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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual collections.
Collection: Executive Clerk, Office of the: Records
Folder Title: 05/24/1985 H.R. 1869
[Amendment of Certain Taxpayer
Recordkeeping Requirements]
Box: 58
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https://www.reaganlibrary.gov/archives/digitized-textual-material
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\
THE WHITE HOUSE
WASHINGTON
May 24, 1985
MR. PRESIDENT:
Attached for your approval is
H.R. 1869 - Amendment of Certain
Taxpayer Recordkeeping Requirements.
This Bill has the approval of OMB,
Treasury, and the Office of Policy
Development, Legislative Affairs,
and Cabinet Affairs. Counsel's
Office has no objection.
David L. Chew
Please note: You are scheduled to
sign this Bill today in ceremony.
Legislative Affairs has requested
two signing pens. They are attached
for your convenience.
HR1869
Hold -
Signing Ceremony
requested 5/20/85
by Jeg. affers.
ses
15/ 5/24/85
OF
RESIDENT
The President has seen
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
Received SS
WASHINGTON, D.C. 20503
CEREMONY APPR MEMORANDUM - ICENED 1:00 2 OVAL $ 1985 PM OFFICE FOR
5/24/85
1985 MAY 22 PM 3: 00
ARCHIVES
MAY 22 1985
THE PRESIDENT
Subject: Enrolled Bill H.R. 1869 - Amendment of Certain Taxpayer
Recordkeeping Requirements
Sponsors - Rep. Rostenkowski (D) Illinois and 20 others
Last Day for Action
May 31, 1985 - Friday
Purpose
To amend the Internal Revenue Code concerning recordkeeping
requirements for business use of motor vehicles and certain other
property.
Agency Recommendations
Office of Management and Budget
Approval
Department of the Treasury
Approval
Discussion
-- Background
Until 1984, the Internal Revenue Code permitted a taxpayer to
deduct expenses incurred in the business use of an automobile
only to the extent that he or she could establish the nature and
extent of the business use. For travel away from home, adequate
records or sufficient evidence corroborating the taxpayer's own
statement was required. For local travel, the taxpayer had the
burden of demonstrating, whether through records or otherwise,
that the use of the automobile did, in fact, have a business
purpose.
In spite of the rules regarding substantiation of business
expenses in connection with the use of motor vehicles, taxpayer
compliance was spotty, at best; overstated deductions for
business use of automobiles were common. In 1979, the latest
year for which data are available, the Internal Revenue Service
(IRS) estimates that about one-half of the 11.3 million taxpayers
who claimed deductions for business use of automobiles received
more than $3 billion in excess tax benefits (i.e., tax benefits
for which they did not qualify).
2
Congress addressed the substantiation problem in the Tax Reform
Act of 1984, which was enacted as part of the Deficit Reduction
Act of 1984, Public Law 98-369. The Internal Revenue Code was
amended, effective January 1, 1985, to require taxpayers to
substantiate business use of automobiles and certain other
property (i.e., home computers) by "adequate contemporaneous
records." The report of the conference committee on the Tax
Reform Act of 1984 indicated that these records would "reflect
with substantial accuracy the business use of the property," and
that, with respect to automobiles, "logs recording the date of
the trip and the mileage driven for business purposes must be
kept."
In October 1984, the IRS promulgated proposed regulations to
implement the new substantiation requirements. Revised proposed
regulations were issued in February 1985.
-- Description of the Enrolled Bill
The enrolled bill, which passed the House by a vote of 412-1 and
the Senate by voice vote, responds to concerns of many taxpayers
that the substantiation requirements of the Tax Reform Act of
1984 and the IRS regulations implementing them are unduly burden-
some and onerous. Key provisions of the enrolled bill are
highlighted below.
o Repeal of Contemporaneous Recordkeeping Requirement. The
enrolled bill repeals the contemporaneous recordkeeping
requirement of the Tax Reform Act of 1984 and reinstates the
requirement of prior law that any deduction must be supported
by "adequate records or sufficient evidence corroborating
the taxpayer's own statement." The conference report rejected
a provision contained in the original House bill that would
have required that any corroborating evidence be in writing.
The conferees emphasized, however, that they recognize that
different kinds of evidence have different probative value. In
particular, the conference report states that oral evidence is
of considerably less usefulness in substantiating a deduction
than written records and urges the Internal Revenue Service and
the courts to discount or reject evidence of limited or no
probative value. To ensure greater compliance, the conferees
want the IRS to issue appropriate forms or schedules for
taxpayers to use in substantiating deductions. The
substantiation requirements do not apply to certain vehicles
(e.g., school buses) that by their nature receive little
personal use.
o Repeal of Provisions Concerning Return Preparers and Negligence
Penalty. Under the Tax Reform Act of 1984, tax return
preparers must advise taxpayers of the requirements for
substantiating deductions for business use of automobiles and
obtain written confirmation that the pertinent requirements
3
have been met. H.R. 1869 repeals this requirement. The Tax
Reform Act also imposed a special no-fault negligence penalty
applicable to any understatement of tax resulting from failure
to comply with the substantiation requirements. The enrolled
bill repeals this provision as well.
o Withholding Election for Personal Use of Employer-Provided
Vehicle. Under authority extended to it by the 1984 Act,
Treasury has issued regulations requiring the withholding of
income and employment taxes with respect to taxable noncash
fringe benefits, including an employee's personal use of a
vehicle provided by his or her employer. The enrolled bill
permits an employer to elect not to withhold taxes on the value
of any vehicle fringe benefit provided to an employee; however,
an employer so electing must report the value of the fringe
benefit on the employee's W-2 form.
o Reduction in Limitations on Investment Tax Credit and
Depreciation for Luxury Automobiles. Current law limits the
investment tax credit that is available for automobiles to
$1,000. Depreciation is limited to $4,000 for the year an
automobile is placed in service and $6,000 for subsequent
years. For years after 1984, these amounts are to be adjusted
annually for inflation. To offset the revenue losses that will
result from repeal of the contemporaneous record requirement,
the enrolled bill reduces the existing limitations on the
investment tax credit and depreciation for automobiles. In
particular, the bill limits the investment tax credit to $675
and reduces allowable depreciation to $3,200 for the first
taxable year and $4,800 for each subsequent year. Indexing for
inflation is delayed for four years, until 1989.
-- Revenue Effects
Congressional Budget Office Estimates of Revenue
Effects of H.R. 1869
Changes in Substantiation and
Withholding Requirements, 1985-1990
$885 million
Reduction in Investment Tax
Credit and Depreciation, 1985-1990
+$1,005 million
Total
$120 million
James Legislative m. Director Reference Trey for
Enclosures
Document No.
Received SS
1985 MAY 23 PM
WHITE HOUSE STAFFING MEMORANDUM
5/22/85
9:00 A.M. TOMORROW 5/23
DATE:
ACTION/CONCURRENCE/COMMENT DUE BY:
H.R. 1869 - AMENDMENT OF CERTAIN TAXPAYER RECORDKEEPING
SUBJECT:
REQUIREMENTS
ACTION FYI
ACTION FYI
VICE PRESIDENT
LACY
REGAN
McFARLANE
STOCKMAN
OGLESBY
ok
BUCHANAN
ROLLINS
CHAVEZ
RYAN
CHEW
P
SPEAKES
DANIELS
SPRINKEL
FIELDING
SVAHN
FRIEDERSDORF
TUTTLE
HENKEL
HICKEY
HICKS
KINGON
REMARKS:
Please provide any comments/recommendations by 9:00 a.m. tomorrow,
May 23rd. Thank you.
RESPONSE:
David L. Chew
Staff Secretary
Ext. 2702
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF management AND BUDGET
THE
Received SS
WASHINGTON, D.C. 20503
1085 MAY 22 PH 3: 00
MAY 22 1985
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 1869 - Amendment of Certain Taxpayer
Recordkeeping Requirements
Sponsors - Rep. Rostenkowski (D) Illinois and 20 others
Last Day for Action
May 31, 1985 - Friday
Purpose
To amend the Internal Revenue Code concerning recordkeeping
requirements for business use of motor vehicles and certain other
property.
Agency Recommendations
Office of Management and Budget
Approval
Department of the Treasury
Approval
Discussion
-- Background
Until 1984, the Internal Revenue Code permitted a taxpayer to
deduct expenses incurred in the business use of an automobile
only to the extent that he or she could establish the nature and
extent of the business use. For travel away from home, adequate
records or sufficient evidence corroborating the taxpayer's own
statement was required. For local travel, the taxpayer had the
burden of demonstrating, whether through records or otherwise,
that the use of the automobile did, in fact, have a business
purpose.
In spite of the rules regarding substantiation of business
expenses in connection with the use of motor vehicles, taxpayer
compliance was spotty, at best; overstated deductions for
business use of automobiles were common. In 1979, the latest
year for which data are available, the Internal Revenue Service
(IRS) estimates that about one-half of the 11.3 million taxpayers
who claimed deductions for business use of automobiles received
more than $3 billion in excess tax benefits (i.e., tax benefits
for which they did not qualify).
2
Congress addressed the substantiation problem in the Tax Reform
Act of 1984, which was enacted as part of the Deficit Reduction
Act of 1984, Public Law 98-369. The Internal Revenue Code was
amended, effective January 1, 1985, to require taxpayers to
substantiate business use of automobiles and certain other
property (i.e., home computers) by "adequate contemporaneous
records." The report of the conference committee on the Tax
Reform Act of 1984 indicated that these records would "reflect
with substantial accuracy the business use of the property," and
that, with respect to automobiles, "logs recording the date of
the trip and the mileage driven for business purposes must be
kept."
In October 1984, the IRS promulgated proposed regulations to
implement the new substantiation requirements. Revised proposed
regulations were issued in February 1985.
-- Description of the Enrolled Bill
The enrolled bill, which passed the House by a vote of 412-1 and
the Senate by voice vote, responds to concerns of many taxpayers
that the substantiation requirements of the Tax Reform Act of
1984 and the IRS regulations implementing them are unduly burden-
some and onerous. Key provisions of the enrolled bill are
highlighted below.
O Repeal of Contemporaneous Recordkeeping Requirement. The
enrolled bill repeals the contemporaneous recordkeeping
requirement of the Tax Reform Act of 1984 and reinstates the
requirement of prior law that any deduction must be supported
by "adequate records or ... sufficient evidence corroborating
the taxpayer's own statement." The conference report rejected
a provision contained in the original House bill that would
have required that any corroborating evidence be in writing.
The conferees emphasized, however, that they recognize that
different kinds of evidence have different probative value. In
particular, the conference report states that oral evidence is
of considerably less usefulness in substantiating a deduction
than written records and urges the Internal Revenue Service and
the courts to discount or reject evidence of limited or no
probative value. To ensure greater compliance, the conferees
want the IRS to issue appropriate forms or schedules for
taxpayers to use in substantiating deductions. The
substantiation requirements do not apply to certain vehicles
(e.g., school buses) that by their nature receive little
personal use.
Repeal of Provisions Concerning Return Preparers and Negligence
Penalty. Under the Tax Reform Act of 1984, tax return
preparers must advise taxapayers of the requirements for
substantiating deductions for business use of automobiles and
obtain written confirmation that the pertinent requirements
3
have been met. H.R. 1869 repeals this requirement. The Tax
Reform Act also imposed a special no-fault negligence penalty
applicable to any understatement of tax resulting from failure
to comply with the substantiation requirements. The enrolled
bill repeals this provision as well.
o Withholding Election for Personal Use of Employer-Provided
Vehicle. Under authority extended to it by the 1984 Act,
Treasury has issued regulations requiring the withholding of
income and employment taxes with respect to taxable noncash
fringe benefits, including an employee's personal use of a
vehicle provided by his or her employer. The enrolled bill
permits an employer to elect not to withhold taxes on the value
of any vehicle fringe benefit provided to an employee; however,
an employer so electing must report the value of the fringe
benefit on the employee's W-2 form.
o Reduction in Limitations on Investment Tax Credit and
Depreciation for Luxury Automobiles. Current law limits the
investment tax credit that is available for automobiles to
$1,000. Depreciation is limited to $4,000 for the year an
automobile is placed in service and $6,000 for subsequent
years. For years after 1984, these amounts are to be adjusted
annually for inflation. To offset the revenue losses that will
result from repeal of the contemporaneous record requirement,
the enrolled bill reduces the existing limitations on the
investment tax credit and depreciation for automobiles. In
particular, the bill limits the investment tax credit to $675
and reduces allowable depreciation to $3,200 for the first
taxable year and $4,800 for each subsequent year. Indexing for
inflation is delayed for four years, until 1989.
-- Revenue Effects
Congressional Budget Office Estimates of Revenue
Effects of H.R. 1869
Changes in Substantiation and
Withholding Requirements, 1985-1990
$885 million
Reduction in Investment Tax
Credit and Depreciation, 1985-1990
+$1,005 million
Total
$120 million
James Assistant Legislative m. Director Reference Trey for
Enclosures
5
Document No. 271544
5/23
WHITE HOUSE STAFFING MEMORAND
HOLD to see ifl
5/22/85
9
DATE:
ACTION/CONCURRENCE/COMMENT DUE BY:
Signing approved ceremony 23
H.R. 1869 - AMENDMENT OF CERTAIN TAXPAYER RECORDKEEPING
SUBJECT:
REQUIREMENTS
ACTION FYI
ACTION FYI
VICE PRESIDENT
LACY
REGAN
McFARLANE
STOCKMAN
OGLESBY approves
BUCHANAN
ROLLINS concur
CHAVEZ
RYAN
CHEW
P
SPEAKES
DANIELS
SPRINKEL
FIELDING no legal oly
SVAHN OK
FRIEDERSDORF approves
TUTTLE
HENKEL
HICKEY
HICKS
KINGON OK
REMARKS:
Please provide any comments/recommendations by 9:00 a.m. tomorrow,
May 23rd. Thank you.
RESPONSE:
LA- 2 signing pens
wants signing ceremony
David L. Chew
Staff Secretary
Ext. 2702
OF
THE TREASURY THE
THE GENERAL COUNSEL OF THE TREASURY
WASHINGTON, D.C. 20220
1789
MAY 22 1985
Director, Office of Management and Budget
Executive Office of the President
Washington, D.C. 20503
Attention: Assistant Director for Legislative Reference
Dear Sir:
This is in reply to your request for the views of the
Department of the Treasury concerning H.R. 1869, an enrolled bill
"To amend the Internal Revenue Code of 1954 to repeal the con-
temporaneous recordkeeping requirements added by the Tax Reform
Act of 1984, and for other purposes."
Section 1 of the bill repeals the requirement that a tax-
payer maintain "contemporaneous records" and instead requires
that "adequate records" or other "sufficient evidence" corrobora-
ting the taxpayer's statement be maintained to substantiate
certain deductions and credits. Section 2 exempts from the
substantiation requirements vehicles that are "not likely to be
used more than a de minimis amount for personal purposes."
Section 3 of the bill authorizes employers to elect not to
deduct and withhold taxes in the case of certain vehicle fringe
benefits, provided that employees are notified of the election as
provided by regulations issued by the Secretary of the Treasury
and that the amount of the benefit is reported to the Internal
Revenue Service. Section 4 changes the limitations on the
investment tax credit and depreciation for luxury automobiles.
The Department of the Treasury supports the enrolled bill.
The Department believes that the enrolled bill represents a con-
structive compromise between the Department's responsibility to
protect and collect the revenue and the obligation of taxpayers
to adequately substantiate deductions and credits.
Sincerely yours,
Mangery Waxman
Acting General Counsel
Document No.
Received SS
WHITE HOUSE STAFFING MEMORANDUM
1985 MAY 22
5/22/85
9:00 A.M. TOMORROW 5/23
DATE:
ACTION/CONCURRENCE/COMMENT DUE BY:
H.R. 1869 - AMENDMENT OF CERTAIN TAXPAYER RECORDKEEPING
SUBJECT:
REQUIREMENTS
ACTION FYI
ACTION FYI
VICE PRESIDENT
LACY
REGAN
McFARLANE
STOCKMAN
OGLESBY
BUCHANAN
ROLLINS
CHAVEZ
RYAN
CHEW
P
SPEAKES
DANIELS
SPRINKEL
FIELDING
SVAHN
FRIEDERSDORF
TUTTLE
HENKEL
HICKEY
HICKS
KINGON
REMARKS:
Please provide any comments/recommendations by 9:00 a.m. tomorrow,
May 23rd. Thank you.
RESPONSE: sent to Tom Gibsen
OKAK
David L. Chew
Staff Secretary
Ext. 2702
ID # 175411
CA
OFFICE OF CABINET AFFAIRS
ACTION TRACKING WORKSHEET
Action resulting from:
Document Date: 5 / 22 / 85
X
Document (attached)
Telephone call
From:
Executive Office of the
Meeting (attach conference
report if available)
President - OMB
Date Received: 5 / 22/ 85
SUBJECT: H.R. 1869 - Amendment of Certain Taxpayer
Recordkeeping Requirements
ACTION CODES:
A- Appropriate Action
D- Draft Response
R- Direct Reply w/Copy
B - Briefing Paper
F - Furnish Fact Sheet/Background
S- For Signature
C- Comment/Recommendation
1- Info Copy Only/No Action Necessary
X- Interim Reply
ROUTE TO:
Action
Date Sent
Name
Codes
Date Due
Action Taken
85 / 05 / 22
Tom Gibson
A
85 / 05 / 23
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
COMMENTS:
Please provide any comments/recommendations by 9:00 a.m.
tomorrow, May 23rd. Thank you.
ORIGINATOR:
Clarey
Finnegan
Gibson
X
Wenzel
Faoro
Herbolsheimer
Kingon
Keep this worksheet attached to the original incoming material and when the
assigned action is complete, return to:
OFFICE OF CABINET AFFAIRS
Attention: Adele Gonzalez (x2823), West Wing/Ground Floor
ID #
175411
CA
OFFICE OF CABINET AFFAIRS
ACTION TRACKING WORKSHEET
Action resulting from:
5
22
85
Document (attached)
Document Date:
/
/
Telephone call
Meeting (attach conference
From:
Executive Office of the
report if available)
President - OMB
Date Received: 5 / 22/ 85
SUBJECT:
H.R. 1869 - Amendment of Certain Taxpayer
Recordkeeping Requirements
ACTION CODES:
A - Appropriate Action
D - Draft Response
R - Direct Reply w/Copy
B - Briefing Paper
F - Furnish Fact Sheet/Background
$ For Signature
C- - Comment/Recommendation
I - Info Copy Only/No Action Necessary
x - Interim Reply
ROUTE TO:
Action
Date Sent
Name
Codes
Date Due
Action Taken
85/05/22
Tom Gibson
A
85/05/23
85/05/22
wonzel/AHK
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /
COMMENTS:
Please provide any comments recommendations by 9:00 a
The bill should be Signed. OMB: Tr. say yes.
tomorrow, May 23rd. Thank you.
The contemporaneous record keeping for business use of antos was targeted for
repeal my as multiple of groups. Passed on voice note in sevate, 412-1 in Hause
Net revenue increase (7100 m), because of changes in tax credit F depreciation
serv ssming dues Leg salepaps
Minor reg. re-right.
ORIGINATOR:
Clarey
Faoro
Finnegan
Gibson
Wenzel
Herbolsheimer
Kingon
Keep this worksheet attached to the original incoming material and when the
assigned action is complete, return to:
OFFICE OF CABINET AFFAIRS
Attention: Adele Gonzalez (x2823), West Wing/Ground Floor
EXECUTIVE OFFICE OF THE PRESIDENT
MISSOURI
OFFICE OF management AND BUDGET
Received SS
WASHINGTON, D.C. 20503
1085 MAY 22 py 3: 00
MAY 22 1985
MEMORANDUM FOR THE PRESIDENT
Subject: Enrolled Bill H.R. 1869 - Amendment of Certain Taxpayer
Recordkeeping Requirements
Sponsors - Rep. Rostenkowski (D) Illinois and 20 others
Last Day for Action
May 31, 1985 - Friday
Purpose
To amend the Internal Revenue Code concerning recordkeeping
requirements for business use of motor vehicles and certain other
property.
Agency Recommendations
Office of Management and Budget
Approval
Department of the Treasury
Approval
Discussion
-- Background
Until 1984, the Internal Revenue Code permitted a taxpayer to
deduct expenses incurred in the business use of an automobile
only to the extent that he or she could establish the nature and
extent of the business use. For travel away from home, adequate
records or sufficient evidence corroborating the taxpayer's own
statement was required. For local travel, the taxpayer had the
burden of demonstrating, whether through records or otherwise,
that the use of the automobile did, in fact, have a business
purpose.
In spite of the rules regarding substantiation of business
expenses in connection with the use of motor vehicles, taxpayer
compliance was spotty, at best; overstated deductions for
business use of automobiles were common. In 1979, the latest
year for which data are available, the Internal Revenue Service
(IRS) estimates that about one-half of the 11.3 million taxpayers
who claimed deductions for business use of automobiles received
more than $3 billion in excess tax benefits (i.e., tax benefits
for which they did not qualify).
2
Congress addressed the substantiation problem in the Tax Reform
Act of 1984, which was enacted as part of the Deficit Reduction
Act of 1984, Public Law 98-369. The Internal Revenue Code was
amended, effective January 1, 1985, to require taxpayers to
substantiate business use of automobiles and certain other
property (i.e., home computers) by "adequate contemporaneous
records." The report of the conference committee on the Tax
Reform Act of 1984 indicated that these records would "reflect
with substantial accuracy the business use of the property," and
that, with respect to automobiles, "logs recording the date of
the trip and the mileage driven for business purposes must be
kept."
In October 1984, the IRS promulgated proposed regulations to
implement the new substantiation requirements. Revised proposed
regulations were issued in February 1985.
-- Description of the Enrolled Bill
The enrolled bill, which passed the House by a vote of 412-1 and
the Senate by voice vote, responds to concerns of many taxpayers
that the substantiation requirements of the Tax Reform Act of
1984 and the IRS regulations implementing them are unduly burden-
some and onerous. Key provisions of the enrolled bill are
highlighted below.
o Repeal of Contemporaneous Recordkeeping Requirement. The
enrolled bill repeals the contemporaneous recordkeeping
requirement of the Tax Reform Act of 1984 and reinstates the
requirement of prior law that any deduction must be supported
by "adequate records or sufficient evidence corroborating
the taxpayer's own statement." The conference report rejected
a provision contained in the original House bill that would
have required that any corroborating evidence be in writing.
The conferees emphasized, however, that they recognize that
different kinds of evidence have different probative value. In
particular, the conference report states that oral evidence is
of considerably less usefulness in substantiating a deduction
Design
than written records and urges the Internal Revenue Service and
the courts to discount or reject evidence of limited or no
Forms
probative value. To ensure greater compliance, the conferees
want the IRS to issue appropriate forms or schedules for
taxpayers to use in substantiating deductions. The
Quisting
substantiation requirements do not apply to certain vehicles
(e.g., school buses) that by their nature receive little
personal use.
o Repeal of Provisions Concerning Return Preparers and Negligence
Penalty. Under the Tax Reform Act of 1984, tax return
preparers must advise taxapayers of the requirements for
substantiating deductions for business use of automobiles and
obtain written confirmation that the pertinent requirements
[mike mike -2316 Rolliso
3
have been met. H.R. 1869 repeals this requirement The Tax
Reform Act also imposed a special no-fault negligence penalty
applicable to any understatement of tax resulting from failure
to comply with the substantiation requirements. The enrolled
bill repeals this provision as well.
Withholding Election for Personal Use of Employer-Provided
Vehicle. Under authority extended to it by the 1984 Act,
Regs.
Treasury has issued regulations requiring the withholding of
income and employment taxes with respect to taxable noncash
fringe benefits, including an employee's personal use of a
vehicle provided by his or her employer. The enrolled bill
permits an employer to elect not to withhold taxes on the value
of any vehicle fringe benefit provided to an employee; however,
an employer so electing must report the value of the fringe
benefit on the employee's W-2 form.
Reduction in Limitations on Investment Tax Credit and
Depreciation for Luxury Automobiles. Current law limits the
minor
investment tax credit that is available for automobiles to
$1,000. Depreciation is limited to $4,000 for the year an
automobile is placed in service and $6,000 for subsequent
years. For years after 1984, these amounts are to be adjusted
annually for inflation, To offset the revenue losses that will
result from repeal of the contemporaneous record requirement,
the enrolled bill reduces the existing limitations on the
1
investment tax credit and depreciation for automobiles. In
particular, the bill limits the investment tax credit to $675
and reduces allowable depreciation to $3,200 for the first
taxable year and $4,800 for each subsequent year. Indexing for
inflation is delayed for four years, until 1989.
-- Revenue Effects
Congressional Budget Office Estimates of Revenue
Effects of H.R. 1869
Changes in Substantiation and
Withholding Requirements, 1985-1990
$885 million
Reduction in Investment Tax
Credit and Depreciation, 1985-1990
+$1,005 million
Total
+$120 million
James Assistant Legislative m. Director Reference Trey for
Enclosures
THE WHITE HOUSE
Received SS
WASHINGTON
1385 MAY 23 AM I 06
May 22, 1985
MEMORANDUM FOR DAVID L. CHEW
DEPUTY ASSISTANT TO THE PRESIDENT AND
STAFF SECRETARY
FROM:
SHERRIE M. COOKSEY smc
ASSOCIATE COUNSEL TO THE PRESIDENT
SUBJECT:
Enrolled Bill H.R. 1869 -- Amendment of
Certain Taxpayer Recordkeeping Requirements
We have reviewed the above-referenced enrolled bill, which
would repeal the contemporaneous recordkeeping requirement for
business use of motor vehicles and certain other provisions of
the Tax Reform Act of 1984, and have no legal objections to
the President signing it.
Document No.
WHITE HOUSE STAFFING MEMORANDUM
5/22/85
9:00 A.M. TOMORROW 5/23
DATE:
ACTION/CONCURRENCE/COMMENT DUE BY:
H.R. 1869 - AMENDMENT OF CERTAIN TAXPAYER RECORDKEEPING
SUBJECT:
REQUIREMENTS
ACTION FYI
ACTION FYI
VICE PRESIDENT
LACY
REGAN
McFARLANE
STOCKMAN
OGLESBY
BUCHANAN
ROLLINS
CHAVEZ
RYAN
CHEW
P
SPEAKES
DANIELS
SPRINKEL
FIELDING
SVAHN
FRIEDERSDORF
TUTTLE
HENKEL
HICKEY
HICKS
KINGON
REMARKS:
Please provide any comments/recommendations by 9:00 a.m. tomorrow,
May 23rd. Thank you.
RESPONSE: Recommend approval. 2 original
from pens will be requested but Requested David L. Chew
ceremony pending before Scheduling.
Staff Secretary
Ext. 2702
Please u. Reserve
Document No.
WHITE HOUSE STAFFING MEMORANDUM
5/22/85
9:00 A.M. TOMORROW 5/23
DATE:
ACTION/CONCURRENCE/COMMENT DUE BY:
H.R. 1869 - AMENDMENT OF CERTAIN TAXPAYER RECORDKEEPING
SUBJECT:
REQUIREMENTS
ACTION FYI
ACTION FYI
VICE PRESIDENT
LACY
REGAN
McFARLANE
STOCKMAN
OGLESBY
BUCHANAN
ROLLINS
CHAVEZ
RYAN
CHEW
P
SPEAKES
DANIELS
SPRINKEL
FIELDING
SVAHN
FRIEDERSDORF
TUTTLE
HENKEL
HICKEY
HICKS
KINGON
REMARKS:
Please provide any comments/recommendations by 9:00 a.m. tomorrow,
May 23rd. Thank you.
RESPONSE:
David L. Chew
Staff Secretary
Ext. 2702
Document No.
Received SS
1095 MAY 23 AM a. 57
WHITE HOUSE STAFFING MEMORANDUM
5/22/85
9:00 A.M. TOMORROW 5/23
DATE:
ACTION/CONCURRENCE/COMMENT DUE BY:
H.R. 1869 - AMENDMENT OF CERTAIN TAXPAYER RECORDKEEPING
SUBJECT:
REQUIREMENTS
ACTION FYI
ACTION FYI
VICE PRESIDENT
LACY
REGAN
McFARLANE
STOCKMAN
OGLESBY
BUCHANAN
ROLLINS
CHAVEZ
RYAN
CHEW
SPEAKES
DANIELS
SPRINKEL
FIELDING
SVAHN
FRIEDERSDORF
TUTTLE
HENKEL
HICKEY
HICKS
KINGON
REMARKS:
Please provide any comments/recommendations by 9:00 a.m. tomorrow,
May 23rd. Thank you.
RESPONSE: Concur in approval recommendation.
David L. Chew
Staff Secretary
Ext. 2702
THE WHITE HOUSE
Received SS
WASHINGTON
1985 MAY 23 PM 12: 46
May 23, 1985
MEMORANDUM FOR DAVID L. CHEW
FROM:
JOHN A. SVAHN
JAS
SUBJECT:
H.R. 1869 - Amendment of Certain Taxpayer
Recordkeeping Requirements
The Office of Policy Development has no objection to
the signing of H.R. 1869, Amendment of Certain Taxpayer
Recordkeeping Requirements.
THE WHITE HOUSE
WASHINGTON
SCHEDULE PROPOSAL
May 20, 1985
TO:
FREDERICK J. RYAN, JR., Director of
Presidential Appointments and Scheduling
FROM:
M.B. Oglesby, Jr.
Max L. Friedersdorf in my.
REQUEST:
To have a formal signing ceremony for H.R. 1869,
an Act to repeal the contemporaneous recordkeeping
requirements added to the Tax Reform Act of 1984.
PURPOSE:
To recognize those Members of Congress who
provided strong leadership in enacting H.R. 1869.
BACKGROUND:
During the 98th Congress, an amendment to the
Tax Reform Act of 1984 required that taxpayers
maintain contemporaneous written records, or
logs, of business vehicles when used for personal
purposes. These records were to be used to
substantiate certain business expense deductions
or credits. After a tremendous public outcry in
opposition, the Congress repealed this written
recordkeeping requirement in H.R. 1869.
PREVIOUS
PARTICIPATION:
None on this issue.
DATE AND TIME:
Between now and May 24, the scheduled date for
adjournment for the Memorial Day recess.
DURATION: 10 minutes
LOCATION:
The Oval Office
PARTICIPANTS:
Participants list attached.
OUTLINE OF EVENTS:
Members to arrive through the Northwest Gate
and be escorted from the West Lobby to the
Oval Office for a formal signing ceremony
with the President.
REMARKS REQUIRED:
Briefing paper to be provided.
MEDIA COVERAGE:
White House photographer only.
PROPOSED "PHOTO":
The President greeting the Members of Congress.
RECOMMENDED BY:
Max L. Friedersdorf
M.B. Oglesby, Jr.
OPPOSED BY:
No opposition.
PROJECT OFFICER:
Fred McClure
Attachment A: Participants list
Attachment A
PARTICIPANTS
The President
The Vice President
Senator Robert Packwood (R-OR)
Senator James Abdnor (R-SD)
Senator John Heinz (R-PA)
Senator Malcolm Wallop (R-WY)
Senator Russell Long (D-LA)
Senator Lloyd Bentsen (D-TX)
Senator David Pryor (D-ARK)
Senator Edward Zorinsky (D-NE)
Appropriate House Members
Staff
Donald Regan
Max L. Friedersdorf
M.B. Oglesby, Jr.
Calendar No. 51
99TH CONGRESS
1st Session
}
REPORT
SENATE
99-23
REPEALING THE REQUIREMENT THAT CONTEMPORANE-
OUS RECORDS BE KEPT TO SUBSTANTIATE CERTAIN DE-
DUCTIONS AND CREDITS
APRIL 2 (legislative day, FEBRUARY 18), 1985.-Ordered to be printed
Mr. PACKWOOD, from the Committee on Finance,
submitted the following
REPORT
[To accompany S. 245]
[Including cost estimate of the Congressional Budget Office]
The Committee on Finance, to which was referred the bill (S.
245) to repeal the requirement that contemporaneous records be
kept to substantiate certain deductions and credits, having consid-
ered the same, reports favorably thereon with an amendment to
the text and an amendment to the title and recommends that the
bill as amended do pass.
The amendment to the text of the bill is shown in italics.
51-010 o
2
3
I. EXPLANATION OF THE BILL
Tax preparer rules.-The 1984 Act required that paid income tax
A. PRESENT LAW
return preparers must advise the taxpayer of the section 274(d)
substantiation requirements and obtain written confirmation from
Substantiation rules
the taxpayer that these requirements were met. Failure to advise
the taxpayer or to obtain the confirmation subjects the return pre-
Background
parer to a penalty of $25 for each failure, unless due to reasonable
A taxpayer may deduct expenditures, including depreciation and
cause and not to willful neglect (sec. 6695(b)).
operating costs, attributable to business use of an automobile or
Special negligence penalty.-The 1984 Act provided that, for pur-
other means of transportation. No deduction is allowed for expendi-
poses of the section 6653 negligence penalty, any portion of an un-
tures attributable to the personal use of an automobile or other
derpayment of tax due to a failure to comply with the section
property (other than for interest on purchase indebtedness or for
274(d) recordkeeping requirements is treated as due to negligence,
certain State taxes). For example, the costs of commuting to and
in the absence of clear and convincing evidence to the contrary.
from work are personal expenses that are nondeductible pursuant
The penalty is five percent of the portion of the understatement at-
to Code section 262.1
tributable to the failure to comply with the section 274(d) record-
Under general tax law principles, the courts have held that a
keeping requirements (sec. 6653(h)).
taxpayer bears the burden of proving both the eligibility of an ex-
penditure as a deduction or credit and also the amount of any such
B. REASONS FOR CHANGE
eligible expenditure, including the expenses of using a car in the
taxpayer's trade or business.²
The contemporaneous recordkeeping requirement and related
In the Revenue Act of 1962, the Congress enacted Code section
compliance provisions enacted in the Tax Reform Act of 1984 re-
274(d), under which a taxpayer must substantiate the business pur-
flected concerns of the Congress about significant overstatements of
pose, amount, and date of certain types of expenditures "by ade-
deductions and credits for claimed business use of automobiles and
quate records or by sufficient evidence corroborating his own state-
other types of property that typically are used for personal pur-
ment." This provision was added because the Congress recognized
poses, such as for commuting, vacation trips, personal errands and
that "in many instances deductions are obtained by disguising per-
shopping excursions, etc. Many taxpayers who did make business
sonal expenses as business expenses." 3 These specific substantia-
use of automobiles or other vehicles failed to keep fully accurate
tion rules were made applicable to (1) traveling expenses (including
records or based exaggerated claims of business use on inexact
meals and lodging while away from home); (2) expenditures with
recollections at the time of filing their returns. To achieve in-
respect to entertainment, amusement, or recreation activities or fa-
creased compliance and accuracy, the Congress required that only
cilities; and (3) business gifts. Local travel expenses were not sub-
contemporaneous records could be used to substantiate traveling
ject to this provision as enacted, but instead were subject to the
expenses and the other types of expenditures listed in section
general substantiation requirements applicable to all other busi-
274(d), as revised by the 1984 Act. No definition of "contemporane-
ness expenditures.
ous" was set forth in the statute.
As businesses and individuals have sought to understand and
1984 Act amendments
comply with the contemporaneous recordkeeping requirement, it
Recordkeeping.-The Tax Reform Act of 1984 (P.L. 98-369) made
has become clear that the requirement sweeps too broadly and gen-
several amendments to Code section 274(d), effective for taxable
erally imposes excessive recordkeeping burdens on many taxpay-
years beginning after December 31, 1984. First, the 1984 Act added
ers. While the Internal Revenue Service has modified its initial
a requirement that the taxpayer must keep "contemporaneous"
regulations interpreting the new requirement and has scheduled
records to substantiate deductions for expenditures subject to sec-
public hearings prior to adoption of final rules, the committee has
tion 274(d). Second, the 1984 Act deleted from section 274(d) the al-
concluded that the only appropriate actions that will provide a
ternative method of substantiating deductions, which was by
speedy and certain resolution to these problems are to repeal the
means of sufficient evidence (written or oral) corroborating the tax-
"contemporaneous" requirement (and the tax return preparer and
payer's own statement. Third, the 1984 Act made additional prop-
negligence penalty provisions) as added by the 1984 Act, to repeal
erty subject to the requirements of section 274(d), including auto-
the IRS temporary regulations interpreting the "contemporaneous"
mobiles and other means of transportation. As a result, local travel
requirement, and to reinstate the prior-law substantiation stand-
expenses, like traveling expenses away from home, became subject
ards under section 274(d) and the long-standing regulations there-
to the section 274(d) rules.
under.
1 Fausner V. Comm'r 413 U.S. 838 (1973).
2 See, e.g., Interstate Transit Lines V. Comm'r 319 U.S. 59, 593 (1943); Comm'r V. Heininger, 320
U.S. 467 (1943); Gaines V. Comm'r, 35 T.C.M. 1415 (1976).
3 H. Rept. No. 87-1447, 87th Cong., 2d sess. (1962), at 19.
4
5
C. EXPLANATION OF PROVISIONS
trucks, cement mixers, refrigerated trucks, tractors, and specialized
1. Repeal of 1984 Act provisions
utility repair trucks used as such.
The committee also intends that the Treasury is to substitute the
Repeal of "contemporaneous"
following safe-harbor valuation rules with respect to employee
The bill strikes the words "adequate contemporaneous records"
flights on employer-provided noncommercial aircraft that consti-
from Code section 274(d) as if those words had never been a part of
tute taxable fringe benefits, for the valuation rules with respect to
that provision, and inserts in lieu thereof the words "adequate
such benefits that are currently set forth in temporary regulations.
records or by sufficient evidence corroborating the taxpayer's own
The committee believes that these substitute safe-harbor rules re-
statement". This is the substantiation standard that had been in
flect the intent of the Congress concerning the valuation of person-
effect prior to the Tax Reform Act of 1984 and that had been inter-
al use of noncommercial aircraft under the fringe benefit rules in
preted in long-standing IRS regulations originally issued in 1962.
the Tax Reform Act of 1984.
The substantiation standard reinstated by the bill applies, as pro-
vided by section 274(d), to traveling expenses; entertainment,
Weight of aircraft
Includible value for control employees
Includible value for other employees
amusement, or recreation activities or facilities; business gifts; and,
effective for taxable years beginning after 1984, and listed property
More than 10,000 pounds
First class fare
Value imputed to parent of airline employ-
(as defined in sec. 280F(d)(4)).
ee.
More than 6,000 pounds but not more Coach fare
3/4 value imputed to parent of airline
Repeal of return preparer provision
than 10,000 pounds.
employee.
6,000 pounds or less
1/2 coach fare.
1/2 value imputed to parent of airline
The bill repeals the provision of the 1984 Act requiring that a
employee.
return preparer must specifically advise the taxpayer of the record-
keeping requirements of section 274(d) and must obtain written
confirmation from the taxpayer that such requirements were met
The amount imputed to employees other than control employees
(Code sec. 6695(b)). The bill provides that the Internal Revenue
is intended to be no more than the amount imputed to a parent of
Code shall be applied and administered as if this provision had
an airline employee, since it is difficult to distinguish the value of
never been enacted.
a standby flight on a commercial airline and a flight on a space-
available basis on a similar noncommercial jet aircraft. However,
Repeal of special negligence penalty
the amount imputed to a parent of an airline employee under tem-
The bill repeals the provision of the 1984 Act providing a special
porary Treasury regulations is presently 50 percent of the highest
negligence penalty rule (Code sec. 6653(h)) applicable to an under-
unrestricted coach fare for the trip which is charged by the carrier
payment of tax attributable to a failure to comply with the record-
for which the employee works. The safe-harbor valuation regula-
keeping requirements of section 274(d). The bill provides that the
tions (as revised to reflect the committee's intent) are to utilize
Internal Revenue Code shall be applied and administered as if this
rules referring to commercial airline fares, such as Standard Initial
provision had never been enacted.
Fare Level (SIFL) rates or industry average rates.
For purposes of the valuation rules in the table above, the term
Repeal of certain regulations
control employee means an employee (whether or not an officer)
The bill repeals all Treasury regulations (temporary or proposed)
who controls the use of the aircraft for the trip, i.e., who controls
issued prior to the enactment of the bill which carry out the
either the use, scheduling, or destination of the aircraft.
amendments made by paragraphs (1)(C), (2), and (3) of section 179(b)
of the Tax Reform Act of 1984 that are repealed by this bill. These
D. EFFECTIVE DATE
revoked regulations are to have no force and effect whatsoever.
The provisions of the bill repealing certain provisions enacted in
2. Limited-use vehicles and certain flight benefits
the Tax Reform Act of 1984 take effect as if included in the amend-
The committee intends that Treasury regulations are to provide
ments made by section 179(b) of the 1984 Act.
that the fair market value of an employee's commuting use of a
E. REVENUE EFFECT
limited-use vehicle furnished by the employer is excluded, as a
working condition fringe, from the employee's gross income for
The provisions of the bill are estimated to reduce fiscal year
Federal income tax purposes, and from the wage base (and, if appli-
budget receipts by $48 million in 1985, $150 million in 1986, $225
cable, from the benefit base) for purposes of income tax withhold-
million in 1987, $247 million in 1988, $259 million in 1989, and $270
ing and FICA, FUTA, and RRTA taxes. A limited-use vehicle is a
million in 1990.
vehicle the characteristics of which make it unlikely that it will be
used more than a very minimal amount for personal purposes. Ex-
ample of such limited-use vehicles include marked police and fire
vehicles, ambulances used as such, school buses used as such, dump
7
6
Part II of this report) and agrees with the committee's budget esti-
II. BUDGET EFFECTS AND VOTE OF THE COMMITTEE
mates. The Director submitted the following statement.
A. BUDGET EFFECTS
U.S. CONGRESS,
CONGRESSIONAL BUDGET OFFICE,
In compliance with paragraph 11(a) of Rule XXVI of the Stand-
Washington, DC, April 2, 1985.
ing Rules of the Senate, the following statement is made relative to
Hon. BoB PACKWOOD,
the budget effects of S. 245, as reported by the committee.
Chairman, Committee on Finance,
Revenue effects
U.S. Senate, Washington, DC.
The revenue provisions of the bill are estimated to reduce fiscal
DEAR MR. CHAIRMAN: The Congressional Budget Office has exam-
year budget receipts by $48 million in 1985, $150 million in 1986,
ined S. 245, a bill which makes changes to certain provisions en-
$225 million in 1987, $247 million in 1988, $259 million in 1989, and
acted in the Deficit Reduction Act of 1984 (DEFRA), as ordered re-
$270 million in 1990.
ported by the Committee on Finance on April 2, 1985. The bill
would repeal the contemporaneous recordkeeping requirement for
B. VOTE OF THE COMMITTEE
certain deductions and credits imposed by DEFRA. In addition, the
bill would change regulations governing the valuation of private
In compliance with paragraph 7(c) of Rule XXVI of the Standing
use of corporate airplanes.
Rules of the Senate, the following statement is made relative to the
The Congressional Budget Office has reviewed and concurs with
vote of the committee on the motion to report the bill, S. 245, as
estimates of the revenue effects of the bill prepared by the staff of
amended, was ordered favorably reported by a record vote.
the Joint Committee on Taxation. The bill would reduce fiscal year
III. REGULATORY IMPACT OF THE BILL AND OTHER MATTERS To BE
revenues by $48 million in 1985, $150 million in 1986, $225 million
DISCUSSED UNDER SENATE RULES
in 1987, $247 million in 1988, $259 million in 1989, and $270 million
in 1990.
A REGULATORY IMPACT
If you wish further details on this estimate, we will be pleased to
provide them.
Pursuant to paragraph 11(b) of Rule XXVI of the Standing Rules
With best wishes.
of the Senate, the committee makes the following statement con-
Sincerely,
cerning the regulatory impact that might be incurred in carrying
RUDOLPH G. PENNER.
out the provisions of S. 245, as reported.
New budget authority
Numbers of individuals and businesses who would be regulated
In compliance with section 308(a)(1) of the Budget Act, and after
The bill does not involve new or expanded regulation of individ-
consultation with the Director of the Congressional Budget Office,
uals or businesses. The bill reduces recordkeeping burdens on indi-
the committee states that the changes made to existing law by the
viduals and businesses.
bill involve no new budget authority.
Economic impact of regulation on individuals, consumers, and busi-
Tax expenditures
nesses
In compliance with section 308(a)(2) of the Budget Act with re-
The bill repeals certain recordkeeping requirements imposed in
spect to tax expenditures, and after consultation with the Director
the Tax Reform Act of 1984 and thereby reduces recordkeeping
of the Congressional Budget Office, the committee states that the
burdens on individuals and businesses.
changes made to existing law by the bill will involve no new or in-
Impact on personal privacy
creased tax expenditures.
The bill reduces recordkeeping burdens on individuals.
IV. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
Determination of the amount of paperwork
In the opinion of the committee, it is necessary, in order to expe-
The bill reduces paperwork burdens on individuals and businesses.
dite the business of the Senate, to dispense with the requirements
of paragraph 12 of Rule XXVI of the Standing Rules of the Senate
(relating to the showing of changes in existing law made by the
B. OTHER MATTERS
provisions of S. 245, as reported by the committee).
Consultation with Congressional Budget Office on budget estimates
In accordance with section 403 of the Budget Act, the committee
advises that the Director of the Congressional Budget Office has ex-
amined the committee's budget estimates for the bill (as shown in
99TH CONGRESS
}
REPORT
1st Session
HOUSE OF REPRESENTATIVES
99-34
REPEAL OF THE CONTEMPORANEOUS RECORDKEEPING
REQUIREMENTS
APRIL 2, 1985.-Committed to the Committee of the Whole House on the State of the
Union and ordered to be printed
Mr. ROSTENKOWSKI, from the Committee on Ways and Means,
submitted the following
REPORT
[To accompany H.R. 1869]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 1869) to repeal the contemporaneous recordkeeping re-
quirements added by the Tax Reform Act of 1984, and for other
purposes, having considered the same, report favorably thereon
without amendment and recommend that the bill do pass.
I. EXPLANATION OF THE BILL
A. PRESENT LAW
Substantiation rules
Background
A taxpayer may deduct expenditures, including depreciation and
operating costs, attributable to business use of an automobile or
other means of transportation. No deduction is allowed for expendi-
tures attributable to the personal use of an automobile or other
property (other than for interest on purchase indebtedness or for
certain State taxes). For example, the costs of commuting to and
from work are personal expenses that are nondeductible pursuant
to Code section 262.1
Under general tax law principles, the courts have held that a
taxpayer bears the burden of proving both the eligibility of an ex-
penditure as a deduction or credit and also the amount of any such
1 Fausner V. Commissioner, 413 U.S. 838 (1973).
51-006 o
3
2
Limitations on ITC and depreciation for certain automobiles
eligible expenditure, including the expenses of using a car in the
General rules
taxpayer's trade or business.²
In the Revenue Act of 1962, the Congress enacted Code section
In general, a 6-percent investment tax credit may be claimed for
274(d), under which a taxpayer must substantiate the business pur-
an eligible automobile, and its cost (reduced by one-half the
pose, amount, and date of certain types of expenditures "by ade-
amount of the 6-percent credit) may be recovered over three years.
quate records or by sufficient evidence corroborating his own state-
The accelerated recovery percentages, beginning with the first
ment." This provision was added because the Congress recognized
year, are 25, 38, and 37 percent. Other options with respect to the
that "in many instances, deductions are obtained by disguising per-
investment credit and depreciation are generally available.
sonal expenses as business expenses." 3 These specific substantia-
However, limits generally are imposed on the amount of invest-
tion rules were made applicable to (1) traveling expenses (including
ment credit and annual depreciation deductions that are allowed
meals and lodging while away from home); (2) expenditures with
for an automobile placed in service or leased by the taxpayer after
respect to entertainment, amusement, or recreation activities or fa-
June 18, 1984 (sec. 280F).4 For an automobile subject to these limits
cilities; and (3) business gifts. Local travel expenses were not sub-
and placed in service in 1984, (1) the investment tax credit is limit-
ject to this provision as enacted, but instead were subject to the
ed to $1,000, (2) depreciation in the first year is limited to $4,000,
general substantiation requirements applicable to all other busi-
and (3) depreciation in any subsequent year is limited to $6,000.
ness expenditures.
For more expensive automobiles, the limits generally produce a
recovery period longer than three years. If the depreciation limits
1984 Act amendments
result in unrecovered basis existing at the end of the recovery
Recordkeeping.-The Tax Reform Act of 1984 (P.L. 98-369) made
period otherwise applicable, then that basis may be recovered
several amendments to Code section 274(d), effective for taxable
through a depreciation deduction in subsequent years equal to the
years beginning after December 31, 1984. First, the 1984 Act added
lesser of the unrecovered basis of $6,000, if use of the automobile in
a requirement that the taxpayer must keep "contemporaneous"
those years is such that a depreciation deduction is otherwise al-
records to substantiate deductions for expenditures subject to sec-
lowable. The "unrecovered basis" means the excess of unadjusted
tioin 274(d). Second, the 1984 Act deleted from section 274(d) the al-
basis over the aggregate amount of depreciation deductions that
ternative method of substantiating deductions, which was by
would have been allowed if 100 percent of the automobile's use had
means of sufficient evidence, (written or oral) corroborating the
been in a trade or business or for the production of income.
taxpayer's own statement. Third, the 1984 Act made additional
The limits for any year are reduced by the proportion of total use
in that year that is personal use.
property subject to the requirements of section 274(d), including
automobiles and other means of transportation. As a result, local
Inflation adjustment to limits
travel expenses, like traveling expenses away from home, became
For years after 1984, the $1,000, $4,000, and $6,000 limits are ad-
subject to the section 274(d) rules.
justed for inflation, as measured by the percentage growth of the
Tax preparer rules.-The 1984 Act required that paid income tax
automobile component of the Consumer Price Index for All Urban
return preparers must advise the taxpayer of the section 274(d)
Consumers between October of the preceding year and October,
substantiation requirements and obtain written confirmation from
1983. The adjustment is rounded to the nearest $100. The adjusted
the taxpayer that these requirements were met. Failure to advise
limits for any year apply only to automobiles placed in service in
the taxpayer or to obtain the confirmation subjects the return pre-
that year.
parer to a penalty of $25 for each failure, unless due to reasonable
cause and not to willful neglect (sec. 6695(b)).
B. REASONS FOR CHANGE
Special negligence penalty.-The 1984 Act provided that, for pur-
poses of the section 6653 negligence penalty, any portion of an un-
The contemporaneous recordkeeping requirement and related
derpayment of tax due to a failure to comply with the section
compliance provisions enacted in the Tax Reform Act of 1984 re-
274(d) recordkeeping requirements is treated as due to negligence,
flected concerns of the Congress about significant overstatements of
deductions and credits for claimed business use of automobiles and
in the absence of clear and convincing evidence to the contrary.
The penalty is five percent of the portion of the understatement at-
other types of property that typically are used for personal pur-
tributable to the failure to comply with the section 274(d) record-
keeping requirements (sec. 6653(h)).
4 However, the limits do not apply to (1) certain automobiles acquired under binding contracts
in effect before June 19, 1984; (2) ambulances and hearses used directly in the taxpayer's trade
or business; (3) vehicles (such as taxicabs and limousines) used by the taxpayer directly in the
trade or business of transporting persons or property for compensation or hire; and (4) regula-
tions, trucks or vans.
Also, the limits do not apply to an automobile leased or held for leasing by a person regularly
engaged in the business of leasing automobiles. Rather, the limitation affects the lessee, whose
2 See, e.g., Interstate Transit Lines V. Comm 319 U.S. 59, 593 (1943); Comm V. Heininger, 320
deductions for lease payments are reduced (according to tables prescribed by the Treasury) by
U.S. 467 (1943); Gaines V. Comm'r, 35 T.C.M. 1415 (1976).
amounts intended to approximate the results of placing the limits on the lessor.
3 H. Rep. No. 87-1447 (March 16, 1962), at 19.
4
5
poses, such as for commuting, vacation trips, personal errands and
the investment tax credit and depreciation deductions for automo-
shopping excursions, etc. Many taxpayers who did make business
biles.
use of automobiles or other vehicles failed to keep fully accurate
C. EXPLANATION OF PROVISIONS
records or based exaggerated claims of business use on inexact
recollections at the time of filing their returns, To achieve in-
1. Repeal of 1984 Act provisions
creased compliance and accuracy, the Congress required that only
contemporaneous records could be used to substantiate traveling
Repeal of "contemporaneous"
expenses and the other types of expenditures listed in section
The bill repeals the word "contemporaneous" from Code section
274(d), as revised by the Act. No definition of "contemporaneous"
274(d) as if it had never been a part of that section. The bill also
was set forth in the statute.
provides that the Internal Revenue Code is to be applied and ad-
As businesses and individuals have sought to understand and
ministered as if the word "contemporaneous" had never been
comply with the contemporaneous recordkeeping requirement, it
added to section 274(d).
has become clear that the requirement sweeps too broadly and gen-
erally imposes excessive recordkeeping burdens on may taxpayers.
Repeal of return preparer's provision
While the Internal Revenue Service has modified its initial regula-
The bill repeals the provision of the 1984 Act requiring that a
tions and scheduled public hearings prior to adoption of final rules,
return preparer must specifically advise the taxpayer of the record-
the committee has concluded that the only appropriate actions that
keeping requirements of section 274(d) and must obtain written
will provide a speedy and certain resolution to these problems are
confirmation from the taxpayer that adequate contemporaneous
to repeal the "contemporaneous" requirement (and the tax return
records existed to support the claimed deductions or credits (Code
preparer and negligence penalty provisions) as added by the 1984
sec. 6695(b)). The bill provides that the Internal Revenue Code shall
Act, to repeal the IRS temporary regulations interpreting the "con-
be applied and administered as if this provision had never been en-
temporaneous" requirement, to reinstate with modifications gener-
acted.
ally the prior-law substantiation rules under section 274(d), and to
The committee believes that it is inappropriate to single out this
except from these reinstated rules vehicles which, by reason of
one area of recordkeeping for special requirements, since return
their nature, are not likely to be used more than a de minimis
preparers already are responsible for the overall substantive accu-
amount for personal purposes.
racy of the preparation of the return. Also, because the committee
To provide guidance to taxpayers, the bill requires the IRS to
intends (see below) that taxpayers claiming tax credits or deprecia-
issue regulations not later than October 1, 1985, carrying out the
tion for the use of automobiles and other listed property must indi-
provisions of the bill. The bill specifies that these IRS regulations
cate on the tax return whether the taxpayer has adequate records
must fully reflect all the amendments made by the bill. In addi-
or sufficient written evidence supporting the claimed deductions
tion, IRS regulations must be consistent with the legislative history
and credits, the return preparer requirement is not needed. That
of the bill, including this report. Accordingly, any type of vehicle
is, if a return preparer signed a return that both claimed a deduc-
(such as farm tractors or combines, marked police or fire vehicles,
tion for the business use of a car and indicated that the taxpayer
etc.) that this report specifies are vehicles excepted from section
did not have the evidence required by the statute to justify the
274(d) as qualified nonpersonal use vehicles must be so treated in
claims, the return preparer would be subject to existing penalties.
the regulations.
The committee remains concerned about overstated claims of the
Repeal of special negligence penalty
extent of business use of automobiles or other property. The bill
does not repeal all recordkeeping requirements for traveling ex-
The bill also repeals the provision of the 1984 Act providing a
penses, etc. Indeed, the bill reinstates the prior-law substantiation
special negligence penalty rule applicable to an underpayment of
requirements of section 274(d) as in effect prior to the 1984 Act
tax attributable to a failure to comply with the recordkeeping re-
amendments, with two modifications. First, a taxpayer who fails to
quirements of section 274(d). The bill provides that the Internal
maintain adequate records can substantiate expenditures subject to
Revenue Code shall be applied and administered as if this provision
had never been enacted.
section 274(d) only by sufficient written evidence corroborating his
or her own statement; oral evidence alone is not sufficient as cor-
The committee believes that repealing this portion of the negli-
roboration for this purpose. Second, automobile expenses are made
gence penalty is needed to restore to the Internal Revenue Service
subject to the reinstated section 274(d) substantiation rules, effec-
and the courts discretion not to impose the negligence penalty for
tive for taxable years beginning after 1985; thus, such expenses are
minor, inadvertent recordkeeping or computational errors. The
treated in the same manner as traveling expenses away from
committee emphasizes, however, that the regular negligence and
home.
fraud penalties will continue to be applicable if a taxpayer claims
In view of the budget deficit, the committee concluded that it is
tax benefits that cannot be supported. The committee is concerned
appropriate to balance the revenue loss resulting from the provi-
that these negligence and fraud penalties have not been applied by
sions of the bill repealing certain compliance rules enacted in the
the Internal Revenue Service or the courts in a substantial number
1984 Act by adjusting the limitations set forth in section 280F on
of instances where their application would be fully justified.
6
7
In one Tax Court case, for example, the taxpayer had kept de-
2. Definition of adequate records
tailed mileage records, required by his employer for reimbursement
purposes, that indicated that his business use was approximately
In general
five percent of total use. On his tax return, the taxpayer claimed
The bill amends section 274 to require that taxpayers must main-
70 percent business use, with no records to justify this claim. The
tain adequate records or sufficient written evidence corroborating
Tax Court properly allowed only five percent business use. The
the taxpayer's own statement to support the credits or deductions
Court did not, however, impose a negligence or fraud penalty. The
they are claiming.
committee believes that, in a case like this one, the negligence pen-
The bill specifies that, in the alternate substantiation test, the
alty should certainly be imposed, and that careful consideration
sufficient corroborating evidence must be written. The committee
should be given to imposing the civil fraud penalty.
believes that it is appropriate to require that taxpayers maintain
In another Tax Court case, the taxpayer had kept detailed
written evidence to support their claims of tax credits and deduc-
records so that he could be reimbursed by his employer, but
tions. The written evidence must exist by the time tax return is
filed.⁸
claimed on his tax return approximately 35,000 miles of business
use beyond what his records demonstrated, without any justifica-
More specifically, in the case of travel, the committee intends
tion. No negligence penalty was imposed. In another case, the tax-
that these records or evidence support the deductions or credits
claimed. Adequate records or sufficient written evidence includes
payer produced a diary purporting to justify the claimed deduc-
the following:
tions. The Tax Court called the diary a "fabrication" and said that
a. Account books
the taxpayer "was not telling the truth." The Court still permitted
b. Diaries
him a deduction, and did not impose the negligence or civil fraud
c. Logs
penalty. Finally, another taxpayer apparently claimed a deduction
d. Documentary evidence (receipts, paid bills)
for business mileage that exceeded the total mileage shown on his
e. Trip sheets
odometer, but the Tax Court did not impose a negligence or civil
f. Expense reports
fraud penalty.
g. If the employee is required to make an adequate account-
These cases indicate that the negligence and civil fraud penalties
ing to the employer and the reimbursement equals expenses,
are not being administered by either the Internal Revenue Service
the employee is not required to report the expenses and reim-
or the courts in the manner that the Congress intended when it
bursement on his tax return
initially enacted these penalties. While minor, inadvertent record-
h. Written statements of witnesses
keeping or computational errors should not lead to the imposition
All of these types of documentation were specifically approved
of a substantial penalty, the committee believes that it is vital to
under prior law. The committee specifically approves of these
the integrity of the tax system that honest taxpayers know that
means of documentation, and considers the longstanding Treasury
others who claim tax benefits far in excess of what can be justified
Regulations on recordkeeping issued under section 274(d) ⁹ prior to
will be subject to the negligence and fraud penalties.
the 1984 Act to reflect accurately its intent as to the documenta-
tion that taxpayers are required to maintain, except insofar as
Repeal of regulations
those regulations authorize the use of sufficient oral evidence cor-
The bill repeals all Treasury Regulations (temporary or pro-
roborating the taxpayer's own statements and except that the writ-
posed) issued prior to the enactment of the bill that carry out the
ten evidence must be compiled by the time the return is filed. The
amendments made by section 179(b) of the Tax Reform Act of 1984.
committee also believes that case law under section 274(d) general-
Thus, regulations issued to implement the changes to section 274(d)
ly reflects appropriate standards of recordkeeping, except insofar
made by that Act, particularly the inclusion in that section of the
as those cases authorize the use of oral evidence corroborating the
word "contemporaneous," are revoked.⁵ In addition, any regula-
taxpayer's own statement. While taxpayers may choose to keep
tions relating to the return preparer provision and the special neg-
contemporaneous logs on the use of their automobiles, the Treas-
ligence penalty (described above) are revoked.⁶ These revoked regu-
ury is specifically prohibited from requiring that all taxpayers keep
lations are to have no force and effect whatsoever.⁷
daily contemporaneous logs of their use of the automobile.
The committee believes that the written policy statements kept
by the employer to implement a policy of no personal use (or no
personal use except for commuting) qualify as sufficient written
5 Also, the regulations prohibiting the employer from including the entire value of the use of
evidence corroborating the taxpayer's own statement. Therefore,
the automobile in the income of certain employees are revoked.
the employee will not need to keep records under section 274(d) for
6 The regulations relating to valuation issued under sections 61 and 132 are not, however, re-
voked.
7 The committee revokes the regulations that provide for safe harbors for the use of highway
8 In a few instances, the courts had permitted taxpayers to deduct amounts solely on the basis
vehicles. This change does not prohibit Treasury from developing similar safe harbors. To the
of oral evidence. The committee believes that requiring written evidence will be beneficial to
extent that Treasury considers reinstating these safe harbors, the committee believes that
taxpayers, because they will compile the necessary information by the time the tax return is
Treasury should consider whether the standard requiring that farmers derive 70% of their
filed.
income from farming may be too high.
. See Treas. Reg. sec. 1.274-5, initially published in the Federal Register on December 29, 1962.
9
8
In order to utilize this exception to the otherwise applicable sub-
the use of a vehicle that qualifies under either of these provisions.
stantiation requirements, there must be evidence that would
A written policy statement adopted by a governmental unit would
enable the Internal Revenue Service to determine whether the use
be eligible for this rule. Thus, a resolution of the city council or a
of the vehicle meets the conditions set forth in the preceding para-
provision of state law or the state constitution would qualify, so
graphs.
long as the conditions described below are met.
The committee wants to continue the provision in the recent reg-
Information required on return
ulations that provided that no recordkeeping under section 274(d) is
The committee wants to ensure that taxpayers claim only the de-
required if the employer provides a vehicle to an employee and pro-
ductions to which they are entitled without being unduly burdened
hibits personal use by the employee. In order to be eligible for this
by complex recordkeeping requirements. The committee also be-
special rule, the following conditions must be met-
lieves that taxpayers should provide sufficient information on their
(a) The vehicle owned or leased by the employer is provided
returns so that the Internal Revenue Service can make a prelimi-
to one or more employees for use in connection with the em-
nary evaluation of the appropriateness of the taxpayer's claimed
ployer's trade or business;
deductions. Previously, the Internal Revenue Service found it diffi-
(2) When the vehicle is not being used for such business pur-
cult to make this sort of preliminary evaluation without auditing
poses, it is kept on the employer's business premises (or tempo-
the taxpayer, which can also be a significant burden on the taxpay-
rarily located elsewhere, e.g., for repair);
er. Therefore, the committee believes that taxpayers should all
(3) Under the employer's policy, no employee may use the ve-
answer a few short questions on their returns if they claim the tax
hicle for personal purposes, other than de minimis personal
benefits for the business use of an automobile.
use (such as a stop for lunch between two business deliveries);
The committee believes that taxpayers will not be significantly
(4) The employer reasonably believes that no employee uses
burdened by responding to a few questions, most of them requiring
the vehicle, other than de minimis use, for any personal pur-
a yes or no response. The committee directs that the following
pose; and
questions appear on the tax return, to be answered by taxpayers
(5) No employee using the vehicle lives at the employer's
claiming credits or deductions for the business use of an automo-
business premises.
bile:
To utilize this exception to the otherwise applicable substantia-
1. Total number of miles driven during the year:
tion requirement, there must be evidence that would enable the In-
miles.
ternal Revenue Service to determine whether the use of the vehicle
2. Percentage of personal use claimed:
%.
met the five conditions listed in the preceding paragraph.
3. Was the vehicle used for commuting
Yes
No.
The committee also wants to continue the provision in the recent
If Yes, the distance normally commuted:
miles.
regulations that provided that no recordkeeping under section
4. Was the vehicle available for personal use in off duty
274(d) is required if the employer provides a vehicle to a specified
hours
Yes
No.
employee and prohibits personal use by the employee, except for
5. Is another vehicle available for personal use
Yes
commuting. In order to be eligible for this rule, the following condi-
No.
tions must be met-
6. I have adequate records or sufficient written evidence to
(1) The vehicle owned or leased by the employer is provided
justify these deductions
Yes
No. If no, no deduc-
to one or more employees for use in connection with the em-
tion is permitted.
ployer's trade or business and is used in the employer's trade
The committee notes that the requirement that these questions
or business;
be included on the tax forms does not appear in the bill because
(2) For bona fide noncompensatory business reasons, the em-
the Internal Revenue Code does not generally specify the format or
ployer requires the employee to commute to and/or from work
specific content of forms. The Internal Revenue Code does not need
in the vehicle;
to be amended to provide the authority to require these questions,
(3) The employer establishes a policy under which the em-
since that authority already exists in sections 6001 and 6011.
ployee may not use the vehicle for personal purposes, other
The committee intends that employees who claim deductions or
than commuting or de minimis personal use (such as a stop for
credits for business use of their own car be asked these questions
a personal errand between a business delivery and the employ-
on Form 2106 (relating to employee business expenses); some of this
ee's home);
information is already required to be provided on that form. Unin-
(4) The employer reasonably believes that, except for de min-
corporated taxpayers who claim these credits or deductions on
imis use, the employee does not use the vehicle for any person-
either Schedules C or F (or on some other form) will be asked these
al purpose other than commuting; and
questions on that form. Corporate taxpayers, as well as all other
(5) The employer accounts for the commuting use by includ-
taxpayers and entities, will be asked these questions on the forms
ing an appropriate amount in the employee's gross income.
they are required to file.
This special exception to the substantiation rule is not avail-
The committee intends that employees give this information to
able if the employee using the vehicle for commuting is an offi-
their employers if the employer provided the car. Generally, the
cer or one-percent owner of the employer.
10
11
employer would put this information on its tax return, since the
cause of their inherent nature or characteristics, are unlikely to be
employer is claiming the tax benefits of the use of the car. Employ-
used more than a very minimal amount for personal purposes. The
ers who provide more than 5 cars to employees, however, would not
committee has identified the following types of vehicles as meeting
have to include this information on the employer's return; the In-
this criterion:
ternal Revenue Sevice could examine on audit the information that
a. delivery trucks with seating only for the driver,¹⁰
the employees provide to the employer. The employer would have
b. flatbed trucks,
to indicate on his return that he has received this information
C. any vehicle designed to carry cargo with a loaded gross ve-
from the employees. The employer can rely on the employee's
hicle weight over 14,000 pounds,
statement (unless the employer has reason to know it is false) to
d. passenger buses used as such with a capacity of at least 20
determine the credits and deductions to which the employer is enti-
passengers,
tled and to determine the amount of income, if any, the employer
e. clearly marked police and fire vehicles,
must include in the employee's income because of the employee's
f. ambulances used as such,
personal use of the employer's car.
g. hearses used as such,
The committee intends that similar questions be asked on the
h. bucket trucks ("cherry pickers"),
tax return about other listed property, such as yachts, airplanes,
i. cranes, and
and computers. For computers, for example, the following questions
j. derricks.
should be asked:
The committee recognizes that it may not have developed an ex-
1. Percentage of personal use claimed:
%.
haustive list of vehicles not susceptible to personal use. Therefore,
2. Was the computer located at your
place of business
the committee intends that the Internal Revenue Service expand
or
your home or
both. If both, what percentage of
this list through either regulations or revenue rulings to include
the year was it at home:
%.
those vehicles that the committee may not have included in this
3. Do you have records or written evidence to justify these
listing but that are appropriate for listing because by their nature
deductions
Yes
No.
it is highly unlikely that they will be used more than a very mini-
mal amount for personal purposes.
3. Vehicles with no personal use
A clearly marked police or fire vehicle is a vehicle, owned or
The bill provides that any vehicle that by reason of its nature is
leased by a governmental unit, that is clearly marked (through
not likely to be used more than a de minimis amount for personal
painted insignia or words) as a police or fire vehicle, the markings
purposes is exempt from the recordkeeping requirements of section
on which make it readily apparent that it is a police or fire vehicle.
274(d).
A marking on a license plate is not a clear marking.
The committee believes that this is an appropriate exemption
The committee expects that it is appropriate for Treasury to pro-
from the recordkeeping requirements of section 274(d) because one
vide in regulations that under certain conditions all use of such ve-
of the purposes of those recordkeeping requirements is to ensure
hicles by an employee is excluded, as a working condition fringe
that taxpayers do not deduct as a business expense an expense that
benefit, from the employee's income and wages. If, for example, an
is really personal in nature. This purpose does not apply to a vehi-
employer requires, for bona fide business reasons, that the employ-
cle the characteristics of which make it highly unlikely that it will
ee takes such a vehicle to his or her home when the employee is
be used more than a very minimal amount for personal purposes.
not working and that no personal use (e.g., shopping or recreation)
Consequently, the committee believes that it is appropriate to
is made of the vehicle, then all use of the vehicle could be consid-
exempt these vehicles from the recordkeeping requirements of sec-
ered business use which would be deductible under section 162, and
tion 274(d). Taxpayers will still have to justify their claimed deduc-
thus excluded from income under section 132(d) as a working condi-
tions for these vehicles as required under either section 162 or 212,
tion fringe.
which are the general provisions relating to business deductions.
The committee has not generally exempted from the recordkeep-
The Internal Revenue Service had listed in its recent regulations
ing requirement all pickup trucks and vans, because these vehicles
under section 274(d) several examples of vehicles that by their
can be easily used for personal purposes. Some taxpayers purchase
nature are not likely to be used more than a de minimis amount
these vehicles as substitutes for passenger sedans, and use them
for personal purposes:
predominantly (or entirely) for personal purposes. One article has
a. forklifts,
noted that, should vans be exempted, "taxpayers will have an op-
b. cement mixers,
portunity to acquire luxury passenger vehicles with full tax bene-
c. dump trucks (including garbage trucks),
fits." On the other hand, however, the committee recognizes that
d. refrigerated trucks,
this is not applicable to all vans. For example, a van that has only
e. tractors, and
a front bench for seating, in which permanent shelving has been
f. combines.
The committee intends that these types of vehicles continue to be
10 A vehicle with a jump seat (i.e., a seat that folds up flat) in addition to the seat only for the
considered to be not susceptible to personal use. In addition, the
driver would also qualify.
committee believes that there are other types of vehicles that, be-
12
13
installed, that constantly carries merchandise, and that has been
D. EFFECTIVE DATES
specially painted with advertising or the company's name, is a ve-
Substantiation rules
hicle not susceptible to personal use.
The repeal of word "contemporaneous" from section 274(d) and
4. Withholding elections
the repeal of the return preparer's provision and the special negli-
As authorized by the legislative history of the 1984 Act, the In-
gence penalty enacted in the 1984 Act are effective as if those pro-
ternal Revenue Service has provided (in temporary regulations)
visions had never been included in the 1984 Act.
that an employer may withhold income and employment taxes due
The amendments to section 274(d) as reinstated-(1) providing
on taxable fringe benefits provided to an employee on a quarterly
that the evidence which can corroborate the taxpayer's own state-
basis. For example, if the employee receives a $100 taxable benefit
ment, in the absence of adequate records, is written evidence and
on January 10, withholding can be deferred by treating the benefit
(2) modifying the types of items subject to section 274(d)-are effec-
as paid on March 31.
tive for taxable years beginning after December 31, 1985. The In-
The committee intends that the regulations are to be revised to
ternal Revenue Service is required to issue the regulations carrying
allow an employer to elect, for income and employment tax pur-
out the provisions of the bill no later than October 1, 1985. This
poses, to treat taxable fringe benefits (including personal use of em-
should give taxpayers sufficient time to prepare to comply with the
ployer-provided automobiles) as paid on a pay period, quarterly,
provisions of this bill.
semi-annual, or annual basis. Thus, in the example above, with-
For taxable years beginning in 1985, the bill provides that prior
holding could be deferred by treating the benefit as paid on June
law relating to recordkeeping applies. The committee believes that,
30 or December 31.
because of the confusion that has existed since the start of the cur-
In addition, the bill provides that an employer could elect not to
rent year as to what recordkeeping requirements taxpayers would
withhold income taxes on the value of the personal use of an auto-
have to follow, taxpayers should be permitted for the current year
mobile that is included in the employee's income if (1) the employ-
to follow the rules that were in effect before the 1984 Act.
er gives the employee advance written notice of this election that
Limitations on ITC and depreciation
nonwithholding is implemented as to that employee and (2) the em-
ployer includes the taxable amount of the benefit in the employee's
In general, the reduced limits on the investment tax credit and
income as reported on the Form W-2 provided by the employer to
depreciaiton are effective for property placed in service by the tax-
the employee for the year in which such benefit is received. 11 This
payer or leased by the taxpayer after April 2, 1985. However, prop-
election does not apply to FICA or RRTA taxes. The advance notice
erty acquired by the taxpayer pursuant to a binding contract in
generally must be provided to the employee by January 1 of the
effect on April 1, 1985, and at all times thereafter, is not subject to
year as to which the election is to apply; if an election is made for
the reduced limits provided by the bill, if it is placed in service
1985, the notice must be provided by July 1, 1985. If the employer
before August 1, 1985; and property of which the taxpayer is the
elects not to withhold income taxes, the employee can increase his
lessee pursuant to a binding contract in effect on April 1, 1985, and
withholding from regular wages by adjusting his Form W-4 so that
all times thereafter, is not subject to the reduced limits if the tax-
the employee does not need to make estimated tax payments.
payer first uses the property under the lease before August 1, 1985.
The reduced limits on the investment tax credit and depreciation
5. Limitations on ITC and depreciation
are effective for the remainder of 1985; in 1986, those limits are in-
The bill reduces the limits on the amount of investment tax
dexed.
credit and annual depreciation decuctions that are allowed for an
II. BUDGET EFFECTS
automobile as follows: (1) the investment tax credit is limited to
$675; (2) depreciation in the first year is limited to $3600; and (3)
In compliance with clause 7 of Rule XIII of the Rules of the
depreciation in any subsequent year is limited to $5400.
House of Representatives, the following statement is made concern-
For years after 1985, the limits provided in the bill are indexed
ing the effect on the budget of the bill (H.R. 1869) as reported by
for inflation, as measured by the percentage growth of the automo-
the committee. The provisions of the bill as reported are estimated
bile component of the Consumer Price Index for All Urban Con-
to decrease fiscal year budget receipts by $67 million in 1985, by $4
sumers between October of the preceding year and October 1984.
million in 1986, and increase receipts by $4 million in 1987, by $46
Adjustments for inflation are otherwise determined as under
million in 1988, by $52 million in 1989, and by $57 million in 1990.
present law. The committee intends that the Secretary of the
The Treasury Department agrees with this statement of budget
Treasury shall prescribe the adjusted limits.
effect.
11 These amounts will be treated as withheld upon for purposes of 280F(dX6xCXiXIIID.
14
15
III. VOTE OF THE COMMITTEE AND OTHER MATTERS To BE DISCUSSED
Inflationary impact
UNDER HOUSE RULES
In compliance with clause 2(1)(4), the committee states that the
enactment of the bill is not expected to have any inflationary
A VOTE OF THE COMMITTEE
impact on prices and costs in the operation of the national econo-
In compliance with clause 3(1)(2)(B) of Rule XI of the Rules of
my.
the House of Representatives, the following statement is made con-
cerning the vote of the committee on the motion to report H.R.
IV. CHANGES IN EXISTING LAW MADE BY THE BILL, As REPORTED
1869. The bill, as amended, was ordered favorable reported by by
In compliance with clause 3 of Rule XIII of the Rules of the
voice vote.
House of Representatives, changes in existing law made by the bill,
as reported, are shown as follows (existing law proposed to be omit-
B. OTHER MATTERS
ted is enclosed in black brackets, new matter is printed in italic,
In compliance with clauses 2(1)(3) and 2(1)(4) of Rule XI of the
existing law in which no change is proposed is shown in roman):
Rules of the House of Representatives, the following statements are
made with respect to the committee action H.R. 1869.
INTERNAL REVENUE CODE OF 1954
Oversight findings
With respect to subdivision (A) of clause 2(1)(3) (relating to over-
sight findings), the committee advises that it was a result of the
Subtitle A-Income Taxes
committee's review of the effect on individuals and businesses of
the contemporaneous recordkeeping requirements enacted in the
Tax Reform Act of 1984, as interpreted in temporary regulations
issued by the IRS on October 15, 1984 and February 15, 1985, that
CHAPTER 1-NORMAL TAXES AND SURTAXES
the committee concluded that it is appropriate to repeal the con-
temporaneous requirements, to repeal the IRS temporary regula-
tions interpreting that requirement, and to reinstate the prior law
substantiation rules under Code section 274(d), with certain modifi-
Subchapter B-Computation of Taxable Income
cations. The committee held a hearing on this subject on March 5,
1985.
Tax expenditures
PART IX-ITEMS NOT DEDUCTIBLE
With respect to subdivision (B) of clause 2(1)(3), after consultation
with the Director of the Congressional Budget Office, the commit-
tee states that the changes made by the bill as reported involve
SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EX-
fiscal year decreases in tax expenditures of $17 million in 1985, $97
PENSES.
million in 1986, $130 million in 1987, $138 million in 1988, $144
(a) ENTERTAINMENT, AMUSEMENT OR RECREATION.-
million in 1989, and $151 million in 1990.
(1) IN GENERAL.-
New budget authority
With respect to subdivision (B) of clause 2(1)(3) after consultation
(d) SUBSTANTIATION REQUIRED.-No deduction or credit shall be
with the Director of the Congressional Budget Office, the commit-
allowed-
tee states that the changes made by the bill as reported involve no
(1) under section 162 or 212 for any traveling expense (in-
new budget authority.
cluding meals and lodging while away from home),
(2) for any item with respect to an acitivity which is of a
Congressional Budget Office estimates
type generally considered to constitute entertainment, amuse-
Because of time constraints, it is not feasible to present a letter
ment, or recreation, or with respect to a facility used in con-
from the Director of the Congressional Budget Office before the bill
nection with such an activity,
is filed.
(3) for any expense for gifts, or
(4) with respect to any listed property (as defined in section
Oversight by Committee on Government Operations
280F(d)(4)),
With respect to subdivision (D) of clause 2(1)(3), the committee ad-
unless the taxpayer substantiates by adequate [contemporaneous]
vises that no oversight findings or recommendations have been sub-
records or sufficient written evidence corroborating the taxpayer's
mitted to the Committee on Government Operations regarding the
own statement (A) the amount of such expense or other item, (B)
subject matter of the bill.
the time and place of the travel, entertainment, amusement, recre-
16
17
ation, or use of the facility or property, or the date and description
of the gift, (C) the business purpose of the expense or other items,
lowable with respect to such property for such taxable
and (D) the business relationship to the taxpayer of persons enter-
year.
tained, using the facility or property, or receiving the gift. The Sec-
(iv) AMOUNT TREATED AS RECOVERY DEDUCTION.-For
retary may by regulations provide that some or all of the require-
purposes of this subtitle, any amount allowable as a
ments of the preceding sentence shall not apply in the case of an
deduction by reason of this subparagraph shall be
expense which does not exceed an amount prescribed pursuant to
treated as a recovery deduction allowable under sec-
tion 168.
such regulations. This subsection shall not apply to any qualified
(3) COORDINATION WITH REDUCTIONS IN AMOUNT ALLOWABLE
nonpersonal use vehicle (as defined in subsection (i)).
BY REASON OF PERSONAL USE, ETC.-This subsection shall be ap-
plied before-
(i) QUALIFIED NONPERSONAL USE VEHICLE.-For purposes of sub-
(A) the application of subsection (b), and
section (d), the term "qualified nonpersonnal use vehicle" means
(B) the application of any other reduction in the amount
any vehicle which, by reason of its nature, is not likely to be used
of the credit determined under section 46(a) or any recov-
more than a de minimis amount for personal purposes.
ery deduction allowable under section 168 by reason of any
[ii)](j) REGULATORY AUTHORITY.-The Secretary shall prescribe
use not qualifying the property for such credit or recovery
such regulations as he may deem necessary to carry out the pur-
deduction.
poses of this section, including regulations prescribing whether sub-
(4) SPECIAL RULE WHERE ELECTION OF REDUCED CREDIT IN LIEU
section (a) or subsection (b) applies in cases where both such subsec-
OF THE BASIS ADJUSTMENT.-In the case of any election under
tions would otherwise apply.
section 48(q)(4) with respect to any passenger automobile, the
limitation of paragraph (1) applicable to such passenger auto-
*
mobile shall be 2/3 of the amount which would be so applicable
but for this paragraph.
SEC. 280F. LIMITATION ON INVESTMENT TAX CREDIT AND DEPRECIA-
TION FOR LUXURY AUTOMOBILES: LIMITATION WHERE CER-
*
TAIN PROPERTY USED FOR PERSONAL PURPOSES.
(a) LIMITATION ON AMOUNT OF INVESTMENT TAX CREDIT AND DE-
(d) DEFINITIONS AND SPECIAL RULES.-For purposes of this sec-
tion-
PRECIATION FOR LUXURY AUTOMOBILES.-
(1) COORDINATION WITH SECTION 179.-Any deduction allow-
(1) INVESTMENT TAX CREDIT.-The amount of the credit deter-
able under section 179 with respect to any listed property shall
mined under section 46(a) for any passenger automobile shall
be subject to the limitations of subsections (a) and (b) in the
not exceed [$1,000.] $675.
same manner as if it were a recovery deduction allowable
(2) DEPRECIATION.-
under section 168.
(A) LIMITATION.-The amount of the recovery deduction
(2) SUBSEQUENT DEPRECIATION DEDUCTIONS REDUCED FOR DE-
for any taxable year for any passenger automobile shall
DUCTIONS ALLOCABLE TO PERSONAL USE.-Solely for purposes of
not exceed-
determining the amount of the recovery deduction for subse-
(i) [$4,000] $3,600 for the first taxable year in the
quent taxable years, if less than 100 percent of the use of any
recovery period, and
listed property during any taxable year is not use described in
(ii) [$6,000] $5,400 for each succeeding taxable year
section 168(c)(1) (defining recovery property), all of the use of
in the recovery period.
such property during such taxable year shall be treated as use
(B) DISALLOWED DEDUCTIONS ALLOWED FOR YEARS AFTER
so described.
RECOVERY PERIOD.-
(3) DEDUCTIONS OF EMPLOYEE.-
(i) IN GENERAL.-Except as provided in clause (ii),
(A) IN GENERAL.-Any employee use of listed property
the unrecovered basis of any passenger automobile
shall not be treated as use in a trade or business for pur-
shall be treated as an expense for the 1st taxable year
poses of determining the amount of any credit allowable
after the recovery period. Any excess of the unrecov-
under section 38 to the employee or the amount of any re-
ered basis over the limitation of clause (ii) shall be
covery deduction allowable to the employee unless such
treated as an expense in the succeeding taxable year.
use is for the convenience of the employer and required as
(ii) [$6,000] $5,400 LIMITATION.-The amount treat-
a condition of employment.
ed as an expense under clause (i) for any taxable year
(B) EMPLOYEE USE.-For purposes of subparagraph (A),
shall not exceed [$6,000] $5,400.
the term "employee use" means any use in connection
(iii) PROPERTY MUST BE DEPRECIABLE.-No amount
with the performance of services as an employee.
shall be allowable as a deduction by reason of this sub-
(4) LISTED PROPERTY.-
paragraph with respect to any property for any tax-
(A) IN GENERAL.-Except as provided in subparagraph
able year unless a depreciation deduction would be al-
(B), the term "listed property" means—
(i) any passenger automobile,
18
19
(ii) any other property used as a means of transpor-
spect to such use, and, where required, there was
tation,
withholding under chapter 24.
(iii) any property of a type generally used for pur-
(ii) SPECIAL RULE FOR AIRCRAFT.-Clause (i) shall not
poses of entertainment, recreation, or amusement,
apply with respect to any aircraft if at least 25 percent
(iv) any computer or peripheral equipment (as de-
of the total use of the aircraft during the taxable year
fined in section 168(j)(5)(D)), and
consists of qualified business use not described in
(v) any other property of a type specified by the Sec-
clause (i).
retary by regulations.
(D) DEFINITIONS.-For purposes of this paragraph-
(B) EXCEPTION FOR CERTAIN COMPUTERS.-The term
(i) 5-PERCENT OWNER.-The term "5-percent owner"
"listed property" shall not include any computer or pe-
means any person who is a 5-percent owner with re-
ripheral equipment (as so defined) used exclusively at a
spect to the taxpayer (as defined in section
416(i)(1)(B)(i)).
regular business establishment. For purposes of the pre-
ceding sentence, any portion of a dwelling unit shall be
(ii) RELATED PERSON.-The term "related person"
treated as a regular business establishment if (and only if)
means any person related to the taxpayer (within the
meaning of section 267(b)).
the requirements of section 280A(c)(1) are met with respect
(7) AUTOMOBILE PRICE INFLATION ADJUSTMENT.-
to such portion.
(A) IN GENERAL.-In the case of any passenger automo-
(5) PASSENGER AUTOMOBILE.-
bile, subsection (a) shall be applied by increasing each
(A) IN GENERAL.-Except as provided in subparagraph
dollar amount contained in such subsection by the automo-
(B), the term "passenger automobile" means any 4-wheeled
bile price inflation adjustment for the calendar year in
vehicle-
which such automobile is placed in service. Any increase
(i) which is manufactured primarily for use on
under the preceding sentence shall be rounded to the near-
public streets, roads, and highways, and
est multiple of $100 (or if the increase is a multiple of $50,
(ii) which is rated at 6,000 pounds gross vehicle
such increase shall be increased to the next higher multi-
weight or less.
ple of $100).
(B) EXCEPTION FOR CERTAIN VEHICLES.-The term "pas-
(B) AUTOMOBILE PRICE INFLATION ADJUSTMENT.-For pur-
senger automobile" shall not include-
poses of this paragraph-
(i) any ambulance, hearse, or combination ambu-
(i) IN GENERAL-The automobile price inflation ad-
lance/hearse used by the taxpayer directly in a trade
justment for any calendar year is the percentage (if
or business,
any) by which-
(ii) any vehicle used by the taxpayer directly in the
(I) the CBI automobile component for October of
trade or business of transporting persons or property
the preceding calendar year, exceeds
for compensation or hire, and
(II) the CBI automobile component for October
(iii) under regulations, any truck or van.
of [1983.] 1984.
(6) BUSINESS USE PERCENTAGE.-
In the case of [calendar year 1984,] any calendar
(A) IN GENERAL.-The term "business use percentage"
year before 1986, the automobile price inflation adjust-
means the percentage of the use of any listed property
ment shall be zero.
during any taxable year which is a qualified business use.
(ii) CPI AUTOMOBILE COMPONENT.-The term "CPI
(B) QUALIFIED BUSINESS USE.-Except as provided in sub-
automobile component" means the automobile compo-
paragraph (C), the term "qualified business use" means
nent of the Consumer Price Index for All Urban Con-
any use in a trade or business of the taxpayer.
sumers published by the Department of Labor.
(C) EXCEPTION FOR CERTAIN USE BY 5-PERCENT OWNERS
AND RELATED PERSONS.-
(i) IN GENERAL-The term "qualified business use"
shall not include-
Subtitle C-Employment Taxes and Collection
(I) leasing property to any 5-percent owner or
of Income Tax at Source
related person,
(II) use of property provided as compensation for
the performance of services by a 5-percent owner
or related person, or
CHAPTER 24-COLLECTION OF INCOME TAX AT
(III) use of property provided as compensation
for the performance of services by any person not
SOURCE ON WAGES
described in subclause (II) unless an amount is in-
cluded in the gross income of such person with re-
20
21
SEC. 3402. INCOME TAX COLLECTED AT SOURCE.
penalty of $25 for such failure, unless it is shown that such failure
(a) REQUIREMENT OF WITHHOLDING.-
is due to reasonable cause and not to willful neglect."
(1) IN GENERAL.-
[(3) UNDERPAYMENT ATTRIBUTABLE TO FAILURE TO MEET SUB-
STANTIATION REQUIREMENTS TREATED AS DUE TO NEGLIGENCE.-
(s) EXEMPTION FROM WITHHOLDING FOR ANY VEHICLE FRINGE
Section 6653 (relating to failure to pay tax) is amended by
BENEFIT.-
adding at the end thereof the following new subsection:
(1) EMPLOYER ELECTION NOT TO WITHHOLD.-The employer
["(h) SPECIAL RULE IN THE CASE OF UNDERPAYMENT ATTRIB-
may elect not to deduct and withhold any tax under this chap-
UTABLE To FAILURE To MEET CERTAIN SUBSTANTIATION RE-
ter with respect to any vehicle fringe benefit provided to any
QUIREMENTS.-
employee if such employee is notified (at such time and in such
["(1) IN GENERAL.-Any portion of an underpayment attrib-
manner as the Secretary shall by requlations prescribe) by the
utable to a failure to comply with the requirements of section
employer that the employer is making such election. The preced-
274(d) shall be treated, for purposes of subsection (a), as due to
ing sentence shall not apply to any vehicle fringe benefit unless
negligence in the absence of clear and convincing evidence to
the amount of such benefit is included by the employer on a
the contrary.
statement timely furnished under section 6051.
["(2) PENALTY TO APPLY ONLY TO PORTION OF UNDERPAYMENT
(2) EMPLOYER MUST FURNISH w-2.-Any vehicle fringe benefit
DUE TO FAILURE TO MEET SUBSTANTIATION REQUIREMENTS.-If
shall be treated as wages from which amounts are required to
any penalty is imposed under subsection (a) by reason of para-
be deducted and withheld under this chapter for purposes of
graph (1), the amount of the penalty imposed by paragraph (1)
section 6051.
of subsection (a) shall be 5 percent of the portion of the under-
(3) VEHICLE FRINGE BENEFIT.-For purposes of this subsec-
payment which is attributable to the failure described in para-
tion, the term "vehicle fringe benefit means any fringe bene-
graph (1)."]
fit-
(A) which constitutes wages (as defined in section 3401),
*
*
and
(B) which consists of providing a highway motor vehicle
for the use of the employee.
*
*
*
*
*
SECTION 179 OF THE TAX REFORM ACT OF 1984
SEC. 179. LIMITATION ON AMOUNT OF DEPRECIATION AND INVESTMENT
TAX CREDIT FOR LUXURY AUTOMOBILES; LIMITATION
WHERE CERTAIN PROPERTY USED FOR PERSONAL PUR-
POSES.
(a) IN GENERAL.-***
(b) COMPLIANCE PROVISIONS.-
(1) AMENDMENT OF SECTION 274
[(2) DUTIES OF RETURN PREPARERS.-Subsection (b) of section
6695 (relating to failure to sign return) is amended to read as
follows:
["(b) FAILURE To INFORM TAXPAYER OF CERTAIN RECORDKEEP-
ING REQUIREMENTS OR To SIGN RETURN.-Any person who is an
income tax return preparer with respect to any return or claim for
refund and who is required by regulations to sign such return or
claim-
["(1) shall advise the taxpayer of the substantiation require-
ments of section 274(d) and obtain written confirmation from
the taxpayer that such requirements were met with respect to
any deduction or credit claimed on such return or claim for
refund and
["(2) shall sign such return or claim for refund.
Any person who fails to comply with the requirements of the pre-
ceding sentence with respect to any return or claim shall pay a
99TH CONGRESS
}
REPORT
1st Session
HOUSE OF REPRESENTATIVES
99-67
REPEAL OF CONTEMPORANEOUS RECORDKEEPING
REQUIREMENTS
MAY 7, 1985.-Ordered to be printed
Mr. ROSTENKOWSKI, from the committee of conference,
submitted the following
CONFERENCE REPORT
[To accompany H.R. 1869]
The committee of conference on the disagreeing votes of the two
Houses on the amendments of the Senate to the bill (H.R. 1869) to
repeal the contemporaneous recordkeeping requirements added by
the tax Reform Act of 1984, and for other purposes, having met,
after full and free conference, have agreed to recommend and do
recommend to their respective Houses as follows:
That the House recede from its disagreement to the amendment
of the Senate to the text of the bill and agree to the same with an
amendment as follows:
In lieu of the matter proposed to be inserted by the Senate
amendment insert the following:
SECTION 1. REPEAL OF CONTEMPORANEOUS RECORDKEEPING REQUIRE-
MENTS, ETC.
(a) CONTEMPORANEOUS RECORDKEEPING REQUIREMENTS.-Subsec-
tion (d) of section 274 of the Internal Revenue Code of 1954 (relating
to substantiation requirements for certain deductions and credits) is
amended by striking out "adequate contemporaneous records" and
inserting in lieu thereof "adequate records or by sufficient evidence
corroborating the taxpayer's own statement", and the Internal Reve-
nue Code of 1954 shall be applied and administered as if the word
"contemporaneous" had not been added to such subsection (d).
(b) PROVISIONS RELATING TO RETURN PREPARERS AND NEGLI-
GENCE PENALTY.-Paragraphs (2) and (3) of section 179(b) of the Tax
Reform Act of 1984 are hereby repealed, and the Internal Revenue
Code of 1954 shall be applied and administered as if such para-
graphs (and the amendments made by such paragraphs) had not
been enacted.
51-006 0
2
3
(c) REPEAL OF REGULATIONS.-Regulations issued before the date
(2) DEPRECIATION.-Paragraph (2) of section 280F(a) of such
of the enactment of this Act to carry out the amendments made by
Code (relating to depreciation) is amended-
paragraphs (1)(C), (2), and (3) of section 179(b) of the Tax Reform
(A) by striking out "$4,000" in subparagraph (A)(i) and
Act of 1984 shall have no force and effect.
inserting in lieu thereof "$3,200", and
SEC. 2. SUBSTANTIATION REQUIREMENTS NOT TO APPLY TO CERTAIN VE-
(B) by striking out "$6,000" each place it appears in sub-
HICLES WITH LITTLE PERSONAL USE.
paragraphs (A)(ii) and (B)(ii) and inserting in lieu thereof
(a) IN GENERAL.-Subsection (d) of section 274 of the Internal
"$4,800".
Revenue Code of 1954 (relating to substantiation required) is amend-
(b) 4-YEAR DEFERRAL OF INFLATION ADJUSTMENT.-
ed by adding at the end thereof the following new sentence: "This
(1) ADJUSTMENT AFTER 1988.-Subparagraph (A) of section
subsection shall not apply to any qualified nonpersonal use vehicle
280F(d)(7) of such Code (relating to automobile price inflation
(as defined in subsection (i))."
adjustment) is amended by striking out "passenger automobile"
(b) QUALIFIED NONPERSONAL USE VEHICLE DEFINED.-Section 274
and inserting in lieu thereof "passenger automobile placed in
of such Code is amended by redesignating subsection (i) as subsec-
service after 1988".
tion (j) and by inserting after subsection (h) the following new sub-
(2) 1987 BASE PERIOD.-Subclause (II) of section
section:
280F(d)(7)(B)(i) of such Code is amended by striking out "1983"
"(i) QUALIFIED NONPERSONAL USE VEHICLE.-For purposes of sub-
and inserting in lieu thereof "1987".
section (d), the term 'qualified nonpersonal use vehicle' means any
(3) TECHNICAL AMENDMENT.-Clause (i) of section
vehicle which, by reason of its nature, is not likely to be used more
280F(d)(7)(B) of such Code is amended by striking out the last
sentence.
than a de minimis amount for personal purposes.'
SEC. 5. NEW REGULATIONS.
SEC. 3. EXEMPTION FROM REQUIRED INCOME TAX WITHHOLDING FOR CER-
TAIN FRINGE BENEFITS.
Not later than October 1, 1985, the Secretary of the Treasury or
Section 3402 of the Internal Revenue Code of 1954 (relating to
his delegate shall prescribe regulations to carry out the provisions of
income tax collected at source) is amended by adding at the end
this Act which shall fully reflect such provisions.
thereof the following new subsection:
SEC. 6. EFFECTIVE DATES.
"(s) EXEMPTION FROM WITHHOLDING FOR ANY VEHICLE FRINGE
(a) REPEALS.-The amendment and repeals made by subsections
BENEFIT.-
(a) and (b) of section 1 shall take effect as if included in the amend-
"(1) EMPLOYER ELECTION NOT TO WITHHOLD.-The employer
ments made by section 179(b) of the Tax Reform Act of 1984.
may elect not to deduct and withhold any tax under this chap-
(b) RESTORATION OF PRIOR LAW FOR 1985.-For taxable years be-
ter with respect to any vehicle fringe benefit provided to any
ginning in 1985, section 274(d) of the Internal Revenue Code of 1954
employee if such employee is notified by the employer of such
shall apply as it read before the amendments made by section
election (at such time and in such manner as the Secretary
179(b)(1) of the Tax Reform Act of 1984.
shall by regulations prescribe). The preceding sentence shall not
(c) EXCEPTION FROM SUBSTANTIATION REQUIREMENTS FOR QUALI-
apply to any vehicle fringe benefit unless the amount of such
FIED NONPERSONAL USE VEHICLES.-The amendments made by sec-
benefit is included by the employer on a statement timely fur-
tion 2 shall apply to taxable years beginning after December 31,
nished under section 6051.
1985.
"(2) EMPLOYER MUST FURNISH w-2.-Any vehicle fringe benefit
(d) WITHHOLDING AMENDMENT.-The amendment made by section
shall be treated as wages from which amounts are required to
3 shall take effect on January 1, 1985.
be deducted and withheld under this chapter for purposes of
(e) REDUCTION IN LIMITATIONS ON INVESTMENT TAX CREDIT AND
DEPRECIATION.-
section 6051.
"(3) VEHICLE FRINGE BENEFIT.-For purposes of this subsec-
(1) Except as provided in paragraph (2), the amendments
tion, the term 'vehicle fringe benefit' means any fringe benefit-
made by section 4 shall apply to-
"(A) which constitutes wages (as defined in section 3401),
(A) property placed in service after April 2, 1985, in tax-
and
able years ending after such date, and
"(B) which consists of providing a highway motor vehicle
(B) property leased after April 2, 1985, in taxable years
ending after such date.
for the use of the employee."
(2) The amendments made by section 4 shall not apply to any
SEC. 4. REDUCTION IN LIMITATIONS ON INVESTMENT TAX CREDIT AND DE-
property-
PRECIATION FOR LUXURY AUTOMOBILES.
(A) acquired by the taxpayer pursuant to a binding con-
(a) GENERAL RULE.-
tract in effect on April 1, 1985, and at all times thereafter,
(1) INVESTMENT TAX CREDIT.-Paragraph (1) of section 280F(a)
but only if the property is placed in service before August 1,
of the Internal Revenue Code of 1954 (relating to investment tax
1985, or
credit) is amended by striking out "$1,000" and inserting in
(B) of which the taxpayer is the lessee, but only if the
lieu thereof "$675".
lease is pursuant to a binding contract in effect on April 1,
4
5
1985, and at all times thereafter, and only if the taxpayer
STATEMENT OF MANAGERS ON THE PART OF THE HOUSE
first uses such property under the lease before August 1,
1985.
I. EXPLANATION OF PROVISIONS
And the Senate agree to the same.
That the House recede from its disagreement to the amendment
A. Repeal of Requirement That Certain Records Must Be Contem-
of the Senate to the title of the bill and agree to the same.
poraneous (secs. 1.(a) and (c) and 2(a) of the House bill and secs. 1
(a) and (c) of the Senate amendment)
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF
1. Repeal of "contemporaneous" requirement
CONFERENCE
Present law
The managers on the part of the House and the Senate at the
conference on the disagreeing votes of the two Houses on the
The Tax Reform Act of 1984 (the 1984 Act) amended Code section
amendments of the Senate to the bill (H.R. 1869) to repeal the con-
274(d) to require that taxpayers must maintain "adequate contem-
temporaneous recordkeeping requirements added by the Tax
poraneous records" to substantiate deductions and credits for busi-
Reform Act of 1984, and for other purposes, submit the following
ness use of automobiles and other listed property.
joint statement to the House and the Senate in explanation of the
House bill
effect of the action agreed upon by the managers and recommend-
ed in the accompanying conference report:
The House bill repeals the word "contemporaneous," effective as
The Senate amendment to the text of the bill struck out all of
if it had never been enacted.
the House bill after the enacting clause and inserted a substitute
Senate amendment
text.
The House recedes from its disagreement to the amendment of
The Senate amendment is the same as the House bill.
the Senate with an amendment which is a substitute for the House
Conference agreement
bill and the Senate amendment. The differences between the House
bill, the Senate amendment, and the substitute agreed to in confer-
The conference agreement follows the House bill and the Senate
ence are noted below, except for clerical corrections, conforming
amendment.
changes made necessary by agreements reached by the conferees,
2. Alternate substantiation method
and minor drafting and clarifying changes.
DAN ROSTENKOWSKI,
Present law and background
SAM M. GIBBONS,
Prior to the 1984 Act, taxpayers were required under section
J.J. PICKLE,
274(d) to substantiate deductions for travel away from home (in-
C.B. RANGEL,
cluding meals and lodging), for items with respect to entertain-
PETE STARK,
ment, amusement, or recreation activities of facilities, and for busi-
JOHN J. DUNCAN,
ness gifts by adequate records or by sufficient evidence corroborat-
BILL ARCHER,
ing the taxpayer's own statement. In the case of an expense or
GUY VANDER JAGT,
item subject to substantiation under section 274(d), that provision
Managers on the Part of the House.
required substantiation as to (1) the amount of such expense or
BoB PACKWOOD,
other item, (2) the time and place of the travel, entertainment,
BoB DOLE,
amusement, recreation, or use of the facility, or the date and de-
W.V. ROTH, Jr.,
scription of the gift, (3) the business purpose of the expense or
JOHN DANFORTH,
other item, and (4) the business relationship to the taxpayer of per-
RUSSELL LONG,
sons entertained, using the facility, or receiving the gift. Prior to
LLOYD BENTSEN,
the 1984 Act, local travel (i.e., travel not away from home) was not
SPARK M. MATSUNAGA,
subject to the section 274(d) substantiation standards.
Managers on the Part of the Senate.
Section 179(b) of the 1984 Act deleted from section 274(d) the al-
ternate substantiation method of sufficient evidence corroborating
the taxpayer's own statement. The 1984 Act also applied the sec-
tion 274(d) substantiation requirements to deductions or credits
claimed for use of listed property (as defined in sec. 280F(d)(4)). The
categories of listed property include automobiles (whether used for
local travel or travel away from home), other means of transporta-
tion, computers, etc.
6
7
House bill
162,1 which have been interpreted to permit in certain circum-
The House bill provides that, as an alternative to maintaining
stances uncorroborated statements by taxpayers to support busi-
adequate records, taxpayers may substantiate deductions and cred-
ness deductions not subject to section 274(d) or other special rules,
its under section 274(d) by sufficient written evidence corroborating
are to have no application to deductions or credits with respect to
their own statement.
local travel, computers, and other listed property first required
The committee report also requires that certain information con-
(under this bill) to meet the section 274(d) substantiation standards
cerning mileage and business use of vehicles, as well as similar in-
beginning January 1, 1986, just as they are to have no application
formation concerning business use of other listed property, must be
with respect to expenditures with respect to travel away from
requested on tax returns.
home, etc., which continue to be subject to section 274(d) substan-
The House bill is effective on January 1, 1986. For 1985, the sub-
tiation standards.
stantiation rules in effect prior to the 1984 Act would apply.
The conference agreement does not include the provision of the
Senate amendment
House bill that would require that the sufficient evidence corrobo-
rating the taxpayer's own statement be written. The conferees be-
The Senate amendment is similar to the House bill in that it pro-
lieve that oral evidence corroborating the taxpayer's own state-
vides for an alternate substantiation method. However, the Senate
ment, such as oral testimony from a disinterested, unrelated party
amendment does not require that the evidence must be written in
describing the taxpayer's activities, may be of sufficient probative
order to qualify as sufficient under the alternate substantiation
value that it should not be automatically excluded from consider-
standard. The Senate amendment is effective January 1, 1985.
ation under section 274(d).
The Senate amendment does not specifically require that ques-
The conferees emphasize, however, that different types of evi-
tions regarding the business use of automobiles and other listed
dence have different degrees of probative value. The conferees be-
property be asked on tax returns.
lieve that oral evidence alone has considerably less probative value
Conference agreement
than written evidence. In addition, the conferees believe that the
probative value of written evidence is greater the closer in time it
Substantiation standards
relates to the expenditure. Thus, written evidence arising at or
near the time of the expenditure, absent unusual circumstances,
In general
has much more probative value than evidence created years later,
The conference agreement generally follows the Senate amend-
such as written evidence first prepared for audit or court.
ment as to the substantiation standards under section 274(d). Thus,
The conferees specifically approve the types of substantiation
section 274(d) is amended to require that a taxpayer must have
that were required under prior law, and consider the longstanding
adequate records or sufficient evidence corroborating the taxpay-
Treasury regulations on recordkeeping issued under section 274(d)²
er's own statement to support credits or deductions for expendi-
prior to the 1984 Act to reflect accurately their intent as to the
tures subject to the section 274(d) substantiation rules. As under
substantiation that taxpayers are required to maintain. 3 While tax-
pre-1984 Act law, section 274(d) as amended by the bill requires the
payers may choose to keep logs on the use of their automobiles,
taxpayer to substantiate (1) the amount of the expense or item sub-
and while such evidence generally has more probative value than
ject to section 274(d), (2) the time and place of the travel, entertain-
evidence developed later, the Treasury is specifically prohibited
ment, amusement, recreation, or use of the facility or property, or
from requiring that taxpayers keep daily contemporaneous logs of
the date and description of the gift, (3) the business purpose of the
their use of automobiles.
expense or other item, and (4) the business relationship to the tax-
payer of persons entertained, using the facility or property, or re-
I Under general tax law principles, the courts have held that a taxpayer bears the burden of
ceiving the gift.
proving both the eligibility of any expenditure claimed as a deduction or credit and also the
amount of any such eligible expenditure, including the expenses of using a car in the taxpayer's
The conferees believe that a taxpayer's uncorroborated state-
trade or business. See, e.g., Interstate Transit Lines V. Comm'r, 319 U.S. 590, 593 (1943); Comm'r
ment as to the business use of an automobile or other listed proper-
V. Heininger, 320 U.S. 467 (1943); Gaines V. Comm'r, 35 T.C.M. 1415 (1976).
ty does not alone have sufficient probative value to warrant consid-
2 See Teas. Reg. sec. 1.274-5.
3 Prior law provided that adequate records or sufficient evidence may take the following
eration by the Internal Revenue Service or the courts. Consequent-
forms:
ly, the conferees adopt for this purpose the standard of prior law
a. Account books
b. Diaries
applicable to travel away from home and business entertainment
c. Logs
(sec. 274(d)) that requires taxpayers to provide either adequate
d. Documentary evidence (receipts, paid bills)
e. Trip sheets
records or sufficient evidence corroborating their own statements
f. Expense reports
in order to support a deduction or credit under section 274(d). The
g. Statements of witnesses
h. If the employee is required to make an adequate accounting to the employer and the reim-
more general substantiation standards applicable under section
bursement equals expenses, the employee is not required to report the expenses and reimburse-
ment on his or her tax return. (A reimbursement would equal expenses where the reimbursement
is determined pursuant to data on the type of automobile and its availability for personal
purposes, and on a reasonable allocation of local operating and fixed costs.)
8
9
The conferees expect the Internal Revenue Service and the
inadequate and unacceptable for purposes of section 274(d). In sev-
courts to continue to weigh carefully the probative value of these,
eral cases previously decided under section 274(d), it is not clear
as well as all other, forms of evidence. The Service and the courts
that the courts had rejected the Cohan rule; the conferees believe
continue to have the ability to discount or reject totally evidence
that the courts must clearly and explicitly reject the Cohan rule
that has limited or no probative value (such as documents actually
for expenditures required to meet the substantiation requirements
created much later than they purport to have been created). As
of section 274(d).
noted above, section 274(d) requires that the records or evidence
(whatever their particular form) most substantiate not just the
Written policy statements
amount of the expense, but also the time and place of the travel,
The conferees intend that the two types of written policy state-
entertainment, amusement, recreation, or use of the facility or
ments satisfying the conditions described below, if initiated and
property, or the date and description of the gift; the business pur-
kept by an employer to implement a policy of no personal use (or
pose of the expense or other item; and the business relationship to
no personal use except for commuting) of a vehicle provided by the
the taxpayer of persons entertained, using the facility or property,
employer, qualify as sufficient evidence corroborating the taxpay-
or receiving the gift.
er's own statement 6 and therefore will satisfy the employer's sub-
Although the conferees intend that the principles of these regu-
stantiation requirements under section 274(d). Therefore, the em-
lations fully apply to deductions and credits claimed for local travel
ployee need not keep a separate set of records for purposes of the
and the use of other listed property under section 274(d), the con-
employer's substantiation requirements under section 274(d) with
ferees also recognize that these principles will need to be carefully
respect to use of a vehicle satisfying these written policy statement
applied to local travel and listed property not previously subject to
rules. A written policy statement adopted by a government unit as
section 274(d). This will need to be done because the nature of
to employee use of its vehicles would be eligible for these excep-
making these expenditures generally differs from the nature of
tions to the section 274(d) substantiation rules. Thus, a resolution
making the types of expenditures that had been required to meet
of a city council or a provision of state law or the state constitution
the section 274(d) substantiation standards prior to the 1984 Act,
would qualify as a written policy statement, so long as the condi-
such as travel away from home and business meals. For example,
tions described below are met.
deductions associated with local travel may be for annual amounts
The first type of written policy statement that will satisfy the
for items such as depreciation and insurance, rather than a series
employer's substantiation requirements under section 274(d) is a
of discrete expenditures for meals or hotels. Also, expenses for
policy that prohibits personal use by the employee. In order to be
travel away from home often involve a third party, such as an air-
eligible for this special rule, all of the following conditions must be
line, train, or hotel, that provides a receipt for the taxpayer of the
met-
date and amount of the expenditure and the destination or loca-
tion. Similarly, expenses for business meals generally occur in res-
(1) The vehicle is owned or leased by the employer and is provid-
taurants, which provide a similar receipt. While these receipts do
ed to one or more employees for use in connection with the employ-
er's trade or business;
not, of course, encompass all of the elements of the substantiation
requirements under section 274(d),4 they do aid taxpayers in their
(2) When the vehicle is not being used for such business pur-
recordkeeping. Similar third party involvement generally is not
poses, it is kept on the employer's business premises (or temporari-
available for local travel or the use of computers. Similarly, ex-
ly located elsewhere, e.g., for repair);
penses for travel away from home or for business meals do not gen-
(3) Under the employer's written policy, no employee may use
erally occur with the same frequency as individual local travel
the vehicle for personal purposes, other than de minimis personal
trips. Because the bill repeals the 1984 Act requirement of contem-
use (such as a stop for lunch between two business deliveries);
poraneous records, taxpayers are not required to maintain trip-by-
(4) The employer reasonably believes that no employee uses the
trip logs and records encompassing each element of the substantia-
vehicle, other than de minimis use, for any personal purpose;
tion standards of section 274(d) to justify a deduction or credit.
(5) No employee using the vehicle lives at the employer's busi-
Consequently, the conferees recognize that some adjustment gen-
ness premises; and
(6) There must be evidence that would enable the Internal Reve-
erally will need to be made in order to apply these principles to the
nue Service to determine whether the use of the vehicle met the
specific factual circumstances surrounding expenditures for local
travel and use of listed property not previously subject to section
five preceding conditions.
274(d) rules. The conferees believe that the courts and the Treasury
The second type of written policy statement that will satisfy the
employer's substantiation requirements under section 274(d) is a
can make these required adjustments without sacrificing these
principles, and without reverting to the section 162 standards (in-
policy that prohibits personal use by the employee, except for com-
cluding the Cohan 5 rule), which the conferees have determined are
muting. In order to be eligible for this rule, all of the following con-
ditions must be met-
4 For example, the third party is not in a position to record the business purpose of the trip or
meal; the taxpayer must provide that information, which is required under the section 274(d)
8 The substance of these two special rules was set forth in the temporary Treasury regulations
substantiation rules.
repealed by the bill. The conferees intend that these rules, as described in this report, be rein-
5 Cohan V. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930).
stated in the new regulations required by the bill.
10
11
(1) The vehicle is owned or leased by the employer and is provid-
other taxpayers and entities, claiming such deductions or credits
ed to one or more employees for use in connection with the employ-
also are to be asked to supply such information on the forms or
er's trade or business and is used in the employer's trade or busi-
schedules they are required to file.
ness;
The conferees have carefully considered the fact that furnishing
(2) For bona fide noncompensatory business reasons, the employ-
additional tax return information, although involving only a limit-
er requires the employee to commute to and/or from work in the
ed number of questions, requires some additional effort by taxpay-
vehicle;
ers. However, the conferees note that computations involved with
(3) The employer establishes a written policy under which the
respect to vehicles (such as mileage and percentage of business use)
employee may not use the vehicle for personal purposes, other than
normally would be made by taxpayers in the process of determin-
commuting or de minimis personal use (such as a stop for a person-
ing the proper amount of deductions and credits to claim, and that
al errand between a business delivery and the employee's home);
other information can be obtained through "yes" or "no" questions.
(4) The employer reasonably believes that, except for de minimis
Accordingly, to achieve better compliance and more accurate com-
use, the employee does not use the vehicle for any personal purpose
putations, the conference agreement directs the Internal Revenue
other than commuting;
Service to obtain this information on appropriate tax forms or
(5) The employer accounts for the commuting use by including an
schedules, notwithstanding any otherwise applicable paperwork re-
appropriate amount (specified in Treasury regulations) in the em-
duction considerations.
ployee's gross income; 7 and
The conferees intend that employees give this return information
(6) There must be evidence that would enable the Internal Reve-
to their employers with respect to employer-provided vehicles. Gen-
nue Service to determine whether the use of the vehicle met the
erally, the employer would report this information on its tax
five preceding conditions.
return, since the employer is claiming the tax deductions or credits
This second type of written policy statement is not available if
for use of the vehicle. An employer which provides more than five
the employee using the vehicle for commuting is an officer or one-
cars to its employees, however, would not have to include all this
percent owner of the employer.⁸
information on the employer's return; instead, such an employer
must obtain this information from its employees, must so indicate
Tax return questions
on its return, and must retain the information received. The Inter-
The conference agreement generally follows the House bill as to
nal Revenue Service could then examine on audit the information
information to be requested on tax returns about business use of
that the employees had provided to the employer. An employer
vehicles and other listed property.
may rely on such a statement from its employee (unless the em-
The conferees want to ensure that taxpayers claim only the de-
ployer knows or has reason to know it is false) to determine the
ductions and credits to which they are entitled, but without being
credits and deductions to which the employer is entitled and to de-
unduly burdened by unnecessarily complex recordkeeping require-
termine the amount, if any, which must be included in employee's
ments. At the same time, the conferees believe that taxpayers
income and wages by the employer because of the employee's com-
should provide sufficient information on their returns so that the
muting or other personal use of the employer-provided car.
Internal Revenue Service can make a preliminary evaluation of
the appropriateness of the taxpayer's claimed deductions. Previous-
Effective dates
ly, the Internal Revenue Service found it difficult to make such a
The modification to the substantiation standards of section 274(d)
preliminary evaluation without auditing the taxpayer, which can
that provides that taxpayers must substantiate deductions or cred-
also be a significant burden on the taxpayer.
its subject to that provision by adequate records or sufficient evi-
Therefore, the conferees intend that individual taxpayers (wheth-
dence corroborating their own statement is effective January 1,
er employees or self-employed) claiming deductions or credits for
1985.
business use of an automobile or other listed property subject to
Use of listed property that was not subject to section 274(d) sub-
the substantiation standards of section 274(d) are to provide on
stantiation rules prior to the 1984 Act (such as local travel in an
their returns the substance of the information (generally on appro-
automobile or use of computers) is subject to the section 274(d) sub-
priate existing tax forms) called for by all the questions as set forth
stantiation requirements effective January 1, 1986. 10 For 1985, use
in the House report on the bill.9 Corporate taxpayers, as well as all
in service, use of other vehicles and after-work use, whether the taxpayer has evidence to sup-
7 Of course, if in fact the employee uses the vehicle for personal purposes in violation of the
port the business use claimed on the return, and whether or not the evidence is written. In the
particular type of written policy statement, then the employee has additional gross income.
case of other listed property subject to the section 274(d) rules, information should be requested
8 This restriction, which makes this rule inapplicable to officers or one-percent owners, applies
in connection with appropriate tax forms or schedules as to type of property (e.g., yacht, comput-
for substantiation purposes under the conference agreement. The treatment of commuting use
er, airplane, etc.), percentage of business use, whether the taxpayer has written evidence to sup-
of vehicles by such persons for valuation purposes is to be determined separately under Treas-
port the business use claimed on the return, and whether or not the evidence is written. Under
ury regulations. No inference is intended, on the basis of the exclusion of officers and one-per-
the conference agreement, the Internal Revenue Service is not required to request on returns
cent owners from eligibility under this substantiation rule, as to the treatment of commuting
the specific question relating to computers set forth as question 2 on page 10 of the committee
use of vehicles by such persons under valuation rules prescribed by Treasury regulations.
report on the House Bill.
9 In the case of a vehicle, the information required to be requested on the tax return relates to
This January 1, 1986 effective date applies only to the extent that use of listed property was
mileage (total, business, commuting, and other personal), percentage of business use, date placed
first made subject to the substantiation standards of section 274(d) by the 1984 Act. Deductions
Continued
Continued
12
13
of such listed property is not subject to the special substantiation
House bill
standards under section 274(d).
The House bill repeals this provision, effective as if it had never
The tax return information (described above) must be requested
been enacted.
on returns for taxable years beginning in 1985 (i.e., in the case of
most individuals, returns which must be filed by April 15, 1986.)
Senate amendment
3. Repeal of regulations
The Senate amendment is the same as the House bill.
Present law
Conference agreement
The Internal Revenue Service has issued temporary regulations
The conference agreement follows the House bill and the Senate
implementing the recordkeeping provisions of section 179(b) of the
amendment.
1984 Act.
C. Repeal of Special Negligence Penalty (sec. 1(b) of the House bill
House bill
and sec. 1(c) of the Senate amendment)
The House bill repeals all Treasury regulations (temporary or
Present law
proposed) issued prior to the enactment of this House bill that
A special no-fault negligence penalty (Code sec. 6653(h)) applies
carry out the amendments made by section 179(b) of the Tax
to the portion of any understatement of tax attributable to failure
Reform Act of 1984. Thus, such regulations issued to implement
to meet the substantiation requirements of section 274(d).
the changes to section 274(d) made by that Act, particularly the in-
clusion in that section of the word "contemporaneous," are re-
House bill
voked. 11 In addition, any regulations relating to the return prepar-
The House bill repeals this special negligence penalty, effective
er provision and the special negligence penalty (described above)
as if it had never been enacted.
are revoked. 12 These revoked regulations are to have no force and
effect whatsoever.
Senate amendment
Senate amendment
The Senate amendment is the same as the House bill.
The Senate amendment is the same as the House bill.
Conference agreement
Conference agreement
The conference agreement follows the House bill and the Senate
amendment. The conference agreement provides that the Internal
The conference agreement follows the House bill and the Senate
Revenue Code shall be applied and administered as if this special
amendment. Thus, the conference agreement provides that regula-
negligence penalty had never been enacted.
tions issued to carry out the amendments made by paragraphs
The conferees believe that repealing this special negligence pen-
(1)(C), (2), and (3) of section 179(b) of the 1984 Act shall have no
alty is needed to restore to the Internal Revenue Service and the
force and effect.
courts discretion not to impose the negligence penalty for minor,
inadvertent recordkeeping or computational errors. The conferees
B. Repeal of Provisions Relating to Return Preparers (sec. 1(b) of
emphasize, however, that the regular negligence and fraud penal-
the House bill and sec. 1(c) of the Senate amendment)
ties will continue to be applicable if a taxpayer claims tax benefits
Present law
that cannot be supported. The conferees are concerned that these
regular negligence and fraud penalties have not been applied by
Return preparers must advise taxpayers of the substantiation re-
the Internal Revenue Service or the courts in a substantial number
quirements under section 274(d) and obtain written confirmation
of instances where their application would be fully justified.
that those requirements have been met (Code section 6695(b)).
In one Tax Court case, for example, the taxpayer had kept de-
tailed mileage records, required by his employer for reimbursement
for expenses or items that were subject to the section 274(d) substantiation standards prior to
purposes, that indicated that his business use was approximately
the 1984 Act (such as use of an automobile for travel away from home or use of a yacht that is
an entertainment, recreation, or amusement facility) remain subject to the section 274(d) sub-
five percent of total use. On his tax return, the taxpayer claimed
stantiation standards for all taxable years ending after December 31, 1962.
70 percent business use, with no records to justify this claim. The
11 Also, the provisions of the temporary regulations that prohibit an employer from including
Tax Court properly allowed only five percent business use. The
the entire value of the use of an automobile in the income of certain employees are revoked.
Thus, an employer is permitted to charge the entire value of an employer-provided car to an
Court did not, however, impose a negligence or fraud penalty. The
employee as income and wages (for income tax, FICA, FUTA, and RRTA withholding purposes).
conferees believe that, in a case like this one, the regular negli-
The employer may then reimburse the employee for the business use of the car, or the employee
may claim a deduction on the employee's income tax return for the business use of the car.
gence penalty should certainly be imposed, and that careful consid-
The bill only revokes such regulations (issued prior to enactment) carrying out such amend-
eration should be given to imposing the civil fraud penalty.
ments made by sections 179(b)(1)(C), (2), and (3) of the 1984 Act. Thus, the bill does not revoke
any other regulations, such as regulations issued under sections 61 and 132 (relating to valu-
In another Tax Court case, the taxpayer had kept detailed
ation).
records so that he could be reimbursed by his employer, but
14
15
claimed on his tax return approximately 35,000 miles of business
The committee report on the House bill lists the following vehi-
use beyond what his records demonstrated, without any justifica-
cles as examples of vehicles exempted under the bill from the sec-
tion. No negligence penalty was imposed. In another case, the tax-
tion 274(d) substantiation rules: (a) clearly marked police and fire
payer produced a diary purporting to justify the claimed deduc-
vehicles (as described in the report); (b) delivery trucks with seating
tions. The Tax Court called the diary a "fabrication" and said that
only for the driver, or only for the driver plus a folding jump seat;
the taxpayer "was not telling the truth." The Court still permitted
(c) flatbed trucks; (d) any vehicle designed to carry cargo with a
him a deduction, and did not impose the regular negligence or civil
loaded gross vehicle weight over 14,000 pounds; (e) passenger buses
fraud penalty. Finally, another taxpayer apparently claimed a de-
used as such with a capacity of at least 20 passengers; (f) ambu-
duction for business mileage that exceeded the total mileage shown
lances used as such or hearses used as such; (g) bucket trucks
on his odometer, but the Tax Court did not impose a negligence or
("cherry pickers"); (h) cranes and derricks; (i) forklifts; (j) cement
civil fraud penalty.
mixers; (k) dump trucks (including garbage trucks); (1) refrigerated
These cases indicate that the regular negligence and civil fraud
trucks; (m) tractors; and (n) combines.
penalties are not being administered by either the Internal Reve-
The report on the House bill also states that the committee rec-
nue Service or the courts in the manner that the Congress intend-
ognizes that it may not have developed an exhaustive list of vehi-
ed when it initially enacted these penalties. While minor, inadvert-
cles not susceptible to personal use. Therefore, the report states,
ent recordkeeping or computational errors should not lead to the
the committee intends that the Internal Revenue Service is to
imposition of a substantial penalty, the conferees believe that it is
expand this list through either regulations or revenue rulings to in-
vital to the integrity of the tax system that honest taxpayers know
clude any vehicles not included in the listing in the report that are
that others who claim tax benefits far in excess of what can be jus-
appropriate for listing because by their nature it is highly unlikely
tified will be subject to the negligence and fraud penalties.
that they will be used more than a very minimal amount for per-
sonal purposes.
D. Exceptions From Section 274(d) Rules and Exclusion From
The report also states that the committee did not generally
Income for Certain Vehicles (sec. 2(b) of the House bill and sec. 2
exempt from the section 274(d) substantiation rules all pickup
of the Senate amendment)
trucks and vans, because these vehicles can easily be used for per-
Present law
sonal purposes. Some taxpayers purchase these vehicles as substi-
tutes for passenger sedans, and use them predominantly (or entire-
Substantiation rules
ly) for personal purposes. On the other hand, however, the commit-
Temporary Treasury regulations provided that, except for vehi-
tee report recognized that this is not applicable to all vans. For ex-
cles used for commuting, vehicles of a type ordinarily not suscepti-
ample, a van that has only a front bench for seating, in which per-
ble to personal use do not constitute listed property to which the
manent shelving 13 has been installed, that constantly carries mer-
section 274(d) substantiation requirements apply. The regulations
chandise, and that has been specially painted with advertising or
cited, as examples of such vehicles that are not susceptible to per-
the company's name, is a vehicle not susceptible to personal use.
sonal use, trucks specially designed for specific business purposes
Income inclusion
(such as refrigerated delivery trucks), special-purpose farm vehi-
cles (such as tractors and combines), cement mixers, and forklifts.
The committee report on the House bill states that it is appropri-
ate for Treasury regulations to provide that under certain condi-
Income inclusion
tions all use by an employee of any employer-provided vehicle that
The fair market value of an employer-provided fringe benefit,
is exempted under the House bill from the section 274(d) substan-
such as personal use by an employee of an employer-provided vehi-
tiation rules (see above) is excluded, as a working condition fringe
cle, is included in the employee's gross income, and in wages for
benefit (sec. 132(a)(3)),¹⁴ from the employee's gross income, and
purposes of withholding and FICA, FUTA, and RRTA taxes, unless
from wages (and, where appropriate, from the benefit base) for pur-
excluded under a specific statutory provision of the Code (secs.
poses of FICA, FUTA, and RRTA taxes. Such exclusions pursuant
61(a)(1), 3121(a), 3231(e), 3306(b), 3401(a)).
to Treasury regulations are to be effective as of January 1, 1985.
House bill
Senate amendment
Substantiation rules
Substantiation rules
The House bill exempts from the section 274(d) substantiation
The Senate amendment provides that the following vehicles are
rules (as modified by the bill) any vehicle that, by reason of its
exempt from the section 274(d) substantiation rules (as modified by
nature, is not likely to be used more than a de minimis amount for
personal purposes. This provision is effective for taxable years be-
18 It is intended that this shelving fill most of the cargo area.
ginning after December 31, 1985; thus, for 1985 the pre-1984 Act
14 Absent such a special exclusion, commuting use (or other personal use) by an employee of
an employer-provided vehicle could not qualify as a working condition fringe benefit because the
substantiation rules continue to apply with respect to such vehi-
costs of commuting to and from work (or of other personal use of a vehicle) are nondeductible
cles.
pursuant to Code section 262. See, e.g., Fausner V. Comm 'r, 413 U.S. 888 (1973).
16
17
the amendment), and that any commuting or other personal use of
The term "qualified moving vans" means vans used by profes-
such exempted vehicles is excluded from the user's gross income,
sional moving companies in the trade or business of moving house-
and from wages (and, where appropriate, from the benefit base) for
hold or business goods where no personal use of the van is allowed
purposes of FICA, FUTA, and RRTA taxes, effective January 1,
other than for travel to and from a move site (or for de minimis
1985:
use), where personal use for travel to and from a move site is an
(a) Vehicles required to be used as an integral part of the trade
irregular practice (i.e., not more than five times a month on aver-
or business of an individual or of the employer (such as calling on
age), and where personal use is limited to situations in which it is
customers or clients, making deliveries, or visiting job sites), so
more convenient to the employer, because of the location of the em-
long as use in the trade or business is at least 75 percent of the
ployee's residence, for the van not to be returned to the employer's
vehicle's total use;
business location.
(b) Vehicles used by an employee for commuting, where the com-
Also, the conferees agreed that the Treasury Department has au-
muting is for a bona fide business purpose, where the employer
thority to issue regulations exempting from the section 274(d) sub-
does not permit the employee to make other personal use of the ve-
stantiation rules, and from inclusion in income and wages, official-
hicle (other than de minimis use), and where use in the trade or
ly authorized uses of unmarked vehicles by law enforcement offi-
business of the employer is at least 75 percent of total use; and
cers. To qualify for this exemption, the personal use must be au-
(c) Vehicles used by a governmental unit for police or other law
thorized by the Federal, State, county, or local governmental
enforcement purposes and vehicles used as an ambulance.
agency or department that owns or leases the vehicle and employs
the officer, and must be for law-enforcement functions such as un-
Income inclusion
dercover work or reporting directly from home to a stakeout or sur-
The Senate amendment provides that any commuting or other
veillance site, or to an emergency situation. Use of an unmarked
personal use of such exempted vehicles (described above) is ex-
vehicle for vacation or recreation trips cannot qualify as an author-
cluded from the user's gross income, and from wages (and, where
ized use. The term "law enforcement officer" means an individual
appropriate, from the benefit base) for purposes of FICA, FUTA,
who is employed on a full-time basis by a governmental unit that is
and RRTA taxes, effective January 1, 1985.
responsible for the prevention or investigation of crime involving
injury to persons or property, who is authorized by law to carry
ITC and depreciation caps
firearms and execute search warrants and also to make arrests
The Senate amendment provides that police and law enforce-
(other than merely a citizen arrest), and who regularly carries fire-
ment vehicles and ambulances placed in service after June 18, 1984
arms (except when it is not possible to do this because of the re-
quirements of undercover work). The term "law enforcement offi-
are exempt from the investment tax credit and depreciation limita-
cer" does not include Internal Revenue Service special agents.
tions set forth in section 280F.
The conference agreement also provides that if, for example, a
Conference agreement
municipal government ordinance requires that police officers driv-
ing clearly marked police cars who are on duty at all times must
The conference agreement follows the House bill, with the fol-
take the vehicle home when the employee is not on his or her regu-
lowing modifications.
lar shift, and prohibits any personal use (except for this commuting
The conferees intend that school buses (as defined in Code sec-
use) of the vehicle outside the city (i.e., outside the limit of the offi-
tion 4221(d)(7)(C)), qualified specialized utility repair trucks, and
cer's arrest powers), then all use of the vehicle could be considered
qualified moving vans, in addition to the list above (items (a)
in such regulations as an excludable working condition fringe.
through (n) in the description of the House bill), are also to be ex-
amples of vehicles that, by reason of their nature, are not likely to
E. Withholding Election (sec. 3 of the House bill)
be used more than a de minimis amount for personal purposes.
Present law
The term "qualified specialized utility repair trucks" means
trucks (not including vans or pickup trucks) specifically designed
As authorized under the 1984 Act, temporary Treasury regula-
and used to carry heavy tools, testing equipment, or parts where (1)
tions have provided for withholding (or payment) of income and
the shelves, racks, or other permanent interior construction which
employment taxes with respect to taxable noncash fringe benefits,
has been installed to carry and store such heavy items is such that
such as an employee's personal use of an employer-provided vehi-
it is unlikely that the truck will be used more than a very minimal
cle, on a quarterly basis (Code sec. 3501(b)).
amount for personal purposes 15 and (2) the employer requires the
House bill
employee to drive the truck home in order to be able to respond in
The House bill provides that an employer may elect not to
emergency situations for purposes of restoring or maintaining elec-
deduct and withhold income taxes with respect to the noncash
tricity, gas, telephone, water, sewer, or steam utility services.
fringe benefit attributable to an employee's personal use of a high-
way motor vehicle provided by the employer. An employer making
15 An example of this would be permanent shelving that fills most of the cargo area.
this election must so notify the employee (at such time and in such
18
19
manner as provided in Treasury regulations) and must include the
The reduced limits are generally effective for property placed in
fair market value of the benefit on the Form W-2 furnished to the
service or leased by the taxpayer after April 2, 1985. However,
employee. An electing employer must still withhold social security
property acquired by the taxpayer pursuant to a binding contract
(or railroad retirement) taxes. This provision is effective as of Janu-
in effect on April 1, 1985, and at all times thereafter, is not subject
ary 1, 1985.
to the reduced limits if it is placed in service before August 1, 1985;
The committee report on the House bill states that the commit-
and property of which the taxpayer is the lessee pursuant to a
tee intends that the regulations are to be revised to allow an em-
binding contract in effect on April 1, 1985, and all times thereafter,
ployer to elect, for income and employment tax purposes, to treat
is not subject to the reduced limits if the taxpayer first uses the
taxable fringe benefits (including personal use of employer-provid-
property under the lease before August 1, 1985.
ed automobiles) as paid on a pay period, quarterly, semi-annual, or
Senate amendment
annual basis.
No provision.
Senate amendment
Conference agreement
No provision.
The conference agreement follows the House bill, with three
Conference agreement
modifications: (1) depreciation in the first taxable year is limited to
The conference agreement follows the House bill.
$3,200; (2) depreciation in any subsequent taxable year is limited to
$4,800; and (3) the reduced limits on the investment credit and de-
F. Limitations on Investment Tax Credit and Depreciation for
preciation are not indexed for inflation until 1989. For automobiles
Automobiles (sec. 4 of the House bill)
placed in service in any year after 1988, the reduced limits are ad-
justed for the percentage increase of the automobile component of
Present law
the Consumer Price Index for All Urban Consumers between Octo-
The 1984 Act generally imposed limitations on the amount of in-
ber of the preceding year and October, 1987. The conferees made
vestment tax credit and annual depreciation deductions that are al-
these changes to the House bill to ensure that the conference
lowed for an automobile placed in service or leased by the taxpayer
agreement is revenue neutral.
after June 18, 1984.
For an automobile placed in service in 1984, (1) the investment
G. New Regulations (sec. 5 of the House bill)
tax credit. is limited to $1,000; (2) depreciation in the first taxable
Present law
year the automobile is placed in service is limited to $4,000; and (3)
depreciation in any subsequent taxable year is limited to $6,000.
The Treasury Department has the authority to issue regulations
For years after 1984, the limits are adjusted for inflation, as meas-
under the Internal Revenue Code.
ured by the percentage growth of the automobile component of the
House bill
Consumer Price Index for All Urban Consumers between October of
the preceding year and October, 1983. The adjusted limits for any
The House bill requires that the Treasury Department issue reg-
year apply only to automobiles placed in service in that year.
ulations to carry out the provisions of the House bill not later than
October 1, 1985.
House bill
Senate amendment
The limits on the amount of investment tax credit and annual
depreciation deductions that may be claimed with respect to an
No provision.
automobile are reduced as follows under the House bill; (1) the in-
vestment tax credit is limited to $675; (2) depreciation in the first
Conference agreement
taxable year the automobile is placed in service is limited to $3,600
The conference agreement follows the House bill. Because the
and (3) depreciation in any subsequent taxable year is limited to
conferees have delayed applicability of the section 274(d) substan-
$5,400. For years after 1985, the reduced limits are indexed for in-
tiation rules to local travel, computers, etc., until January 1, 1986,
flation, as measured by the percentage growth of the automobile
the conferees believe that requiring regulations to be issued by Oc-
component of the Consumer Price Index for All Urban Consumers
tober 1, 1985, will provide taxpayers with sufficient time to prepare
between October of the preceding year and October, 1984. Adjust-
to meet these requirements.
ments for inflation are otherwise determined as under present law.
The committee report states that the committee intends that the
Secretary of the Treasury prescribe all limits adjusted for inflation.
20
II. ESTIMATED REVENUE EFFECTS
ESTIMATED REVENUE EFFECTS OF PROVISIONS OF H.R. 1869 AS AGREED TO BY THE CONFERENCE
COMMITTEE, FISCAL YEARS 1985-90
[Millions of dollars]
Provision
1985
1986
1987
1988
1989
1990
Changes to Substantiation and Withholding Requirements
-172
-111
-151
-148
-149
-154
Reduction in Limitations on ITC and Depreciation for Autos
22
124
181
209
228
241
Total
- 150
13
30
61
79
87
DAN ROSTENKOWSKI,
SAM M. GIBBONS,
J.J. PICKLE,
C.B. RANGEL,
PETE STARK,
JOHN J. DUNCAN,
BILL ARCHER,
GUY VANDER JAGT,
Managers on the Part of the House.
BoB PACKWOOD,
BoB DOLE,
W.V. ROTH, JR.,
JOHN DANFORTH,
RUSSELL LONG,
LLOYD BENTSEN,
SPARK M. MATSUNAGA,
Managers on the Part of the Senate.
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
May 24, 1985
REMARKS OF THE PRESIDENT
DURING SIGNING CEREMONY FOR HR 1869
The Oval Office
1:03 P.M. EDT
THE PRESIDENT: I am delighted to have you here for this
signing of HR 1869. It repeals a requirement for a very extensive
regulation -- an unnecessary one, I think -- on people who use
business vehicles for private purposes also. And I am glad to have
you here and it is just a part of what I hope will be a larger tax
reform later, so we can all be together for another signing. But
more about that next week.
Q
We are looking forward to it, Mr. President.
Q
I hope the rest of the tax reform is as easy as
this one was. I somehow doubt it.
THE PRESIDENT: You and me both.
This will gladden the hearts of many Americans and I know
that you had there the public support in this.
Q
Thank you. We appreciate you doing this, sir.
THE PRESIDENT: It is the least that I can do.
Q
We are glad that you did that for the American
working man and woman. That is what that is all about.
Q
Particularly in my district. Thank you, Mr.
President.
Q
It is great for the people.
THE PRESIDENT: And, as I say, I think we can remove a
few more regulations.
Q
Mr. President, how would you like to give one of
those pens to Jim Abdnor. It was his bill on the Senate side there.
SENATOR ABDNOR: Thank you, Mr. President.
THE PRESIDENT: All right.
Q
Can another one of those pens be given away, or one
has to go to the Archives? (Laughter.)
Q
You mean the one in Nebraska?
0
Thank you, Mr. President. It shows common sense and
logic prevail.
THE PRESIDENT: God bless you all.
Q
Thank you.
Q
The first stage in tax reform -- that is what I told
Mr. Baker when he testified.
Q
That was the up end.
MORE
- 2 -
Q
That was the downturn. (Laughter)
Q
I wish all our battles on deregulation were this
easy.
THE PRESIDENT: Yes, I do, too. I think we have got a
lot more to go.
Q
Mr. President, did you know this was in the bill
last year? Didn't you know this provision was in the bill last year?
Why did you sign it last year with this onerous provision in it?
THE PRESIDENT: Because I didn't have line-item veto.
Q
Mr. President, do you think the House version of the
budget is really going to hurt national security?
THE PRESIDENT: I think I am going to wait and express my
opinion when it gets to Congress.
Q
You are concerned about it?
THE PRESIDENT: Yes, I am concerned.
Q
Thank you very much, Mr. President.
END
1:06 P.M. EDT