Brian Galle (Georgetown), The IRS Boozily Resurrects the 3-Martini Lunch:
IRS and Treasury have recently been so overwhelmed by the volume of regulation needed to implement the 2017 tax legislation that it’s easy to understand if they just really need a drink. It’s still surprising, though, that one piece of their recent implementing guidance seems to bring back the days of Mad Men’s boozy lunches. In its recent Notice 2018–76, IRS seems to have proclaimed that business meals and beverages are now deductible to an extent we haven’t seen since 1962. They’ve had one martini too many: the Notice totally misreads the 2017 legislation.
Okay, if you haven’t taught or taken a Federal Income Tax class recently, you may need a reminder that for 50 years or so business meals have mostly not been deductible. Until the 2017 changes (herein SCTCJA, or so-called Tax Cut & Jobs Act), in order to “write off” your meal or other business “entertainment,” you had to conduct a concrete business transaction during or right before or after (unless you were traveling for work). While this was hardly an impossible standard to fake, it was a real speed bump, because genuine concrete transactions generate real documentation that can be audited.
SCTCJA deleted all of this language and replaced it with the phrase “no deduction shall be allowed for…activity which is of a type generally considered to constitute entertainment.” They left in place several pre-existing exceptions, including a provision that further bans deductions for meals that are “lavish or extravagant.”
Bizarrely, the new Notice reads this language as greatly expanding the kinds of business meals that can be deducted. Pointing to one sentence in the legislative history, the Notice declares that meals are still deductible. Indeed, meals now can be deducted any time they are shared with a “current or potential business customer, client, consultant, or similar business contact.”
It’s a standard that allows essentially anything to be deducted. “Hey, Chuck, let’s pretend that you might buy a tractor from me some day, ok? Great, now I can deduct these beers.”
But there is an enormous problem with the IRS’s reading of the legislative history. ... [I]n my view the Notice should be withdrawn, and hastily.