Rental of Home for Board Meetings

[taxea]

Just saying

" I used $400 per day as a reasonable amount to pay for a suite at a hotel for the meetings."

This is like saying you will take the hotel daily cost for a seminar in your town and commute from home just because the hotel is available.

You are not using the hotel suite so I think the fair market value of the rental of the room in the house that is used should be the calculation of the daily mortgage fee allocated between the total sqft and the actually sqft of the room used.

[JohnH]

Yes, you do have to make a few assumptions. The first assumption is that the board doesn't go cheap. The second is that there would be an overnight stay involved.

In any event, there's no IRS requirement that board meetings of any kind be held on a shoestring budget. Otherwise those meetings at fancy hotels in cities offering expensive dining and entertainment venues would be out the window.

There's no question this is pushing the limits at every turn, but I'm just wondering if it rises to the level of something more than a disallowed deduction if IRS disagrees in an audit. If not, then the cost of a disallowance would simply be repayment of the tax savings plus some interest.

[taxea]

Yes, you do have to make a few assumptions. The first assumption is that the board doesn't go cheap. The second is that there would be an overnight stay involved.

In any event, there's no IRS requirement that board meetings of any kind be held on a shoestring budget. Otherwise those meetings at fancy hotels in cities offering expensive dining and entertainment venues would be out the window.

There's no question this is pushing the limits at every turn, but I'm just wondering if it rises to the level of something more than a disallowed deduction if IRS disagrees in an audit. If not, then the cost of a disallowance would simply be repayment of the tax savings plus some interest.

Not to mention an addition fee to the preparer who will be willing to represent the client when the preparer should have known this could be costly for the client in the long run.

What say you, John?

[Gary2]

Boards of directors often travel long distances and numerous hours to spend a few hours in a meeting or two, enjoy a few meals or some entertainment, and then return home. Time really isn't in view in these situations, is it?

Actually, there is a time component. If the business activity isn't substantial in relationship to the entertainment, then the entertainment isn't deductible. The IRS won't give specific hours or a specific mathematical relationship; as usual, it's facts and circumstances.

Similarly, expenses that are lavish or extravagant under the circumstances aren't deductible. (See Pub. 463, page 10, table 2-1.) You're right that there's no requirement that they be on a shoestring budget, but there is a requirement that they be legitimate business expenses.

Looking at the tax savings won't fly. The corporation is separate from the shareholders. It's not a savings of $1000 for the corporation, it's an expense of $5200 (before taxes) for the corporation. Would they really spend that on a hotel or other third-party facility? The mere fact that you're looking at the shareholder tax savings is suspect.

[JohnH]

Gary:

I'm sticking with my math. The corporation passes $5,200 to the shareholders in real dollars. Rather than this being a dividend paid out of profits (and thus not deductible by the corporation while being taxable income to the shareholders), it is a tax deductible expense for the corporation AND not taxable income to the shareholders. So the tax savings is real on both sides of the transaction, assuming it passes muster. (I know - BIG assumption)

I'm not taking a firm position about whether the expense is or is not lavish or extravagant. I can make an argument both ways (although it might be a weak one from the client's perspective).

This business of what's lavish and extravagant can take lots of twists & turns. I have a client who flies from Charlotte to DC once a quarter for a board meeting for a large pharmaceutical company. The company has no offices or physical presence in DC. They check into an expensive hotel, attend a 2-hr board meeting in the afternoon, have a working dinner at a lavish resturant that evening, meet for another 2 hours the next morning, and then are free to return home that day or the next day. They are rquired to return home by the day following the AM board meeting in order to claim reimbursement for the trip.

The company foots the whole bill (usually around $ 2,000 or more per director), and also pays them a generous stipend for attending the meeting. 6 hours of total meeting time is considerably less than the time spent traveling and sightseeing (if that's what they choose to do). Lavish? Not according to their attorneys.

[JohnH]

I'm not making any sort of commitment - can't really say I would or would not prepare the return under these circumstances. I'm just brainstorming with all of you because it's makes for interesting discussion.

Whatever the case, I'd certainly want to see the the minutes of each board meeting. No video or tape recordings - just well-documented minutes, prepared contemporaneously and in proper form. (I don't think we've actually discussed this issue yet, have we?)

[Lion]

Support

I could support the case for the H/W shareholders to get OUT of their home office for something like strategic planning once/year or so, uninterrupted change of scenery to encourage new ideas, etc. But, for just the two of them to stay in their same home office but pay themselves extra for the space 13 times per year?! I'd have trouble making that case with a straight face. If I were the preparer, they'd have to do some convincing for me to research that deduction.

[JohnH]

It's just the opposite. The home isn't the corporarte office. If it were rented more than 14 days of the year, the rental income would not be eligible for exclusion from income under Sec 208.

[Lion]

Yeah, but...

Yeah, but it's still not a change of scene for them. They do live together don't they? And, probably talk about business as well as other things they have in common when at home. It feels blatantly like trying to move money to shareholders without the shareholders paying tax on that income.

If they present you a good business reason why they have to meet there and why they have to pay $400/day 13X/year and you find a good cite to back up the deduction, then use it. I'm in pricey Fairfield County, CT, but have had great meetings in $99 rooms including coffee/snacks set-up for lots of people. Add lunch for two, and it's still far from $400. And, I'm not convinced that 13 times/year makes sense. Are they inviting their accountant? Banker? Is their industry changing so fast that they need to do strategic planning every four weeks? Like I said, if they have a business reason...

[JON]

I do not think

it works on an audit, but if it did they better have 100 pages of the stockholder's meeting and another 100 pages of the director's meeting - details will show why they needed the facility. So then we have 13 meetings and 1300 pages each covering the details, who is ever doing the work or recording amy soon try of it.

[jsamans]

How does their living together matter?

This thread is two years old now, but I just came across it and wanted to add a few thoughts.

All of this talk about how they "live together" really isn't relevant: for purposes of corporate governance, the board members of a corporation are individuals, not spouses. Asserting that they "probably talk about business...when at home" is like saying that their corporation isn't real because they are married.

Similarly, arguing that they are meeting too often because they meet once a month is dubious. It's for the corporation to decide in its bylaws how often its directors should meet, and the directors meet pursuant to those bylaws. The more that the directors are needed to do, the more often that they must meet, and if the same people hold the roles of directors as hold the roles of shareholders and executives, then that it nonetheless irrelevant, because the bylaws require that directors do those things and not people in other roles.

Now, I agree that it may be excessive for the directors to charge $400 in rent for the use of their residence for a single day in order to hold a board meeting. But everyone here agrees that the corporation could easily justify renting a hotel -- even at a resort -- or other third-party expense for the meeting. The only question that I see here is whether the transaction is based on a reasonable market rent.