New Ruling Expands Definition of “North American Area” for Attendance at Foreign Conventions

Editor: Anthony S. Bakale, CPA, M.Tax.

Sec. 274(h) limits deductions for expenses incurred while attending a convention, seminar or similar meeting held outside the “North American area.” Generally, no deduction is permitted under Sec. 162 for expenses allocable to such a meeting, unless the taxpayer can establish that they are directly related to the active conduct of its trade or business, while satisfying the stricter standards of reasonableness for the location and a direct business purpose. However, under Rev. Rul. 2007-28 (superseding Rev. Rul. 2003-109), taxpayers are now more easily able to deduct expenses under Sec. 162 for attending seminars, conventions and similar meetings in the Bahamas, Aruba and Netherlands Antilles, as a result of new tax-information-exchange agreements.

Updated Definition

Under the ruling, the IRS has updated the definition of North American area under Sec. 274(h). Specifically, Sec. 274(h)(3)(A) defines the term “North American area” as the U.S., its possessions, the territories formerly known as Trust Territory of the Pacific Islands, Canada and Mexico. Further, under Sec. 7701(a)(9), the U.S. consists of the 50 states and the District of Columbia. In addition, as updated by the ruling, the locations that now satisfy the Sec. 274(h) requirements include American Samoa, Antigua and Barbuda, Aruba, Bahamas, Baker Island, Barbados, Bermuda, Canada, Costa Rica, Dominica, Dominican Republic, Grenada, Guam, Guyana, Honduras, Howland Island, Jamaica, Jarvis Island, Johnston Island, Klingman Reef, Marshall Islands, Mexico, Micronesia, Midway Islands, Netherlands Antilles, Northern Mariana Islands, Palau, Palmyra Atoll, Puerto Rico, Trinidad and Tobago, U.S. Virgin Islands and Wake Island. The North American area also includes U.S. islands, cays and reefs that are possessions but not part of the 50 states or the District of Columbia.

In addition, Sec. 274(h)(6)(A) defines the North American area as including any “beneficiary country” for which a tax-exchange agreement is in force. Under Sec. 274(h)(6)(C), an effective agreement must provide for the exchange of information between the U.S. and the beneficiary country, as well as a finding by Treasury that the beneficiary country’s tax laws do not discriminate against conventions held in the U.S. Sec. 274(h)(6)(B) defines a “beneficiary country” by reference to Section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act, and Bermuda. Under Sec. 274(h)(6)(C)(i), exchange agreements generally are achieved through the adoption of a tax-information-exchange agreement on requested specific tax matters, including information that may otherwise be subject to nondisclosure provisions of the beneficiary country’s local law (i.e., bank secrecy and bearer shares). The agreements also contain safeguards to protect unauthorized disclosures or use of the information.

New Agreements

Recently, the U.S. entered into three new tax-information-exchange agreements, with Aruba (9/13/04), Bahamas (1/1/06) and Netherlands Antilles (3/22/07). As a result, they are now included as part of the North American area under Sec. 274(h)(6). However, it has come to the IRS’s attention that the tax-exchange agreement signed by the U.S. and Saint Lucia in 1987 is not effective, because the government of Saint Lucia failed to implement the agreement. Accordingly, Saint Lucia is not included in the definition of the North American area. Further, the U.S. is not including the Cayman Islands and the British Virgin Islands under the current definition. Although both countries have tax-exchange agreements with the U.S., the limited scopes of the agreements do not meet Sec. 274(h)
(6)(C)(i)’s requirements.