SECTION 2. BACKGROUND

.01 Section 162(a) of the Internal Revenue Code allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses (including amounts expended for meals and lodging) while away from home in pursuit of a trade or business.

.02 Section 1.62–2(c)(2) provides that reimbursements by an employer to an employee for business expenses paid or incurred by the employee are paid under an “accountable plan” if the reimbursement arrangement meets the requirements of business purpose, substantiation, and returning amounts in excess of expenses. Amounts failing to meet these requirements are treated as paid under a nonaccountable plan. Section 1.62–2(c)(3).

.03 Amounts treated as paid under an accountable plan are excluded from the e m p l o y e e ’s gross income, are not reported as wages or other compensation on the employee’s Form W–2, and are exempt from the withholding and payment of employment taxes. Section 1.62–2(c)(4). Conversely, amounts treated as paid under a nonaccountable plan are included in the employee’s gross income, must be reported as wages or other compensation on the employee’s Form W–2, and are subject to the withholding and payment of employment taxes. Section 1.62–2(c)(5).

.04 An employee may satisfy the substantiation requirement of a § 1.62–2(c)(2) accountable plan by substantiating the expenses to the employer in accordance with § 274(d) and the regulations thereunder. Section 1.62–2(e)(2).

.05 Section 274(d) disallows a deduction under § 162 for any travel (including meals and lodging), entertainment, gift, or listed property expense, unless the taxpayer substantiates the elements of the expense by adequate records or by sufficient evidence.

.06 Under § 1.274–5T(c)(2), a taxpayer must maintain two types of records to satisfy the “adequate records” requirement: (1) a summary of expenses (account book, d i a r y, log, statement of expense, trip sheets, or similar record) made at or near the time the expenses are incurred (as provided in § 1.274–5T(c)(2)(ii)), and (2) documentary evidence (such as receipts, paid bills, or similar evidence as provided in § 1.274–5T(c)(2)(iii)). Section 1.274–5T(c)(2)(iii) generally requires that a taxpayer have documentary evidence to substantiate (A) any expenditure for lodging, and (B) any other expenditure of $75 or more ($25 or more for expenses paid or incurred before October 1, 1995). Tog e t h e r, these records must establish the elements of amount, time, place, and business purpose (and, for gifts and entertainment, business relationship of the recipient or persons entertained) for each expenditure or use. Section 1.274–5T(b).

.07 Section 1.274–5T(f)(4)(i) requires an employee substantiating expenses (or making an “adequate accounting” of expenses) to the employer to submit to the employer records that satisfy the “adequate records” requirements of § 1.274–5T(c)(2). Howe v e r, § 1.274–5T(f)(4)(ii) provides that the Commissioner may prescribe rules under which an employee may make an adequate accounting to the employer by submitting an account book, diary, log, etc., alone, without submitting documentary evidence.