRS

uses in locating a missing refund and, in

some instances, issuing a replacement

refund. The process in these regulations

mirrors the existing process and does not

change the reporting burden. Accordingly, the Treasury Department and the IRS

have determined that this Treasury Decision will not have a significant economic

impact on a substantial number of small

entities. Pursuant to section 7805(f) of the

Code, the notice of proposed rulemaking

preceding this regulation was submitted

to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small business entities, and no comments were received.

Section 202 of the Unfunded Mandates

Reform Act of 1995 requires that agencies

assess anticipated costs and benefits and

take certain other actions before issuing a

final rule that includes any Federal mandate that may result in expenditures in any

one year by a state, local, or tribal government, in the aggregate, or by the private

sector, of $100 million in 1995 dollars,

updated annually for inflation. This regulation does not include any Federal mandate that may result in expenditures by

state, local, or tribal governments, or by

the private sector in excess of that threshold.

Executive Order 13132 (titled Federalism) prohibits an agency from publishing

any rule that has federalism implications

if the rule either imposes substantial, direct compliance costs on state and local

governments, and is not required by statute, or preempts state law, unless the agen-

Bulletin No. 2021–2

cy meets the consultation and funding requirements of section 6 of the Executive

Order. This rule does not have federalism

implications and does not impose substantial direct compliance costs on state and

local governments or preempt state law,

within the meaning of the Executive Order.

Drafting Information

The principal author of these regulations is Mary C. King of the Office of the

Associate Chief Counsel (Procedure and

Administration). Other personnel from the

Treasury Department and the IRS participated in the development of the regulations.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR Part 301 is

amended as follows:

PART 301 – PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 is amended by adding an entry

in numerical order for § 301.6402-2(g) to

read in part as follows:

Authority: 26 U.S.C. 7805 * * *

*****

Section 301.6402-2(g) also issued under 26 U.S.C. 6402(n).

*****

Par. 2. Section 301.6402-2 is amended

by:

1. Redesignating paragraph (g) as paragraph (h) and adding new paragraph (g).

2. Revising the heading of newly redesignated paragraph (h) and adding a

sentence at the end of the paragraph.

The additions and revision read as follows:

§301.6402-2 Claims for credit or refund.

*****

313

(g) Misdirected direct deposit refund—

(1) Definition. The term misdirected direct

deposit refund includes any refund of an

overpayment of tax that is disbursed as

a direct deposit but is not deposited into

the account designated on the claim for

refund to receive the direct deposit refund.

(2) Procedures for reporting a misdirected direct deposit refund—(i) In general. A taxpayer or a taxpayer’s authorized

representative may report to the IRS that

the taxpayer never received a direct deposit refund and request a replacement

refund. The report must include the name

of the taxpayer who requested the refund,

the taxpayer identification number of the

taxpayer, the taxpayer’s mailing address,

the type of return to which the refund is

related, the account number and routing

number that the taxpayer requested the

refund be directly deposited into, and any

other information necessary to locate the

misdirected direct deposit refund.

(ii) How to report a misdirected direct

deposit refund. A reporting described in

paragraph (g)(2)(i) of this section may be

made in the following ways:

(A) By calling the IRS;

(B) On the form prescribed by the IRS

and in accordance with the applicable

publications, instructions, or other appropriate guidance;

(C) By contacting the Office of the

Taxpayer Advocate by telephone, by mail,

facsimile, or in person; or

(D) By submitting the appropriate form

in person at a Taxpayer Assistance Center.

(3) Procedures for coordination with

financial institutions—(i) Identification of

the account that received the misdirected

direct deposit refund. If the IRS receives

a report described in paragraph (g)(2)(ii)

of this section, the IRS will confirm that

the overpayment was issued as a direct

deposit. The IRS will confirm that the

overpayment was not credited or offset

pursuant to the law in effect immediately

prior to the direct deposit being disbursed.

If the direct deposit described in the report

was issued, the IRS will initiate a refund

trace to request the assistance of the Department of the Treasury’s Bureau of the

Fiscal Service. In accordance with its own

procedures, the Bureau of the Fiscal Service coordinates with the financial institution that holds directly or indirectly the

deposit account into which the refund was

January 11, 2021

made, requesting from the financial institution such information as is necessary to

identify whether the financial institution

received the refund; whether the financial institution returned, or will return,

the refund to the IRS, or if no funds are

available for return; whether a deposit was

made into the account designated on the

claim for refund; and the identity of the

deposit account owner to whom the deposit was disbursed.

(ii) Coordination to recover the

amounts transferred. Recovery of the

misdirected direct deposit refund from a

financial institution shall follow the procedures established by the Bureau of the

Fiscal Service. The Bureau of the Fiscal

Service shall request the return of the misdirected direct deposit refund from the

financial institution that received it. The

IRS may contact the financial institution

directly to recover the misdirected direct

deposit refund.

January 11, 2021

(4) Issuance of replacement refund.

When the IRS has determined that a

misdirected direct deposit refund has occurred, the IRS will issue a replacement

refund in the full amount of the refund that

was misdirected. The replacement refund

may be issued as a direct deposit or as

a paper check sent to the taxpayer’s last

known address.

(5) Applicability of this paragraph

(g) to missing refunds. The provisions

of paragraphs (g)(2) through (g)(3)(i)

of this section should be used for any

refund that was disbursed as a direct

deposit and that the taxpayer reports as

missing. For example, although a refund

that was deposited into an incorrect bank

account because the taxpayer transposed

two digits in their bank account number is not considered to be a misdirected direct deposit refund, the provisions

of paragraphs (g)(2) through (g)(3)(i) of

this section should be used. If the appli-

314

cation of these procedures results in an

amount recovered by the IRS, the recovered amount will be refunded or credited

as allowed by law.

(h) Applicability dates. * * * Paragraph

(g) of this section applies to reports described in paragraph (g)(2)(ii) of this section made after December 22, 2020.

Sunita Lough,

Deputy Commissioner for Services and

Enforcement.

Approved: December 8, 2020.

David J. Kautter,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on December 18, 2020, 4:15 pm, and published in the issue

of the Federal Register for December 22, 2020, 85

FR 83446)

Bulletin No. 2021–2

Part III

Mandatory E-filing of

Form 4720 by Private

Foundations

Notice 2021-01

SECTION 1. PURPOSE

This notice provides for the delay, pursuant to section 3101(d)(2) of the Taxpayer First Act of 2019, Pub. L. No. 116-25,

133 Stat. 981, 1015 (TFA), of the application of section 6033(n) of the Internal

Revenue Code (Code) with respect to

the requirement for organizations recognized as tax exempt under section 501(c)

(3) of the Code and classified as private

foundations under section 509(a) of the

Code (private foundations) to electronically file Form 4720, Return of Certain

Excise Taxes Under Chapters 41 and 42

of the Internal Revenue Code.1 This notice

also announces that the Department of the

Treasury (Treasury Department) and the

Internal Revenue Service (IRS) intend to

remove § 53.6011-1(c) of the Foundation

and Similar Excise Tax Regulations (26

CFR part 53), because the amendments

made to sections 6104 and 6033 by the

TFA have rendered unfeasible the ability

for a private foundation and other persons

to jointly file the same Form 4720 electronically.

SECTION 2. BACKGROUND

Section 6011(a) of the Code provides

that, when required by regulations prescribed by the Secretary of the Treasury or

his delegate (Secretary), any person made

liable for any tax imposed by the Code,

or with respect to the collection thereof,

must make a return or statement according

to the forms and regulations prescribed by

the Secretary. Every person required to

make a return or statement must include

therein the information required by such

forms or regulations. Under § 53.60111(b), every person (including a govern-

mental entity) liable for tax imposed

by sections 4941(a), 4942(a), 4943(a),

4944(a), 4945(a), 4955(a), 4958(a), 4959,

4960(a), 4965(a), 4966(a), 4967(a), or

4968(a), and every private foundation and

every trust described in section 4947(a)(2)

which has engaged in an act of self-dealing (as defined in section 4941(d)) (other

than an act giving rise to no tax under section 4941(a)) must file an annual return on

Form 4720 and must include therein the

information required by such form and the

instructions issued with respect thereto.

Under § 53.6011-1(c), if a Form 4720 is

filed by a private foundation or trust described in section 4947(a)(2) with respect

to a transaction as to which other persons

are also required to file under this regulation, and if the other persons’ taxable

years are the same as the foundation’s

or trust’s, then the private foundation or

trust and such other persons can file a joint

Form 4720, and, to the extent applicable,

that form will be considered as the other

persons’ return for purposes of complying with the filing requirement under §

53.6011-1(b).

Subject to various exceptions, section

6033(a)(1) of the Code requires every

organization exempt from taxation under

section 501(a) (tax-exempt organization)

to file an annual return, stating specifically

the items of gross income, receipts, and

disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary may

by forms or regulations prescribe. Section

6033(b) provides a list of items that are

generally required to be furnished annually by organizations described in section

501(c)(3), “at such time and in such manner as the Secretary may by forms or regulations prescribe.”

Consistent with section 6033(a)(1), §

1.6033-2(a)(1) of the Income Tax Regulations (26 CFR part 1) provides that, except as provided in section 6033(a)(3) and

§ 1.6033-2(g), every tax-exempt organization must file an annual information return

specifically setting forth its items of gross

income, gross receipts and disbursements,

and such other information as may be prescribed in the instructions issued with respect to the return. Section 1.6033-2(a)(2)

(i) provides that every private foundation

must file Form 990-PF, Return of Private

Foundation, as its annual information return. Although the information to be reported for any particular taxable year is set

forth in the forms and instructions for such

year, § 1.6033-2(a)(2)(ii) also provides a

list of information generally required to be

furnished by a tax-exempt organization on

its annual return, which generally tracks

section 6033(b). The list in the regulations

includes, but is not limited to, in the case

of a private foundation liable for tax imposed under chapter 42 of the Code (chapter 42), such information as is required on

Form 4720. See § 1.6033-2(a)(2)(ii)(J).

In general, under section 6104(b) of

the Code, the information required to be

furnished by section 6033, together with

the names and addresses of such organizations and trusts, must be made available to

the public at such times and in such places

as the Secretary may prescribe. Section

301.6104(b)-1(a)(1) of the Procedure and

Administration Regulations reiterates that

the information required by section 6033

must be made available to the public, except as otherwise provided in section 6104

and the regulations thereunder.

In promulgating § 1.6033-2(a)(2)(ii)

(J), the Treasury Department and the IRS

noted the provision clarifies that Form

4720 (relating to certain excise tax liabilities under chapter 42), when filed by a

private foundation, is part of the information return required under section 6033

as well as a tax return required under section 6011. Accordingly, Form 4720 filed

by a private foundation is information

required by section 6033 and the regulations thereunder and thus is disclosable

under section 6104, whereas Form 4720

filed by a taxpayer other than a private

foundation is not information required by

section 6033 and the regulations thereunder and thus is not disclosable under

section 6104. See TD 7785, 46 FR 38507

(July 28, 1981).

Form 4720 is filed by taxpayers reporting tax liabilities under sections 170(f)(10), 664(c)(2), 4911, 4912, 4941, 4942, 4943, 4944, 4945, 4955, 4958, 4959, 4960, 4965, 4966, 4967, and

4968 of the Code.

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315

January 11, 2021

SECTION 3. MANDATORY

ELECTRONIC FILING OF FORM 4720

On July 1, 2019, the TFA was enacted into law. Section 3101 of the TFA is

effective for taxable years beginning on

or after July 2, 2019. Section 3101(a) of

the TFA amends section 6033(n) of the

Code to provide that any exempt organization required to file a return under

section 6033 of the Code must file such

return in electronic form. Section 3101(c)

of the TFA amends section 6104(b) of the

Code to provide that any annual return

required to be filed electronically under

section 6033(n) must be made available

by the Secretary to the public as soon as

practicable in a machine-readable format.

Section 3101(d)(1) of the TFA provides

that, in general, these amendments apply

to taxable years beginning after the date of

enactment of the TFA. However, section

3101(d)(2) of the TFA gives the Secretary

authority to delay the application of these

amendments if the Secretary determines

the application of the amendments would

cause undue burden without a delay but

the delayed applicability date must not be

later than taxable years beginning on or

after July 1, 2021.

As described in section 2 of this notice,

Form 4720, when filed by a private foundation, is part of the information return

required under section 6033, as well as

a tax return required under section 6011.

Accordingly, Form 4720 filed by a private

foundation as part of the Form 990-PF is

required to be electronically filed as a return required under section 6033(n). The

IRS is modifying Form 4720 so that private foundations can electronically file the

form in accordance with the TFA’s electronic filing mandate. The modifications to

Form 4720 are also necessary to meet the

TFA’s requirement under section 6104(b)

that the Secretary must make available to

the public in machine readable format any

annual return to be filed electronically under section 6033(n). See section 4 of this

notice for the timing implications of these

modifications.

Currently, under § 53.6011-1(c) a disqualified person may designate the private

foundation’s Form 4720 as the disqualified person’s return for purposes of complying with the filing requirement under §

53.6011-1(b), provided all persons share

January 11, 2021

the same taxable year. The current regulation assumes the ability of multiple

taxpayers to sign the same paper copy of

Form 4720. However, that flexibility no

longer exists for private foundations and

their disqualified persons because section 6033(n) requires private foundations

to file Forms 4720 electronically and the

IRS system allows for only one taxpayer

per return. Thus, the TFA has rendered

§ 53.6011-1(c), allowing for joint Form

4720 submissions, no longer applicable to private foundations once the Form

4720 is required to be electronically filed

by private foundations. Accordingly, the

Treasury Department and the IRS intend

to propose the removal of § 53.6011-1(c)

in a future notice of proposed rulemaking.

SECTION 4. DELAY OF

APPLICATION OF ELECTRONIC

FILING MANDATE FOR FORMS 4720

The IRS expects that a modified paper

version of the Form 4720 will be available

for use at the beginning of 2021. Under

the authority granted to the Secretary in

section 3101(d)(2) of the TFA, private

foundations may continue to file the paper

version of the Form 4720 until electronic

filing of Form 4720 is available and the

IRS announces that electronic filing of the

Form 4720 is required (expected to be in

early 2021). Once electronic filing is required, any Forms 4720 filed by private

foundations after such date must be filed

electronically in accordance with the instructions to Form 4720 prescribed by the

IRS.

SECTION 5. EFFECTIVE DATE

This notice is effective on January 11,

2021, the publication date of IRB 2021-2.

SECTION 6. DRAFTING

INFORMATION

The principal author of this notice is

William Riker of the Office of Associate

Chief Counsel (Employee Benefits, Exempt Organizations, and Employment

Taxes). For further information regarding

this notice, please contact William Riker

at (202) 317-5800 or Dave Rifkin at (202)

317-4541 (not toll-free numbers).

316

Extension of Temporary

Relief from the Physical

Presence Requirement for

Spousal Consents Under

Qualified Retirement Plans

Notice 2021-03

I. PURPOSE

In response to the continuing public

health emergency caused by the Coronavirus Disease 2019 (COVID-19) pandemic, and the related social distancing that

has been implemented, this notice extends

from January 1, 2021, through June 30,

2021, the temporary relief provided in

Notice 2020-42, 2020-26 I.R.B. 986, from

the physical presence requirement in Treasury Regulation § 1.401(a)-21(d)(6) for

participant elections required to be witnessed by a plan representative or a notary

public, including spousal consent required

under § 417 of the Internal Revenue Code,

and solicits comments with respect to the

relief.

II. BACKGROUND

On March 13, 2020, the President determined that the COVID-19 pandemic

was of sufficient severity and magnitude

to warrant an emergency determination

under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42

U.S.C. 5121-5207. Providing alternative

procedures for notarization and consent

related to plan distributions that do not require physical presence is an appropriate

emergency protective measure during this

declared emergency period and is consistent with the physical distancing procedures implemented by the states.

Section 1.401(a)-21 sets forth standards for the use of an electronic medium

to provide applicable notices to recipients

or to make participant elections with respect to a retirement plan, an employee

benefit arrangement, or an individual

retirement plan. Section 1.401(a)-21(e)

(6) defines a participant election as any

consent, election, request, agreement, or

similar communication made by or from

a participant, beneficiary, alternate payee, or an individual entitled to benefits

Bulletin No. 2021–2

under a retirement plan, employee benefit arrangement, or individual retirement

plan. Section 1.401(a)-21(d) sets forth the

following conditions for participant elections:

(1) The individual must be effectively

able to access the electronic medium used

to make the participant election;

(2) The electronic system must be reasonably designed to preclude any person

other than the appropriate individual from

making the participant election;

(3) The electronic system must provide the individual making the participant

election with a reasonable opportunity to

review, confirm, modify, or rescind the

terms of the election before it becomes

effective; and

(4) The individual making the participant election, within a reasonable time,

must receive confirmation of the election

through either a written paper document

or an electronic medium under a system

that satisfies the applicable notice requirements under § 1.401(a)-21.

The participant election rules in

§ 1.401(a)-21(d) apply to plans that are

subject to the qualified joint and survivor (QJSA) requirements of § 417. Accordingly, for a plan subject to the QJSA

requirements, a participant’s consent to

a distribution may be provided through

the use of electronic media if the plan

complies with the standards described in

§ 1.401(a)-21(d), provided that the participant also obtains a valid spousal consent,

if applicable.

Section 417 requires spousal consent to

a waiver of a QJSA, which includes the

waiver of a QJSA as part of a request for

a plan distribution or a plan loan. Section

417 further requires that the spousal consent be witnessed by a plan representative

or a notary public. Section 1.401(a)-21(d)

(6)(i) provides that, in the case of a participant election that is required to be

witnessed by a plan representative or a

notary public (such as a spousal consent

to a waiver of a QJSA under § 417), the

signature of the individual making the

participant election must be witnessed in

the physical presence of a plan representative or a notary public. Section 1.401(a)-

21(d)(6)(ii) provides that, if the signature

is witnessed in the physical presence of a

notary public, an electronic signature acknowledging the signature (in accordance

with section 101(g) of the Electronic Signatures in Global and National Commerce

Act, Pub. L. 106-229, 114 Stat. 464 (2000)

(E-SIGN),1 and applicable state law for

notaries public) will not be denied legal

effect.

Section 1.401(a)-21(d)(6)(iii) provides

that the Commissioner may provide in

guidance published in the Internal Revenue Bulletin that the use of procedures

under an electronic system is deemed to

satisfy the physical presence requirement,

but only if those procedures with respect

to the electronic system provide the same

safeguards for participant elections as are

provided through the physical presence

requirement.

Section 1.401(a)-21(d) permits electronic notarization of participant elections. However, the physical presence

requirement in § 1.401(a)-21(d)(6) would

preclude the use of remote notarizations

of participant elections, including spousal

consents.

Remote electronic notarizations differ

from electronic notarizations in that remote electronic notarizations generally are

conducted remotely over the internet using digital tools and live audio-video technologies, whereas electronic notarizations

can be signed electronically but still require that certain signatures be witnessed

in the physical presence of a notary public

or plan representative. The Department of

the Treasury (Treasury Department) and

the Internal Revenue Service (IRS) received several requests from stakeholders

to permit remote electronic notarization of

spousal consents for plan loans and distributions during the COVID-19 pandemic.

These stakeholders stated that due to the

social distancing measures with respect

to the COVID-19 pandemic, the physical

presence requirement in § 1.401(a)-21(d)

(6) makes it difficult, if not impossible, for

a participant to receive a plan distribution

or plan loan (or for a qualified individual

to receive a coronavirus-related distribution or plan loan) for which spousal con-

sent is required. While recognizing the

need for relief, other stakeholders requested that any relief take into account spousal

protections, including limiting the relief

solely to the physical presence requirement and making the relief temporary.

Notice 2020-42 provides temporary

relief from the physical presence requirement in § 1.401(a)-21(d)(6) for any participant election witnessed by a notary public of a state that permits remote electronic

notarization or by a plan representative, if

the requirements of section III of Notice

2020-42 are satisfied. The temporary relief provided in Notice 2020-42 covers

the period from January 1, 2020, through

December 31, 2020. The Treasury Department and the IRS have received requests

from stakeholders to make the relief provided in Notice 2020-42 permanent or,

at a minimum, to extend the temporary

relief period, in light of the continuing

public health emergency caused by the

COVID-19 pandemic.

III. GRANT OF RELIEF

For the period from January 1, 2021,

through June 30, 2021, this notice extends

the temporary relief provided in Notice

2020-42 from the physical presence requirement in § 1.401(a)-21(d)(6), if the

related requirements in subsection A or B

of this section III are satisfied. In particular, this notice extends the following two

types of temporary relief (under terms that

are identical to the temporary relief provided in Notice 2020-42):

(1) temporary relief from the physical

presence requirement for any participant

election witnessed by a notary public of a

state that permits remote electronic notarization, and

(2) temporary relief from the physical

presence requirement for any participant

election witnessed by a plan representative.

During this temporary relief period, a

participant is still able to have a participant election witnessed in the physical

presence of a notary public and have that

participant election be accepted by a plan

in accordance with § 1.401(a)-21(d)(6)(i).

Section 101(g) of E-SIGN provides that “[i]f a statute, regulation, or other rule of law requires a signature or record relating to a transaction in or affecting interstate or foreign commerce

to be notarized, acknowledged, verified, or made under oath, that requirement is satisfied if the electronic signature of the person authorized to perform those acts, together with all other

information required to be included by other applicable statute, regulation, or rule of law, is attached to or logically associated with the signature or record.”

1

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317

January 11, 2021

A. Temporary Relief from the Physical

Presence Requirement for any

Participant Election Witnessed by a

Notary Public

In the case of a participant election witnessed by a notary public, for the period

from January 1, 2021, through June 30,

2021, the physical presence requirement

in § 1.401(a)-21(d)(6) is deemed satisfied

for an electronic system that uses remote

notarization if executed via live audio-video technology that otherwise satisfies the

requirements of participant elections under § 1.401(a)-21(d)(6) and is consistent

with state law requirements that apply to

the notary public.

B. Temporary Relief from the Physical

Presence Requirement for any

Participant Election Witnessed by a

Plan Representative

In the case of a participant election

witnessed by a plan representative, for the

period from January 1, 2021, through June

30, 2021, the physical presence requirement in § 1.401(a)-21(d)(6) is deemed

satisfied for an electronic system if the

electronic system using live audio-video

technology satisfies the following requirements:

(1) The individual signing the participant election must present a valid photo

ID to the plan representative during the

live audio-video conference, and may not

merely transmit a copy of the photo ID

prior to or after the witnessing;

(2) The live audio-video conference

must allow for direct interaction between

the individual and the plan representative

(for example, a pre-recorded video of the

person signing is not sufficient);

(3) The individual must transmit by fax

or electronic means a legible copy of the

signed document directly to the plan representative on the same date it was signed; and

(4) After receiving the signed document, the plan representative must acknowledge that the signature has been

witnessed by the plan representative in

accordance with the requirements of this

notice and transmit the signed document,

including the acknowledgement, back to

the individual under a system that satisfies

the applicable notice requirements under

§ 1.401(a)-21(c).

January 11, 2021

IV. PAPERWORK REDUCTION ACT

The collection of information contained in this notice has been reviewed

and approved by the Office of Management and Budget in accordance with the

Paperwork Reduction Act (44 U.S.C.

3507) under control number 1545–1632.

An agency may not conduct or sponsor,

and a person is not required to respond

to, a collection of information unless the

collection of information displays a valid

OMB control number.

The collection of information is in

section III.B of this notice. One of the

conditions for receiving temporary relief

from the physical presence requirement

in § 1.401(a)-21(d) is that the plan representative acknowledge that he or she

has witnessed the signature and transmit

the signed document, including the acknowledgement, back to the person under a system that satisfies the applicable

notice requirements under § 1.401(a)-21.

This condition is similar to the confirmation requirement for participant elections

in § 1.401(a)-21(d), requiring that the

individual making a participant election,

within a reasonable time, receive a confirmation of the election through either a

written paper document or an electronic medium under a

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