SECTION 5. HIGH-LOW

SUBSTANTIATION METHOD

.01 General rule. If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home and the payor uses the high-low substantiation method described in this section 5 for travel within CONUS, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for such day or the

amount computed at the rate set forth in section 5.02 of this revenue procedure for the locality of travel for such day (or partial day, see section 6.04 of this revenue procedure). Except as provided in section 5.06 of this revenue procedure, this highlow substantiation method may be used in lieu of the per diem substantiation method provided in section 4.01 of this revenue procedure, but may not be used in lieu of the meals only substantiation method provided in section 4.02 or 4.03 of this revenue procedure.

.02 Specific high-low rates. Except as provided in section 5.06 of this revenue procedure, the per diem rate set forth in this section 5.02 is $204 for travel to any “highcost locality” specified in section 5.03 of this revenue procedure, or $125 for travel

Key City County or other defined location

California

Napa Napa (April 1–November 15) Palm Springs Riverside (January 1–May 31) San Francisco San Francisco San Mateo/Redwood City San Mateo Santa Monica City limits of Santa Monica (June 1–September 30) Sunnyvale/Palo Alto/San Jose Santa Clara Tahoe City Placer

Colorado

Aspen Pitkin (January 1–April 30) Silverthorne/Keystone Summit Telluride San Miguel (December 20–September 30) Vail Eagle (December 1–March 31)

District of Columbia

District of Columbia Washington, D.C. (also the cities of Alexandria, Fairfax, and Falls

Washington, D.C. Church, and the counties of Arlington, Fairfax, and Loudoun,

in Virginia; and the counties of Montgomery and Prince George’s in Maryland) Florida

Washington, D.C.

Key West Monroe (January 1–April 30)

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Key City County or other defined location Idaho

Sun Valley City limits of Sun Valley

Illinois

Chicago Cook and Lake

Louisiana

New Orleans/St. Bernard Orleans, St. Bernard (January 1–May 31) Plaquemine, and Jefferson Parishes

Maine

Kennebunk/Kittery/Sanford York (June 15–October 31)

Maryland

(For the counties of Montgomery and Prince George’s, see

District of Columbia) Baltimore Baltimore Ocean City Worcester (June 15–October 31)

Massachusetts

Boston Suffolk Cambridge Middlesex (except Lowell) Martha’s Vineyard Dukes (June 1–October 15) Nantucket Nantucket (June 15–October 15)

Michigan

Mackinac Island Mackinac Traverse City Grand Traverse

Montana

Big Sky Gallatin (except West Yellowstone)

Nevada

Stateline Douglas

New Jersey

Atlantic City Atlantic (June 1–November 30) Cape May Cape May (except Ocean City) (June 1–November 30) Edison Middlesex (except Piscataway) Newark Essex, Bergen, Hudson and Passaic Ocean City City limits of Ocean City (June 15–September 15) Piscataway/Belle Mead Somerset; and the city limits of Piscataway

2002–41 I.R.B. 696 October 15, 2002

Key City County or other defined location

Princeton/Trenton Mercer

New York

The Bronx/Brooklyn/Queens The boroughs of The Bronx, Brooklyn, and Queens Manhattan The borough of Manhattan Nassau County/Great Neck Nassau Staten Island Richmond Suffolk County Suffolk White Plains City limits of White Plains

Pennsylvania

Hershey City limits of Hershey (June 1–September 15) King of Prussia/Ft. Washington/Bala Cynwyd Montgomery (April 1–November 30) Philadelphia Philadelphia

Utah

Ogden/Layton/Davis County Weber and Davis (January 15–February 28) Park City Summit (December 15–March 31) Provo Utah (January 15–February 28) Salt lake City Salt Lake, Dugway Proving Ground, and Tooele Army Depot (January 15–February 28)

Virginia

(For the cities of Alexandria, Fairfax, and Falls Church, and the counties of Arlington, Fairfax, and Loudoun, see District of Columbia) Wintergreen Nelson Washington

Seattle King

.04 Changes in high-cost localities. The list of high-cost localities in section 5.03 of this revenue procedure differs from the list of high-cost localities in section 5.03 of Rev. Proc. 2001–47.

(1) The following localities (listed by key cities) have been added to the list of high-cost localities: Santa Monica, California; Baltimore, Maryland; Staten Island, New York; King of Prussia/Ft. Washington/Bala Cynwyd, Pennsylvania; Philadelphia, Pennsylvania; and Seattle, Washington.

(2) The portion of the year for which the following is a high-cost locality (listed by key city) has been changed: Ogden/ Layton/Davis County, Utah.

(3) The following locality has been removed from the list of high-cost localities: Palm Beach, Florida.

(1) Except as provided in section 5.05(2) of this revenue procedure, a payor that uses the high-low substantiation method with respect to an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. See section 5.06 of this revenue procedure for transition rules.

(2) With respect to an employee described in section 5.05(1) of this revenue procedure, the payor may reimburse actual expenses or use the meals only per

.05 Specific limitation.

diem method described in section 4.02 of this revenue procedure for any travel away from home, and may use the per diem substantiation method described in section 4.01 of this revenue procedure for any OCONUS travel away from home.

.06 Transition rules. A payor who used the substantiation method of section 4.01 of Rev. Proc. 2001–47 for an employee during the first 9 months of calendar year 2002 may not use the High-Low Substantiation Method in section 5 of this revenue procedure for that employee until January 1, 2003. A payor who used the High-Low Substantiation Method of section 5 of Rev. Proc. 2001–47 for an employee during the first 9 months of calendar year 2002 must

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employee is away from home as an expense for food and beverages. For purposes of the preceding sentence, when a per diem allowance for lodging, meal, and incidental expenses is paid at a rate that is less than the federal per diem rate for the locality of travel for such day (or partial day), the payor may treat an amount equal to 40 percent of such allowance as the federal M&IE rate for the locality of travel for such day (or partial day).

(4) When an amount for incidental expenses is computed under section 4.05 of this revenue procedure, none of the amount so computed is subject to limitation under § 274(n) on the deductibility of food and beverage expenses.

.06 No double reimbursement or deduc- tion. If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal, and incidental expenses or for meal and incidental expenses in accordance with section 4 or 5 of this revenue procedure, any additional payment with respect to such expenses is treated as paid under a nonaccountable plan, is included in the employee’s gross income, is reported as wages or other compensation on the employee’s Form W–2, and is subject to withholding and payment of employment taxes. Similarly, if an employee or self-employed individual computes the amount allowable as a deduction for meal and incidental expenses for travel away from home in accordance with section 4.03 or 4.04 of this revenue procedure, no other deduction is allowed to the employee or self-employed individual with respect to such expenses. For example, assume an employee receives a per diem allowance from a payor for lodging, meal, and incidental expenses or for meal and incidental expenses incurred while traveling away from home. During that trip, the employee pays for dinner for the employee and two business associates. The payor reimburses as a business entertainment meal expense the meal expense for the employee and the two business associates. Because the payor also pays a per diem allowance to cover the cost of the employee’s meals, the amount paid by the payor for the employee’s portion of the business entertainment meal expense is treated as paid under a nonaccountable plan, is reported as wages or other compensation on the employee’s Form W–2, and is subject to withholding and payment of employment taxes.

continue to use the High-Low Substantiation Method for the remainder of calendar year 2002 for that employee. A payor described in the previous sentence may use the rates and high-cost localities published in section 5 of Rev. Proc. 2001–47, in lieu of the updated rates and high-cost localities provided in section 5 of this revenue procedure, for travel on or after October 1, 2002, and before January 1, 2003, if those rates and localities are used consistently during this period for all employees reimbursed under this method.