rr-07-28.pdf

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Part I

Section 274.—Disallowance of Certain Entertainment, Etc., Expenses

26 CFR 1.274-1: Disallowance of Certain Entertainment, Etc., Expenses

Rev. Rul. 2007-28

ISSUE
Section 274(h) of the Internal Revenue Code (the “Code”) limits deductions for
expenses incurred in connection with a convention, seminar, or similar meeting held
outside the “North American area.” This revenue ruling contains an updated list of all
geographical areas currently included in the North American area for purposes of
section 274(h).
LAW AND ANALYSIS
Section 274(h) disallows deductions under section 162 for expenses allocable to
attendance of an individual at a convention, seminar, or similar meeting (collectively, a
“convention”) held outside the “North American area” unless the taxpayer demonstrates
that the location of the convention satisfies specified standards of reasonableness.

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A geographical area may be included in the “North American area” for purposes
of section 274(h) under one of the four provisions described below.
Section 274(h)(3)(A)

Section 274(h)(3)(A) defines the term “North American area” as the United
States, its possessions, the Trust Territory of the Pacific Islands, Canada, and Mexico.
Under section 7701(a)(9), the United States consists of the fifty states and the District of
Columbia. The Internal Revenue Service treats the following as the possessions of the
United States for this purpose: American Samoa, Baker Island, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, Howland
Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands, Palmyra
Atoll, the United States Virgin Islands, Wake Island, and other United States islands,
cays, and reefs not part of the fifty states or the District of Columbia. The jurisdictions
that formerly constituted the Trust Territory of the Pacific Islands -- the Republic of the
Marshall Islands, the Federated States of Micronesia, and the Republic of Palau -- are
now covered by the compacts with the United States described below.
The Compact of Free Association Act of 1985

The Compact of Free Association Act of 1985, Pub. L. No. 99-239, 99 Stat. 1770
(1986), went into effect on October 21, 1986, with respect to the Republic of the
Marshall Islands, and on November 3, 1986, with respect to the Federated States of
Micronesia. Section 405 of Title IV of the Compact provides that, for purposes of
section 274(h)(3)(A) of the Code, the Republic of the Marshall Islands and the
Federated States of Micronesia are included in the North American area.

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The Compact of Free Association Between the United States and the Republic of Palau

The Compact of Free Association between the United States and the Republic of
Palau, Pub. L. No. 99-658, 100 Stat. 3672 (1986), went into effect on October 1, 1994.
Section 225(d) of Title II of the Compact with Palau provides that, for purposes of
section 274(h)(3)(A) of the Code, Palau is included in the North American area.
Section 274(h)(6)

Section 274(h)(6)(A) provides that the term “North American area” includes any
“beneficiary country” if, as of the time a convention begins: (i) there is in effect an
agreement described in section 274(h)(6)(C) providing for the exchange of information
between the United States and the beneficiary country; and (ii) there is not in effect a
finding by the Secretary of the Treasury that the tax laws of the beneficiary country
discriminate against conventions held in the United States.
Section 274(h)(6)(B) defines the term “beneficiary country” as a beneficiary
country as defined in section 212(a)(1)(A) of the Caribbean Basin Economic Recovery
Act, Pub. L. No. 98-67, 97 Stat. 384 (1983), and Bermuda. Under section
274(h)(6)(C)(i), to constitute an agreement that provides for the exchange of information
between the United States and a beneficiary country, an agreement generally must
provide:
for the exchange of such information (not limited to information concerning
nationals or residents of the United States or the beneficiary country) as
may be necessary or appropriate to carry out and enforce the tax laws of
the United States and the beneficiary country (whether criminal or civil

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proceedings), including information which may otherwise be subject to
nondisclosure provisions of the local law of the beneficiary country such
as provisions respecting bank secrecy and bearer shares.
Where an exchange of information agreement between a beneficiary country and the
United States does not qualify as an agreement described in section 274(h)(6)(C)(i) or
is not in effect within the meaning of section 274(h)(6)(A)(i), the beneficiary country is
not included as part of the North American area under section 274(h)(6) for purposes of
determining whether deductions are allowed for expenses incurred in connection with a
convention.
Rev. Rul. 2003-109, 2003-2 C.B. 839, identified each of the following jurisdictions
as a beneficiary country for which there was in effect an agreement with the United
States as described in section 274(h)(6)(C)(i) and for which there was not in effect a
finding by the Secretary of the Treasury that the tax laws of the beneficiary country
discriminate against conventions held in the United States: Antigua and Barbuda,
Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana,
Honduras, Jamaica, Saint Lucia, and Trinidad and Tobago
It has come to the attention of the Internal Revenue Service that the tax
information exchange agreement signed by the United States and Saint Lucia on
January 30, 1987, is not in effect within the meaning of section 274(h)(6)(A)(i) because
the government of Saint Lucia has not enacted legislation to implement the agreement.
Accordingly, Saint Lucia is not included in the North American area under section
274(h)(6), subject to the transition relief provided in the Holding below.

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Since publication of Rev. Rul. 2003-109, three new qualifying agreements have
entered into force. First, the “Agreement Between the Government of the United States
of America and the Government of the Commonwealth of the Bahamas for the Provision
of Information with Respect to Taxes and for Other Matters” entered into force on
December 31, 2003. See Treas. News Release JS-1075 (December 31, 2003).
However, under the agreement with the Bahamas, Article 2 (“Provision of Information
with Respect to United States Taxes”) did not take effect with respect to requests for
information made by the United States in connection with a civil matter until January 1,
2006, and Article 5 (“Convention Tax Treatment”) similarly did not take effect until
January 1, 2006. Consequently, the Bahamas is included within the North American
area under section 274(h)(6) as of January 1, 2006.
Second, the “Agreement Between the United States of America and the Kingdom
of the Netherlands in Respect of Aruba for the Exchange of Information With Respect to
Taxes” entered into force on September 13, 2004. See
Treas. News Release JS-1914
(September 14, 2004). Therefore, Aruba is included within the North American area
under section 274(h)(6) as of September 13, 2004.
Third, the “Agreement Between the Government of the United States of America
and the Government of the Kingdom of the Netherlands in Respect of the Netherlands
Antilles for the Exchange of Information With Respect to Taxes” entered into force on
March 22, 2007. Therefore, the Netherlands Antilles is included within the North
American area under section 274(h)(6) as of March 22, 2007.

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Two other beneficiary countries -- the Cayman Islands and the British Virgin
Islands -- have entered into tax information exchange agreements with the United
States that are not of the type described in section 274(h)(6)(C)(i) because of certain
limitations in the scope of those agreements. Accordingly, the Cayman Islands and the
British Virgin Islands are not included as part of the North American area under section
274(h)(6).
HOLDING
For purposes of determining whether deductions are allowed for expenses
incurred in connection with a convention, seminar, or similar meeting, the following
areas are included in the “North American area” as of the effective date of section
274(h) except as otherwise indicated:
1. The fifty states of the United States and the District of Columbia;
2. The possessions of the United States, which for this purpose are
American Samoa, Baker Island, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, Guam, Howland Island,
Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands,
Palmyra Atoll, the United States Virgin Islands, Wake Island, and other
United States islands, cays, and reefs not part of the fifty states or the
District of Columbia;
3. Canada;
4. Mexico;
5. The Republic of the Marshall Islands;

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6. The Federated States of Micronesia;
7. The Republic of Palau;
For expenses incurred in attending a

convention that began after
:
8. Antigua and Barbuda February 9, 2003
9. Aruba September 12, 2004
10. Bahamas December 31, 2005
11. Barbados November 2, 1984
12. Bermuda December 1, 1988
13. Costa Rica February 11, 1991
14. Dominica May 8, 1988
15. Dominican Republic October 11, 1989
16. Grenada July 12, 1987
17. Guyana August 26, 1992
18. Honduras October 9, 1991
19. Jamaica December 17, 1986
20. Netherlands Antilles March 21, 2007
21. Trinidad and Tobago February 8, 1990
The Internal Revenue Service will treat Saint Lucia as not included in the North
American area under section 274(h)(6) with respect to conventions that begin after April
4, 2007, except with respect to expenses for which the taxpayer demonstrates a
nonrefundable contractual obligation existing as of April 4, 2007.

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This revenue ruling will be updated as future developments result in the inclusion
of other areas in, or the exclusion of areas from, the North American area.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 2003-109 is superseded.
DRAFTING INFORMATION
The principal author of this revenue ruling is Denen Norfleet Boyce of the Office
of Associate Chief Counsel (International), Branch 7. For further information regarding
this revenue ruling, contact the principal author at (202) 435-5262 (not a toll-free call).