SECTION 2. BACKGROUND AND

CHANGES

.01 Section 162(a) allows a deduction for the ordinary and necessary expenses a taxpayer pays or incurs during the taxable year in carrying on any trade or business, including the cost of operating an automobile to the extent that it is used in a trade or business.

.02 Under § 262, a taxpayer may not deduct any portion of the cost of operating an automobile attributable to personal use.

.03 To deduct expenses for travel or listed property, a taxpayer must substantiate the expenses under § 274(d). Section 280F(d)(4) provides that listed property includes passenger automobiles and any other property used as a means of transportation.

.04 Section 1.274–5(g) and (j) authorizes the Commissioner to prescribe rules and establish methods under which mileage rates and allowances that comply with reasonable business practice are treated as (1) equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of transportation expenses for purposes of § 1.274–5(c), and (2) satisfying the requirements of an adequate accounting to the employer of the amount of the expenses for purposes of § 1.274–5(f).

.05 For purposes of determining adjusted gross income, § 62(a)(2)(A) allows an employee to deduct business expenses the employee pays or incurs in performing services as an employee under a reimbursement or other expense allowance arrangement with a payor.

.06 Section 62(c) provides that an arrangement is not treated as a reimbursement or other expense allowance arrangement for purposes of § 62(a)(2)(A) if it—

(1) Does not require the employee to substantiate the expenses covered under the arrangement to the payor, or

(2) Allows the employee to retain any amount in excess of the substantiated expenses covered under the arrangement.

.07 Section 62(c) further provides, however, that substantiation is not required for the expense to the extent provided in regulations under § 274(d).

.08 Under § 1.62–2(c), a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c) if it meets the requirements of business