SECTION 6. LIMITATIONS AND

SPECIAL RULES

.01 In general . The federal per diem rate and the federal M&IE rate described in section 3.02 of this revenue procedure for the locality of travel will be applied in the same manner as applied under the Federal Travel Regulations, 41 C.F.R. Part 301–11 (2006), except as provided in sections 6.02 through 6.04 of this revenue procedure.

.02 Federal per diem rate . A receipt for lodging expenses is not required in determining the amount of expenses deemed substantiated under section 4.01 or 5.01 of this revenue procedure. See section 7.01 of this revenue procedure for the requirement that the employee substantiate the time, place, and business purpose of the expense.

.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. 2005–67 (changes listed by key cities).

(1) The following localities have been added to the list of high-cost localities: Santa Barbara, California; South Lake Tahoe, California; Fort Lauderdale, Florida; Fort Walton Beach/DeFuniak Springs, Florida; and Stuart, Florida.

(2) The portion of the year for which the following are high-cost localities has been changed: Aspen, Colorado; Miami, Florida; Chicago, Illinois; Cambridge/St. Michaels, Maryland; Nantucket, Massachusetts; and Jamestown/Middletown/Newport, Rhode Island.

(3) The following localities have been removed from the list of high-cost localities: Napa, California; San Diego, California; Silverthorne/Breckenridge, Colorado; Bar Harbor, Maine; Conway, New Hampshire; Cape May/Ocean City, New Jersey; Riverhead/Ronkonkoma/Melville/Smithtown/Huntington Station/Amagansett/ East Hampton/Montauk/Southampton/ Islandia/Commack/Medford/Stony Brook/ Hauppauge/Centereach, New York; and Tarrytown/White Plains/New Rochelle/Yonkers, New York.

(4) The following localities have been redefined: Baltimore no longer includes Baltimore County; Manhattan, New York

no longer includes Queens; and Washington, D.C. no longer includes Loudoun County, Virginia.

.05 Specific limitation . (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 meal and incidental expenses only per diem substantiation 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. 2005–67 for an employee during the first 9 months of calendar year 2006 may not use the high-low substantiation method in section 5 of this revenue procedure for that employee until January 1, 2007. A payor who used the high-low substantiation method of section 5 of Rev. Proc. 2005–67 for an employee during the first 9 months of calendar year 2006 must

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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 those 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.

.07 Related parties . Sections 4.01 and 5 of this revenue procedure do not apply if a payor and an employee are related within the meaning of § 267(b), but for this purpose the percentage of ownership interest referred to in § 267(b)(2) is 10 percent.