Monday, November 21, 2011

IRS Updates North American Area for Deducting Convention Expenses

The IRS has updated the "North American area" for purposes of the Code Sec. 274(h) limitation on deducting convention expenses (Rev. Rul. 2011-26, 2011-48 IRB). The latest update includes the Republic of Panama within the North American area and transition relief for the Caribbean island nation of St. Lucia.

The North American area designation impacts the deductibility of convention expenses. A taxpayer may deduct expenses incurred in attending a foreign convention, seminar or similar meeting held outside of the North American area only if it is directly related to the active conduct of the taxpayer's trade or business and if it is as reasonable to be held outside the North American area as within the North American area.

Code Sec. 274(h)(3)(A) defines the term North American area as the United States, its possessions, the Trust Territory of the Pacific Islands, Canada, and Mexico. The United States consists of the 50 states and the District of Columbia. The IRS treats the following as the possessions of the United States for this purpose: American Samoa, Baker Island, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands, Palmyra Atoll, the U. S. Virgin Islands, Wake Island, and other U. S. islands, cays, and reefs not part of the 50 states or the District of Columbia.

The Trust Territory of the Pacific Islands is no longer in existence. In its place are the Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau, which are covered by the compacts with the United States.

The North American area also includes any beneficiary country of the Caribbean Basin Economic Recovery Act and Bermuda. A bilateral or multilateral agreement relating to the exchange of information must be in effect between such country and the United States at the time the meeting begins for one of these countries to be considered part of the North American area. The IRS also must determine that the tax laws of the country do not discriminate against conventions held in the United States.

In 2011, the United States entered into a tax information exchange agreement with Panama that satisfies Code Sec. 274(h). Therefore, the IRS determined that Panama is a beneficiary country for purposes of the North American area.

Three other locations, the Cayman Islands, the British Virgin Islands, and Saint Lucia, have entered into tax information exchange agreements with the United States. However, certain limitations in the scope or implementation of those agreements preclude these countries from being part of the North American area, the IRS explained.

St. Lucia, however, qualifies for transition relief. The IRS will treat Saint Lucia as not included in the North American area under Code Sec. 274(h)(6) with respect to conventions that begin after April 4, 2007, except with respect to expenses for which the taxpayer demonstrates a non-refundable contractual obligation existing as of April 4, 2007.

Reference: PTE §9,540

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