are allowed under other provisions of the tax law. Subject to specific limitations discussed below, a deduction is allowed under section 183 for expenditures which are of the type that may be deducted without regard to whether they are incurred in connection with a trade or business or for the production of income. These items include the deductions which are allowed for interest (sec. 163), certain State and local property taxes (sec. 164), and casualty losses (sec. 165). Section 183 further provides that, in the case of an activity not engaged in for profit, a deduction is allowed for expenses which could be deducted if the activity were engaged in for profit, but only to the extent these expenses do not exceed the amount of gross income derived from the activity reduced by the deductions which are allowed in any event (e.g., interest and certain State and local taxes). In other words, as to expenses such as depreciation, insurance, and maintenance, a taxpayer is allowed a deduction but only to the extent of income derived from the activity. The taxpayer is not allowed to use these deductions to create losses which can be used to offset other income. A taxpayer is presumed to be engaged in an activity for profit for a taxable year if, in two or more years of the period of five consecutive taxable years (seven consecutive taxable years in the case of an activity which consists in major part of the breeding, training, showing, or raising of horses) ending with such taxable year, the activity was in fact carried on at a profit. For purposes of this presumption, the activity is treated as being carried on for a profit in a given taxable year if the gross income from the activity exceeds the deductions attributable to the activity which would be allowable if it were engaged in for profit. The rules for determining whether an activity is a trade or business or engaged in for the production of income are the same as those used for determining whether an activity is engaged in for profit. As a result, except for the presumption discussed above, if deductions with respect to the activity are not allowable as a trade or business expense (sec. 162) or as expenses incurred for the production of income, etc. (sec. 212), then the activity will be treated as an activity not engaged in for profit under section 183. The Regulations provide a list of relevant factors which should normally be taken into account in determining whether the activity is engaged in for profit. Among other factors, the presence of personal motives must be considered, especially where there are recreational or personal elements involved. By way of illustration, the regulations provide that a taxpayer will be treated as holding a beach house primarily for personal purposes if, during a three-month season, the beach house is personally used by the taxpayer for one month and used for the production of rents for the remaining two months (Regs. § 1.183-1(d)(3)). However, except for this example, there are no 2 Treas. Reg. 1.183-2(b). These factors include: (1) The manner in which the taxpayer carries on the activity, (2) the expertise of the taxpayer or his advisers, (3) the time and effort expended by the taxpayer in carrying on the activity, (4) the expectation that assets used in the activity may appreciate in value, (5) the success of the taxpayer in carrying on other similar or dissimilar activities, (6) the taxpayer's history of income or losses with respect to the activity, (7) the amount of occasional profits, if any, which are earned, (8) the financial status of the taxpayer, and (9) the elements of personal pleasure or recreation. definitive rules relating to how much personal use of vacation property will result in a finding that the rental of the vacation property is an activity not engaged in for profit. Generally, no deduction is allowed for personal, living, and family expenses except as otherwise expressly provided under the tax laws (sec. 262). Deductions that are expressly allowable, even though they are attributable to personal use, include items of interest, certain taxes, and casualty losses. However, no deduction is allowed for such items as depreciation, maintenance, insurance, and utilities to the extent these items are attributable to personal use. As a result, under prior law, where property was used for both personal and business use, the total amount of maintenance, insurance, and utilities expenses and depreciation incurred during a taxable year had to be allocated on a reasonable and consistently applied basis. Reasons for change Where expenses attributable to a residence are treated as deductible business expenses, an opportunity exists to convert nondeductible personal, living and family expenses into deductible expenses. In the case of so-called "vacation homes" that are used both for personal purposes and for rental purposes, it would appear that frequently personal motives predominate and the rental activities are undertaken to minimize the expenses of ownership of the property rather than to make an economic profit. In marketing vacation homes, it has become common practice to emphasize that certain tax benefits can be obtained by renting the property during part of the year, while reserving the remaining portion for personal use. In addition, certain arrangements have been devised whereby an individual owner of a condominium unit is entitled to exchange the time set aside for the personal use of his own unit (typically three to six weeks) for the use of a different unit under the same general management at another location. Under many of these arrangements, it is extremely difficult under existing law to determine when an activity is engaged in for profit. The present regulations provide that in making this determination a number of factors shall be taken into account. These factors include the presence of "personal motives", especially where there are recreational or personal elements involved. However, except for the example mentioned above, no objective standards are set forth in the regulations. The Congress concluded that definitive rules should be provided to specify the extent to which personal use would result in the disallowance of certain deductions in excess of gross income. In a case where personal use is the controlling factor to be considered, this approach would obviate the need for subjective determinations to be made concerning the taxpayer's motive and the primary purpose for which the vacation home is held. In addition, if there is any personal use of a vacation home, the portion of expenses allocable to rental activities should be limited to an amount determined on the basis of the ratio of time that the home is actually rented for a fair rental to the total time that the vacation home is used during the taxable year for all purposes (i.e., rental, business, and personal activities). Explanation of provision The Act adds a new provision (sec. 280A) which, in general, provides a limitation on the amount allowable to a taxpayer for the deductions attributable to the rental of a dwelling unit if the taxpayer personally uses the unit in excess of specified periods of time during a taxable year. This new limitation only applies if the taxpayer's use of the dwelling unit for personal purposes during his taxable year exceeds the greater of fourteen days or ten percent of the number of the days during the year for which the vacation home is rented. (Rules for determining personal use and rental days are discussed below.) The Act also provides that in the case where the taxpayer rents a dwelling unit used as a residence for less than 15 days, neither operating gain nor loss would be recognized for tax purposes. The provisions of this section apply to an individual, a trust, estate, partnership, and an electing small business corporation. The provisions do not apply to corporate taxpayers (other than shareholders of subchapter S corporations). However, no inference should be drawn from this section in the case of a corporation, as to whether or not expenses incurred for the maintenance of a residence are connected with its trade or business for purposes of the tax laws. If a taxpayer exceeds the personal use limitations for the dwelling unit for a taxable year, the deductions attributable to the rental activity are limited to the amount by which the gross income derived from the rental activity exceeds the deductions otherwise allowable without regard to such rental activities (e.g., interest and certain taxes). For this purpose, deductions attributable to the rental activities are those items which are of a type allowable only as expenses incurred in connection with a trade or business or the production of income (e.g., sec. 162 or 212). If the personal use limitation applies, the allowable deductions would be determined after first determining the expenses of the dwelling unit which are allocable to the rental activities (in accordance with the new allocation rules). Generally, the amounts allowable as deductions would be determined in the same manner as provided in the regulations prescribed under section 183 of the Code. The applicability of this new limitation on allowable deductions would be determined solely by reference to the taxpayer's personal use of the dwelling unit during his taxable year rather than, as under section 183, by reference to the profits or losses during any consecutive period of taxable years or on the basis of a facts and circumstances determination of the taxpayer's objectives. Generally, application of section 183 of the code would not be affected by these new provisions. Thus, if the rental of a dwelling unit is treated as an activity not engaged in for profit after consideration of the relevant objective standards prescribed by the regulations under section 183, deductions attributable to the rental activity would be limited under that provision (sec. 183) even though the new provisions did not apply because there was little or no personal use of the dwelling unit, i.e., the unit was not used for personal purposes for more than 14 days. As indicated above, where the dwelling unit is rented for less than 15 days during the taxable year, neither operating gain nor operating loss would be recognized for Federal income tax purposes. Thus, where a dwelling unit is rented for less than 15 days, neither the new limitation under this new section nor the provisions of section 183 (pertaining to activities not engaged in for profit) are applicable. In this case, expenses which would be allowable if the taxpayer were in a trade or business or subject to the provisions of section 183 (e.g., maintenance, utilities, insurance and depreciation) will not be allowed as a deduction and any revenue received from the rental of a dwelling unit for less than 15 days will not be includible for tax purposes. However, a deduction for expenses otherwise allowable (e.g., interest, certain taxes and casualty losses) will be allowed as a deduction. This new limitation, as indicated above, will not apply unless the taxpayer uses the dwelling unit for personal purposes during his taxable year for more than fourteen days or ten percent of the number of the days during such year for which the dwelling unit is rented, whichever is greater. For this purpose, a dwelling unit would not be treated as rented (at a fair rental) for any day for which it is treated as used for personal purposes. In the case of a dwelling unit owned by a partnership, trust, estate, or subchapter S corporation, the number of days of personal use by a taxpayer shall be determined by reference to the total number of days of personal use by the partners, beneficiaries, or stockholders, as the case may be. However, if two or more partners, beneficiaries, or stockholders personally use the dwelling unit during the same day, that day would constitute only one day of personal use. If a taxpayer owns a dwelling unit during only a portion of the taxable year, no reduction of the personal use specified under the provision would be required by reason that the dwelling unit was owned for less than a full year. The taxpayer generally would be deemed to have used a dwelling unit for personal purposes for a day if, for any part of the day, the unit is used for personal purposes by (1) the taxpayer or any other person who owns an interest in the home; (2) their brothers and sisters, spouses, ancestors, or lineal descendants; (3) any individual who uses the unit under a reciprocal arrangement (whether or not a fair rental is charged); or (4) any other individual who uses the dwelling unit during a day unless for that day the unit is rented for a fair rental. With respect to use by a person other than the taxpayer who also owns an interest in the dwelling unit, the taxpayer would be deemed to have used the dwelling unit for personal purposes for a day if, for any part of the day the unit is used by a co-owner or a holder of any interest in the unit (other than a security interest or an interest under a lease for a fair rental) for personal purposes. For this purpose, any other ownership interest existing at the time the taxpayer has an interest in the unit shall be taken into account even if there are no immediate rights to possession and enjoyment under such other interest. A taxpayer would not be considered to have personally used a dwelling unit with respect to a use by his employee, even if it is rented for less than a fair rental, if the value of such use is excludable from income by the employee under section 119 of the code (relating to meals and lodging furnished for the convenience of an employer). Further, if the taxpayer spends a normal work day cleaning, painting, repairing or otherwise maintaining the dwelling unit, such use shall not be treated as personal use. For purposes of this new provision, the term "dwelling unit" includes a house, apartment, condominium, house trailer, boat, or similar property. The term would include any environs and outbuildings, such as a garage, which relate to the use of the dwelling unit for living accommodations. However, the term would not include that portion of a dwelling unit that is used exclusively as a hotel, motel, inn, or similar establishment. In any case where there is any personal use of a dwelling unit during the taxpayer's taxable year (whether or not that personal use constitutes use as a residence), the expenses allocable to the rental of the vacation home will be limited to an amount which bears the same ratio to such expenses as the number of days the unit is actually rented out for the year bears to the total number of days the unit is actually used for all purposes during the year. However, the limitation upon allocable expenses would not apply to expenses such as interest or taxes which are allowable even if not attributable to the rental activity. For purposes of this limitation, the personal use of a dwelling unit would be determined in accordance with the rules described above. However, for purposes of determining the relationship of rental days to total days of use, the number of rental days would include any day for which the dwelling unit is rented for a fair rental even if the taxpayer is deemed to have personally used the unit for that day. The period during which the unit is merely held out for rent would not be considered in determining the number of rental days for a taxable This provision applies to taxable years beginning after December 31, 1975. Revenue effect This provision and the provision relating to business use of the home will increase revenues by $207 million in fiscal year 1977, $206 million in fiscal year 1978, and $305 million in fiscal year 1981. 3. Deductions for Attending Foreign Conventions (sec. 602 of the Act and sec. 274(h) of the Code) Prior law Generally, the deductibility of traveling expenses paid or incurred to attend a foreign convention, seminar, or similar meeting while away from home is governed by the ordinary and necessary standard under sections 162 and 212 of the code and, in certain cases, the special disallowance rules provided under section 274 (c). Generally, to be deductible, traveling expenses must be reasonable and necessary in the conduct of the taxpayer's business and directly attributable to the trade or business. If a trip is primarily related to the taxpayer's business and the special foreign travel allocation rules do not apply, the entire traveling expenses (including food and lodging) to and from a destination are deductible. If a trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even if the taxpayer engages in business activities |