FCC Card

A. Purpose of Industry Overview
B. Use of the Intranet and Internet
C. Acknowledgement
D. General History of Industry Specialization Program (ISP)
E. History of Hotel ISP
F. Industry Specialist Staffing (Technical Advisors in LB&I)
G. LB&I Industry Staffing
H. Description of the Hotel Industry

History of Hotel Industry

Trends

Industry Terms

Accounting Principles

Information Systems

Industry Operating Procedures

Government Regulatory Requirements

A. Federal Requirements
B. State Requirements
C. Local Requirements

Significant Law and Important Issues

A. Coordinated Issues
B. Emerging or Other Significant Issues
C. Recent or Pending Legislation
D. Specific Industry Related Tax Law
E.   Important Revenue Rulings or Revenue Procedures
F.   Important Court Cases
G.  Technical Advice Memorandums – Field Service Advices

Alternative Issue Resolution Considerations

Industry Resources

A. WEB Sites
B. Trade Associations
C. IRS and Other Training Courses/Videotapes
D. Trade Magazines and Newsletters
E.   Industry Books
F.   Internal Revenue Manual Citations
G.  AICPA Auditing Standards and Publications
H.  Market Segment Specialization Program (MSSP)

Appendix

back to table of contents

Introduction

A. Purpose of Industry Overview

This overview is designed to provide industry-related information to the Large Business & International (LB&I) Division. This is the first step in the effort of LB&I to develop a greater level of expertise in the industry or industries to which you will be assigned. This overview is one of a series of industry specific overviews. See the Appendix for a complete listing of available overviews.

B. Use of the Intranet and Internet

Each Technical Advisor has established a web site on the LB&I Intranet. These web sites contain more detailed information on each Technical Advisor area. Topics that have been included in this Industry Guide are sometimes expanded upon and new topics may be added. Each web site also has a section where Technical Advisors can highlight the latest developments such as new court cases, new technical advice memorandums, new revenue rulings, etc. There is a new section called "Forum" where individuals are able to address any questions they have about various issues. Others reading the question may be able to help you with your issue.

C. Acknowledgment

This guide was primarily drafted by:
James Johnston, Senior Program Analyst, RFPH
Phil Hofmann, Technical Advisor for Food, Restaurants and Hospitality
Paul Knap, Counsel, Milwaukee, WI
John Lelko, Team Coordinator, Chicago, Illinois
Cindy S. Kim, Senior Program Analyst, RFPH

We appreciate all their hard work and also that of others that were contacted for their input into this document.

D. General History of Industry Specialization Program (ISP)

Date

Event

1952The Service was restructured in 1952 into a highly decentralized organization consisting of seven regions and 58 districts. This reorganization was implemented in part to achieve greater sensitivity and responsiveness to pubic needs. District Directors were given wide latitude and authority in administering the Service's policies, procedures and programs. While decentralization of the Service proved to be a progressive action, communication between the regions and districts was made more difficult because of their quasi‑autonomy. Positions taken by the Service on industry issues could differ significantly from one region to another on the same issues.1971The Service implemented the Industry Wide Examination Program to concurrently examine the major taxpayers in a given industry, coordinate selected issues common to that industry and to resolve those issues uniformly and consistently among all the industry taxpayers. Under the direction of project coordinators (usually large case branch chiefs), the industry wide examinations were largely successful in achieving uniform and consistent treatment of issues. Industry wide examinations were conducted in several industries between 1971 and 1979 and the ability to communicate freely across district and regional lines proved to be invaluable to the success of these examinations.1977The Industry wide Examination Program had one major drawback. Since they existed for only two or three tax years and were then terminated, the program failed to provide continuity. To correct this situation, a major study group was created in 1977 to review the Service's Coordinated Examination Program. The study recommended that permanent positions be established for several Industry Specialists and a National Industry Coordinator. In addition, the study group identified basic industries to which it recommended specialists be assigned. The duties and responsibilities of the Specialists and the Coordinator were to be much broader than the former Project Coordinators whom they replaced.1979The recommendations of the study group were implemented greatly expanding the scope and depth of the Industry wide Examination Program. The term, Industry Specialization Program, eventually evolved as a name that could encompass the varied concepts of Industry Specialists, National Industry Coordinator, Coordinated Issues, and the many refinements suggested by the study group.2000As part of the Internal Revenue Service's restructuring, the Industry Specialists were assigned to Pre-Filing and Technical Guidance which is part of LMSB. The "Industry Specialists" are now called "Technical Advisors." Each of them was placed in one of the five industry areas and is managed by a Technical Advisor Manager.

E. History of Hotel ISP

Date

Event

Pre 1984 to 2006

There was no formal Hotel Industry Specialist. However, the Food & Beverage TA and the Gaming TA have been involved in some Hotel cases.

1984 - 1986

Conducted study of food industry, 55 cases in 7 regions included in the program study.

1986

Food industry approved for inclusion in ISP

1987 - 1992

Coordinated issue papers and appeals settlement guidelines developed.

1993

Established an Industry Specialist for Gaming.

1994

Audit Guidelines established.

1997

Gaming Audit Technique Guide published.

1999

First gaming coordinated issue approved – The applicable recovery period under IRC § 168(a) for slot machines, video lottery terminals and gaming furniture, fixtures and equipment.

2006

The Food & Beverage TA adds the Hotel Industry to that program

F. Industry Specialist Staffing (Technical Advisors in LB&I)

Name of Specialist

Telephone #

FAX #

Email Address

Philip Hofmann, Food

316-352-7434316-352-7255Philip.J.Hofmann@irs.govEric Lacher, Gaming702-868-5262702-868-5442Eric.A.Lacher@irs.gov

G. LB&I Industry Staffing

The Industry Specialist is assigned to the Pre-Filing and Technical Guidance Division that is part of LB&I Headquarters. Each industry is assigned to one of the five LB&I Industry Functional Divisions. Industry Specialists will be known as technical advisors in LB&I and will be supervised by a Manager, Technical Advisors. Management and other appropriate personnel for this industry are as follows:

Name

Title

Location

Sergio ArellanoIndustry Director

Downers Grove, IL

Jim RooseyField Operations DirectorDowners Grove, ILLori NicholsField Operations DirectorLouisville, KYJessica YipSenior Industry AnalystDowners Grove, ILGreg ZielinskiManager, Technical Advisors

St. Louis, MO

H. Description of the Hotel Industry

The Hotel Industry program covers taxpayers that develop, own, manage, and/or operate lodging facilities, including motels and full-service hotels.

This industry is comprised of several sub-industries. The following is a compilation of statistical data for these sub-industries sorted by NAICS codes:

721100 – Travel Accommodations721110 – Hotels (except casinos) & Motels721120 – Casino Hotels721191 – Bed & Breakfast Inns721199 – All Other Traveler Accommodation721210 – RV (Recreational Vehicle) Parks & Recreation Camps721310 – Rooming & Boarding Houses

The hotel industry may also have related activities including restaurants and cafes, gambling, sports and recreation, theme parks, retail operations, and other entertainment. Additionally, some members of the industry have expanded into long-term care.

back to table of contents

History Of Industry ^[1]

The hotel industry is a mature industry marked by intense competition. Market share increases typically comes at a competitor's expense. Industry-wide, most growth occurs in the international, rather than the domestic, arena.

Common American hotel classifications are as follows:

Commercial Hotels cater mainly to business clients and usually offer room service, coffee-shop, dining room, cocktail lounge, laundry and valet service as well as access to computers and fax services.

Airport Hotels are located near airports and are a conveniently located to provide any level of service from just a clean room to room service and they may provide bus or limousine service to the air lines.

Conference Centers are designed to specifically provide meeting space from groups; they provide all services and equipment necessary to handle conventions.

Economy Hotels provide a limited service and are known for clean rooms at low prices meeting just the basic needs of travelers.

Suite or All-Suite Hotels are hotels which offer spacious layout and design. Business people like the setting which provides space to work and entertain separate from the bedroom.

Residential Hotels used to be very popular. The typical residential hotel offers long term accommodations.

Casino Hotels are often quite luxurious. Their main purpose is in support of the gambling operation. Casino hotels often offer top name entertainment and excellent restaurants.

Resort Hotels are the planned destination of guests, usually vacationers. This is because resorts are located at the ocean or in the mountains away from inner cities. Resort hotels may offer any form of entertainment to keep their guests happy and busy.

A summary of key events in the history of the industry would include the following:

While the practice of renting space to travelers stretches back to antiquity, what could be considered the modern concept of a hotel derives from 1794, when the City Hotel opened in New York City. While the practice of renting space was not new, the City Hotel was purported to be the first building devoted exclusively to hotel operations. For it's time, the building was quite large and possessed 73 rooms. Similar operations soon appeared in such nearby cities as Baltimore, Boston and Philadelphia.

Interestingly, New York City's first skyscraper was a hotel - the six story Adelphi Hotel.

Hotels took a distinct step up in style and class when the Tremont House opened in Boston in 1829. This hotel was considered by many to be the beginning of what was regarded as first class service. With 170 rooms, the Tremont House was a large facility. In addition, the hotel offered features which, for the time, were amazing. Private single and double rooms were available, which offered not only privacy, but also security. In addition to water pitchers and a washing bowl, free soap was provided in each room. The Tremont House offered French cuisine and, reportedly, was the first hotel to have a Bellboy.

In 1908, the Buffalo Statler opened, marking the beginning of the modern commercial hotel era. Many services now considered standard were introduced by the Statler, including such amenities as a light switch next to the door, private bathe, ice water and a morning newspaper. The Statler set the standard of the day by being clean, comfortable and affordable. The Statler served as the pattern for hotel design and operation for many years.

In the 1920's, hotel building entered a boom phase and many famous hotels were opened, including the Waldorf Astoria, New York's Hotel Pennsylvania, and the Chicago Hilton and Towers, which was originally named the Stevens.

Motels began to replace roadside cabins as use of the automobile spread throughout society. Offering clean rooms with adjacent parking, motels enjoyed great popularity with the traveling public.

In the 1950's and 1960's, the practice of franchising appeared within the industry. Franchising enabled entrepreneurs to expand their operations without the use of substantial capital.

For much of their history, hotels were owned and operated by individuals. However, as franchises and chains began to appear, individually owned hotels found themselves increasingly at a competitive disadvantage. By the 1960's, independent prospects began to improve as the result referral organizations such as Quality Courts, Best Western, Master Host and Best Eastern.

From the 1980's forward, mergers and acquisitions became common within the industry, and brands become hotly traded commodities.

Recently, use of management companies has entered the mainstream. As a result, many chains are more involved in management than in ownership. These chains realize a much more predictable and steady income stream than had normally been yielded by ownership.

[1] History of Hospitality. 27 March 2007. 6 June 2007. http://schonwalder.org/historyHotel.htm

back to table of contents

Trends

In the 1980's there was extensive merger and acquisition activity between hotel and non-hotel companies. Many companies are now selling specific brands in an effort to get back to their core business.

Another trend in the hotel and beverage industry is paperless inventory systems. Improvements in scanning equipment have made this possible. In many instances, ordering, delivery, payment and stocking are all initiated and accomplished by software prompted by information captured by scanning equipment with very little human involvement.

Some chains have sold ownership in their hotels to foreign investors while still maintaining control. This provided the capital that was needed for further expansion.

REIT's (Real Estate Investment Trusts) have been created to allow smaller investors to participate in mortgages and equities.

Product segmentation has become more popular. Luxury and first class hotels have created more amenities and products for their customers while economy and budget motels have cut back services in order to maintain lower prices. Also specialized extended stay and suite hotels have become more popular. Hotels with indoor water parks are one of the newest trends. Timeshares is another segment that many hotel companies are involved with recently. The development, sale, and management of timeshares have become particularly popular with the large chains. Franchising continues to flourish in the hotel industry.

Audit issues cover a variety of areas, as would be expected. In addition to matters such as cost segregation, which impact numerous industries, hotel companies have undertaken such activities as donating used bedding as they upgrade their equipment, using trusts to defer income, delaying recognition of last day of the year receipts, franchising, condo conversion, and so forth.

Several years ago, customers generally called a toll-free number to make room reservations. In 2006, about 50% of hotel rooms were booked through the internet.

The number of domestic hotel rooms reserved for smokers is declining as major hotel chains are beginning to decrease their total number of smoking rooms or becoming non-smoking facilities altogether.

Other recent trends in the industry include luxury mattresses, complimentary breakfast, high definition TV, high speed internet access, Wi-Fi (wireless internet access), and room suites.

A recent 2006 trend is hotels re-imaging their lobbies to destination places. For example part of the lobby may be used for a breakfast area in the morning and a bar at night. This may include sliding walls, decorative lighting, and music. One reason for this is to generate more income per square foot.

A July 2005 article from Knight Ridder Newspapers[2] highlights what the major chains are upgrading in the sleep department. The article provided the following information:

Marriott International has been replacing mattresses at its Marriott and Renaissance hotels for several years and is adding new bedding at its 2,400 hotels, including higher thread count sheets, down comforters and duvet covers at a cost of $190 million.Hilton Hotels is introducing new bedding across its brand, including Hilton, Doubletree and Embassy Suites. There will be higher thread count sheets, plush top mattresses, extra pillows and user friendly clocks.Crown Plaza replaced some 50,000 beds and bedding in 2004, hired a sleep doctor for advice on relaxation, and tossed in a sleep kit for guests. Radisson in 2004 began moving in custom-designed Sleep Number beds at 230 of its hotels and resorts, with most of its 90,000 beds to be replaced by 2006. New bedding is also included in the makeover.Hyatt recently rolled out its Grand Bed, a 13 ½ inch pillow-top mattress, and added more luxurious linens and decorative pillows.Starwood Hotels announced the debut of a new bed at its moderately priced brand, Four Points by Sheraton. The Four Comfort Bed, a $13 million investment, joins the Heavenly Bed and Sheraton Hotel's Sweet Sleeper Bed in Starwood's lineup.Red Roof Inns will offer pillow top mattress pads, 230 thread count sheets and hypoallergenic pillows at select hotels.

Some Best Western hotels will add new mattresses, comforters, feather pillows and triple sheeting.

[2] Martinez, Michael. "Hotels Compete To Give You The Comfiest Night's Sleep." The Wichita Eagle. 10 July 2005. H3.

back to table of contents

Industry Terms

Industry Term

Definition or Explanation

ADJOINING ROOMSGuestrooms located side by side without a connecting door between them.AFFILIATE RESERVATION SYSTEMA hotel chain's reservation system in which all participating properties are contractually related. Each property is represented in the computer system database and is required to provide room availability data to the reservation center on a timely basis.AFFILIATED HOTELA hotel that is a member of a chain, franchise, or referral system. Membership provides special advantages, particularly a national reservation system.AMENITYService or item offered to guests or placed in guestrooms for the comfort and convenience of guests, and at no extra cost. Examples are various guest services (such as in-room entertainment systems, automatic check-out, free parking, concierge services, and multilingual staff) in addition to an array of personal bathroom items offered by most hotels and motels. Amenities are designed to increase a hotel's appeal, enhance a guest's stay, and encourage guests to return.ATRIUMA guestroom floor configuration in which rooms are laid out off a single-loaded corridor encircling a multistory lobby space; also the multistory lobby space, usually with a skylight.AVERAGE OCCUPANCY PER ROOMA ratio that shows the average number of paid guests for each room sold. Calculated by dividing number of paid room guests by number of rooms sold. Measures management's ability to use the lodging facilities. AVERAGE ROOM RATE

A ratio that indicates average room rate, and to what extent rooms are being up-sold or discounted; calculated by dividing rooms' revenue by number of rooms sold. Also called average daily rate or ADR. BANQUETA meal prepared for a particular group, for which the number of guests and the menu are predetermined. Most properties offering banquet service have special facilities for banquet food production and service.BARTERThe trading of merchandise instead of paying cash. (e.g. advertising)

BED &

BREAKFAST (B&B)

A small inn or lodge that provides a room and a breakfast. Often a B&B is in a residential home setting and/or a historic building converted to a quaint lodging facility.BILLING CLERKThe person responsible for charging to hotel guests all vouchers representing food, beverages, room service, and merchandise purchases.

CALL ACCOUNTING

SYSTEM

A system that is part of the telephone equipment that prices telephone calls made by hotel guests and sends the information to the property management system (PMS) for billing.CASINO HOTELA hotel that features legal gambling, with the hotel operation subordinate to the gambling operation.CENTRAL RESERVATION OFFICEPart of an affiliate reservation network. A central reservation office typically deals directly with the public, advertises a central (usually toll-free) telephone number, provides participating properties with necessary communications equipment, and bills properties for handling their reservations.CHAIN OPERATING COMPANYA firm that operates several properties, such as Holiday Inn Worldwide or Hilton Hotels Corporation. Such an operator provides both a trademark and a reservation system as an integral part of the management of its managed properties.CHECK-INThe procedures for a guest's arrival and registration.CHECK-OUT(1) The procedures for a guest's departure and the settling of his or her account.
(2) A room status term indicating that the guest has settled his or her account, returned the room keys, and left the property.COMMERCIAL HOTELA property, usually located in a downtown or business district, that caters primarily to business clients.COMPLIMENT-ARY ROOMA complimentary or "comp" room is an occupied room for which the guest is not charged. A hotel may offer comp rooms to a group in ratio to the total number of rooms the group occupies. One comp room may be offered for each fifty rooms occupied, for example.CONDOMINIUM HOTELA hotel in which an investor takes title to a specific hotel room, which remains in the pool to be rented to transient guests whenever the investor is not using the room. The investor expects to receive a gain from the increase in value of the hotel over time, as well as receive ongoing income from the rental of his or her room.Cooperative advertisingAny arrangement by which a product or service is brought to public notice over the names of both the supplier and any intermediary who comes between that supplier and the ultimate purchaser. The intermediary may be a retailer who buys a product for resale, a distributor who sells to retailers or other form of intermediaries. This arrangement results in consumer advertising as well as other forms of promotion. The cost of the promotion may be shared by the supplier and the intermediary, or the supplier may pay all costs. The process commonly involves reimbursing retailers for advertising they create and place.CORPORATE HOTEL CHAINHotel organization that has its own brand or brands, which may be managed by the corporate chain or by a conglomerate.GENERAL MANAGERThe chief operating officer of a hotel.HOSPITALITY INDUSTRYLodging and food service businesses that provide short-term or transitional lodging and/or food.HOTELA large lodging facility, generally a hotel is full service and a multi-story building with interior entrance guest rooms.INDEPENDENT HOTELA hotel with no chain or franchise affiliation. It may be owned by an individual proprietor or a group of investors.LATE CHARGECharged purchase made by a guest that is posted to the guest's folio after the guest has settled his or her account.MID-PRICE/ EXTENDED-STAY HOTELSHotel that caters mostly to persons who must be in an area for a week or longer. The guestrooms of mid-price/extended-stay hotels have more living space than regular hotel guestrooms, and may also have cooking facilities. Guestrooms in these hotels tend to be less expensive than guestrooms in full-service or all-suite hotels.OccupancyThe percentage of available rooms occupied for a given period.POINT OF SALE SYSTEM (POS)Computerized systems that retail outlets such as restaurants, gift shops, etc, enter orders and maintain various accounting information. The POS generally interfaces with the property management system (PMS).

PROPERTY

MANAGEMENT

SYSTEM (PMS)

A computerized front desk system that manages hotel room inventory, guest billing and interfaces with various other systems such as telephone, call accounting, point of sale (POS), entertainment, etc.PROPRIETARY BOOKING ENGINEA internet reservation system that is owned and operated by an individual hotel or group of hotels to allow them to take reservation on their own website without paying a fee to the GDS, third party booking engines or franchise reservation systems.RACK RATEThe current public rate quoted for each accommodation as established by the property's management. However, most rooms are discounted. (i.e. rented at less than the rate rack)RESERVATIONSA guestroom that being held under an individual or business' name at a particular hotel for a specific date or range of dates.RESORT HOTELA hotel, usually located in a desirable vacation spot, that offers fine dining, exceptional service, activities unavailable at most other properties, and many amenities.ROOM OCCUPANCY SENSORA device that uses infrared light or ultrasonic sound waves to sense the physical occupancy of a room. Sensors have the ability to turn on devices and appliances such as lights, air conditioning, and heating whenever a guest enters a space, and to turn these devices and appliances off when the guest leaves.ROOM RACKA card index system that is constantly updated to reflect occupied and vacant rooms. In the evening, the room rack contains forms for only those registered guests remaining for the night who are to be charged for rooms. A daily room report can be prepared from the room rack.ROOMS MANAGEMENT MODULEA front office application of a computer-based property management system. The module (a) maintains up-to-date information on the status of rooms, (b) assists in the assignment of rooms during registration, and (c) helps coordinate various guest services.SERVICE CHARGEA percentage of the bill (usually 15% to 20%) added to the guest charge for distribution to service employees in lieu of direct tipping.THIRD PARTY
BOOKING
ENGINEAn internet site that provides a booking engine where a traveler can search a large number of lodging facilities for availability and reserve a room. The lodging facilities are not affiliated with the site and pay a fee for the business that the third party site generates. Examples of third party sites include: hotels.com, priceline.com.Transient Occupancy TaxCity or County tax added to the price of a hotel room.WATERPARK HOTELA hotel that offers large recreational water elements such large pools, multiple pools, slides or other water related venues.

back to table of contents

Accounting Principles

The lodging industry was reportedly one of the first industries to develop "definitive standards to provide specific guidance to accountants and operators. The standards evolved because uniformity of layout and presentation were, and are, still not stressed under U.S.

Generally Accepted Accounting Principles (GAAP)."^[3]; Those standards were and are contained in theUniform System of Accounts for the Lodging Industry (USALI), which is published by the American Hotel and Motel Association^. ^[4]

While the accounting profession may not have seen fit to develop GAAP standards specifically applicable to the lodging industry, the USALI has been widely adopted within the industry. Although there is no requirement that a lodging operator use the USALI, the degree of compliance with this time-tested, turnkey system is substantial. The primary reason for widespread adoption of the USALI has been comparability. Lodging operators tend to use financial statement data generated by competitors as a benchmark against which to measure their own operations. If comparability is lacking, then there are no benchmarks.

Additionally, while the system was developed for use within the United States, many hotel operators around the world have adopted the USALI.

Financial statements prepared for external users, are based on GAAP. In addition to other items commonly found in most financial statements, lodging industry financials are likely to report on such items as China, Glassware, Silver, Linen, and Uniforms (CGSLU), and the House Bank.

The USALI is a highly departmentalized system of accounting, and includes Departmental Statements of Income. There are two main department classifications in a hotel: operating and overhead. The operating (revenue-producing) departments include rooms, food and beverage, telecommunications, and similar departments. The overhead departments include administrative and general, data processing, human resources, transportation, marketing, guest entertainment, energy costs, and property operation and maintenance.

The USALI itself provides for up to 30 departmental statements, which include, in addition to those already mentioned: telecommunications, garage and parking, golf shop, golf pro shop, guest laundry, health center, swimming pool, tennis, tennis pro shop, other operated departments, rentals and other income, human resources, information services, security, franchise fees, management fees, rent, property taxes and insurance, interest expense, depreciation and amortization, income taxes, house laundry, salaries and wages and payroll taxes and employee benefits.

The principal differences between a hotel's transactions and internal control and those of other businesses are found in the revenue cycle. Room revenue is the most important source of income to a hotel. The front desk is the center of the hotel's operation and the place where the guest ledger, which summarizes and accumulates all charges to guests using the hotel facilities, is maintained. Some of the functions performed by front desk personnel are registering guests, recording room revenue, recording food and beverage and other guest charges, checking out guests, and settling guests' bills. There are numerous articles and books that further explain the hotel business. For more information, refer to Montgomery's Auditing by O'Reilly,Vincent M., et al., Twelfth Edition. new York: Wiley, 1998.

Montgomery's Auditing recommends the following substantive tests for room revenue for financial statement purposes:

Review reconciliations of rooms occupied per the front desk to the housekeeper's daily inspection report or the exception report Compare the room rate charged on the guest folio with that on the guest registration and room rack for a selected number of foliosTrace room charges to guest folios and compare with established ratesTrace cash receipts to the cashier's report and the cash receipts journal

Montgomery's Auditing recommends the following for revenue deductions (allowances):

Determine that adjustments (credits) made to guests' accounts in connection with overcharges, disputed charges or rate changes were properly approvedReview supporting documentation for proprietyTrace credit postings to individual guest folios

From a tax audit standpoint, the available descriptions of hotel operations would seem to suggest considerable opportunity for manipulation of both revenue and expenses. Room rates vary considerably depending on a variety of factors - e.g., group rates versus individual rates, etc. The occupancy rate would appear to be another area of potential concern.

While these concerns may not be overly great in the case of publicly traded companies who have to undergo an audit in the post Sarbanes-Oxley atmosphere, there may be of considerable concern with non-publicly traded companies.

Additionally, one of the newest areas that is gaining significance in the industry is the barter transaction. A barter transaction occurs when a property agrees to provide accommodation and/or other services in exchange for external services, for example advertising. While USALI recognizes barter transactions as executory contracts that do not need to be recorded in the financial statements until service is provided or received, it suggests that to provide more complete information for decision-making, the internal records reflect the transaction by recording an asset and a liability at the time the barter transaction is negotiated. The value assigned to this transaction should be a conservative average of the market rate for similar accommodations or services at the property, per the USALI.^[5]

When services are provided by the property, revenues are recorded and charged to the barter liability. On the other side, the expense is offset against the barter asset account when the service is received. For external reporting purposes, USAL suggests that the asset and liability accounts be netted and reflected as a current asset or liability. This will result in revenues and expenses associated with the barter transaction being reported in different periods^. ^[6]

Ratio analysis, in general, comprises the same types of ratios used in almost any industry. However, there are a few industry specialized ratios peculiar to hotels and/or restaurants of which one should be aware.

Average Room Rate = Rooms Revenue divided by Paid Rooms Occupied. Average Food Check = Total Food Revenue divided by Number of Covers. Covers refer to guests served in the food operation during the period.

A key recent addition is RevPar, which stands for Revenue per Available Room. It is calculated as either: Rooms Revenue divided by Rooms Available for Sale, or as Rooms Revenue divided by Rooms Available. The USALI expresses a preference for the second computation because "[t]he purpose of the ratio is to determine whether the inventory of rooms is being managed optimally. Therefore, the denominator should also include rooms out of order and temporary house use rooms."^[7]

The USALI also discusses a sample chart of accounts, which uses a twelve-digit numbering system, consisting of four clusters of three digits each. The first three digits are the property number. The second three digits are the revenue departments or cost centers. The third three digits are the major accounts on the balance sheet or income statement and the final three digits are sub-accounts useful for analysis and control. Obviously, this may vary considerably from taxpayer to taxpayer.

The descriptions contained in this guide only scratch the surface of standard practices within the hotel industry which are either unique to the hotel industry, or are uncommon in most other industries. A partial listing of available publications is provided elsewhere within this guide should additional information be required.

[3] Popowich, Taylor, and Daria Sydor. "Uniform System of Accounts for the Lodging Industry: Are you up to Date?" The Journal of Hospitality Financial & Technology Professionals. Volume 12, Number 7 (October/November 1997). 28 June 2007 http://www.hftp.org/members/bottomline/backissues/1997/Oct-Nov/index.html.

[4] Hotel Association of New York City, Inc. Uniform System of Accounts for the Lodging Industry.Ninth Revised Edition. Lansing, MI. Educational Institue of the American Hotel & Lodging Association. 1996.

[5] Popowich, Taylor, and Daria Sydor. "Uniform System of Accounts for the Lodging Industry: Are you up to Date?" The Journal of Hospitality Financial & Technology Professionals. Volume 12, Number 7 (October/November 1997). 28 June 2007http://www.hftp.org/members/bottomline/backissues/1997/Oct-Nov/index.html.

[6] Ibid.

[7] Ibid.

back to table of contents

Information Systems

The following are examples of some of the information system products that are available to hotel operators:

LodgingTouch Property Management System (by Hotel Information Systems)^[8]

The system is divided into various modules which can interact with the front office, group sales, guest history, accounts receivable, travel agencies, and yield management. Hoteliers can search and retrieve guest information by various fields, including name, address, confirmation numbers, and other fields. In addition, the system allows users to search for accounts using any criteria.

Paragon AS/400 Front Office System (by Hotel Information Systems)^[9]

Planning for a guest's stay includes managing accommodations, aggressive pricing, marketing, forecasting, and implementing reporting controls. The Paragon system claims a flexible system that provides information in order to achieve optimal standards. The system provides information and feedback to measure financial impact and quality.

Paragon can manage the complete hotel system. Paragon can be integrated with Paragon Back Office, Central Reservations, and complementary products. Some benefits claimed by the Paragon include improved customer service, efficient internal operations, and control over financial data integrity.

Other key features include:

Easy reservation inputOptimal return on rooms by providing flexible rate configuration and maximum room occupancyAccess availability by room type, total hotel and group.Provide confirmation letters and pre-printed registration cards.Capture additional guest information through hotel configurable fields.Maintain wait listsProvide flexible package configurations.

CLS Software Property Management System (by Hotel Information Systems)^[10]

This system can support properties of all sizes, from 50 to 1,000 rooms. They also claim a comprehensive integrated modular system that links together all aspects of the hotel function. The system comes in domestic and international versions. Other key features include:

Ease of data entryOver 200 interface solutionsTechnical Support - 24-hours a day, 7-days a week, 365-days a yearOver 25 years of experience.

Hotel Information Systems' epitome® Project Management System for UNIX

Hotel Information Systems offers a wide variety of other hotel management systems, namely, epitome® Project Management System for UNIX. This system can be utilized with the hotel's current IT system.

_________________

[8] E-hospitality.com. 28 June 2007.
< http://www.e-hospitality.com/storefronts/hotelinfo.html>

[9] Ibid.

[10] Ibid.

back to table of contents

Industry Operating Procedures

Some hotels are heavily involved in franchising activities. Franchisees will pay a fixed per-cent of receipts to a franchiser for advertising and royalties. Some hotel franchisers will lease the structure to the franchisee for a monthly rate and/or a percentage of sales.

The internal controls of these chain hotels are extensive; conversely, individual independent hotels do not always enjoy the same degree of controls over operations.

Ownership takes diverse forms, ranging from publicly-held companies to individuals. Included within this span are churches and other not-for-profit organizations, municipalities, partnerships and REITs. Of the various ownership arrangements, REITs seem to provide some of the more interesting, and perhaps more involved sets of rules.

Many firms desire to convert to the REIT status because the taxable income that is distributed to the shareholders is not taxed. Therefore, REITs avoid double taxation.

Effective January 1, 2001, REITs were allowed to wholly own taxable subsidiaries. These taxable subsidiaries were, in turn, allowed to lease hotels from the related REIT and/or its affiliates, provided certain conditions were met, and provided the subsidiary did not manage or operate any hotels or health care facilities.

These comments are some highlights of the REIT status. A full analysis the law applying to REITs is clearly beyond the scope of this document.

Also beyond the scope of this document are numerous potential employment tax issues, unrelated business income issues in the case of non-profits, and any other areas which generally fall outside the purview of LMSB. Nevertheless, it should be kept in mind that the hotel industry entails a great variety of business arrangements which include not merely hotel owners, but also hotel operators, designers, builders and so on.

Government Regulatory Requirements

A. Federal Requirements

The Federal Trade Commission (FTC) publishes the rulebook for promotional allowance marketing, titled Guides for Advertising Allowances and Other Merchandising Payments and Services, these guides are usually referred to as "The Guides," "the FTC Guides" or the "Fred Meyer Guides."

Text of the Americans with Disabilities Act, Public Law 336 of the 101st Congress, enacted July 26, 1990. The ADA prohibits discrimination and ensures equal opportunity for persons with disabilities in employment, State and local government services, public accommodations, commercial facilities, and transportation. It also mandates the establishment of TDD/telephone relay services.

B. State Requirements

Each state has their own specific requirements and regulations regarding the manufacture, sale, resale, and consumption of alcoholic beverages.

C. Local Requirements

Many localities have controls over the purchase, sale, resale and consumption of alcoholic beverages.

back to table of contents

Significant Law and Important Issues

A. Coordinated Issues

Issue

Brief Summary of Issue

There are currently no coordinated issues

B. Emerging or Other Significant Issues

Issue

Brief Summary of Issue

Depreciable Life of a Hotel's Small wares Asset Account and Treatment of ReplacementsWhen a hotel opens a location, they will purchase thousands of dollars worth of smallwares (towels, sheets, blankets, glassware, china, silverware, linen, etc.). A potential issue had been identified relating to the recovery period of these assets and how to treat the replacement costs of these items.

Losses Incurred When a Hotel is Closed

Is a taxpayer entitled to deduct the difference between the adjusted basis of the property and its appraised value when a location is closed but not disposed of? Some taxpayers are taking the position that when the building is owned, they are entitled to a loss in the form of bonus depreciation equal to the difference between the adjusted basis and the appraised value of the building, when a decision is made to close an unprofitable location. The current IRS position is that a loss on the Section 1250 property is not allowed until an actual disposition (sale or abandonment) has occurred. The mere closing of the property is not an actual disposition. Deferral of Gift Card SalesAre taxpayers properly following the rules for deferral under Treas. Reg. § 1.451-5? Is a CAM required? Was an information schedule attached to the tax return? Is income from unredeemed gift cards brought into income after 2 years? Was a separate company set up to manage the program? Can the taxpayer track the outstanding liability?Guest Loyalty/ Reward Programs

1. What is the proper character of a reward point? Is a reward point a "rebate or refund" as provided in Treas. Reg. § 1.461-4(g)(3) or a "trading stamp or premium coupon" as provided in Treas. Reg. § 1.451-4(a)? The characterization will affect the timing of expense recognition. Whereas a trading stamp or premium coupon may reduce gross income at the time of the corresponding sale, a rebate or refund will not reduce gross income until payment is made to the person to which the liability is owed. Furthermore, when is the liability fixed: at the time a customer is issued or redeems a reward certificate?

2. What is the cost of a reward point? How was the estimated average cost of redeeming each point computed? Did the retailer include only the costs to acquire the merchandise, cash, or other property required to redeem the points, or did the taxpayer include other costs such as advertising catalogs, transporting and storing merchandise, operating redemption centers, etc.?

3. What methodology was used to estimate future redemptions? Does the methodology result in a reasonably accurate estimate of the points outstanding at the end of the taxable year that will ultimately be presented for redemption? Although an expense may be deductible before it is due and payable, the liability must be firmly established. Is the liability fixed prior to the customer's accumulation of the minimum number of points needed to earn a reward certificate? Does the methodology take into consideration any expiration of previously earned points?

4. Does the recurring item exception provided under Treas. Reg. § 1.461-5 apply if the reward certificate is determined to constitute a rebate?

Cost Segregation StudiesMany hotels are the subject of cost segregation studies. An Audit Technique Guide (ATG) for the preparation and examination of cost segregation studies was initially issued in April 2004 and was most recently updated in January 2006. The primary goal is to provide examiners with an understanding of why cost segregation studies are performed by taxpayers, how such studies are prepared, and what to look for in the review and examination of these studies. This guide will also assist taxpayers and practitioners in understanding some of the items the Service will consider to support property allocations based on these studies. Included in the ATG is industry specific guidance for land-based casinos, restaurants, and retail establishments which were previously issued as Industry Director Directives. It should be noted that this ATG is not an official Service pronouncement and may not be cited as authority.Contributions of Hotel Beds

Some of the problems encountered during examinations are as follows:

Contribution made to an organization that is not a qualifying organization.Fair market value (this is the area where most disputes between the taxpayer and the Service occur).WOTC/WTW ClaimsRev. Rul. 2003-112 provided guidance on whether an individual meets the family membership requirements permitting certification for the WOTC and WTW credits. Some states may have applied a narrower definition in issuing certificates. Many taxpayers are currently filing claims using the revenue ruling as justification. These claimsSHOULD NOT be allowed without proper substantiation. The current Service position is that additional credit should only be allowed when the taxpayer has documented certification from the state agencies.Tax AbatementsAt issue is the proper tax treatment on State & Local Economic Development Subsidies. This might include inducements & Enticements to persuade companies to relocate or maintain their investment in that particular area. Some taxpayers are taking the position that they are entitled to a deduction for a tax abatement. Further, they account for the abatement as income under IRC § 118 and then reduce basis in long life assets or land under IRC § 362. This accounting treatment is an emerging issue in all industries.FICA Tax Tip CreditShould a taxpayer be allowed a credit under section 45B on Service Charges allocated to servers? Should a taxpayer be allowed a credit under section 45B on both directly tipped and indirectly tipped employees? Should a taxpayer be allowed a credit under section 45B for the difference paid for minimum wages for the first 90 days for employees under age 21?

These are some of the issues that hotels with restaurants will face. When a service fee is charged by the restaurant, typically on large parties, banquets, or catering, these amounts are not eligible for the FICA tax tip credit under IRC § 45B.

Franchising FeesSome hotels are requiring nonrefundable franchisee fees upfront, perhaps several years before the franchisees actually get their hotels. When examining franchisers, you should inquire as to their policy for reporting these advance fees. Some are properly including them in income and some are not.Upfront PaymentsIn some situations vendors will enter into long term agreements with hotels. These contracts typically call for a large up-front payment from the vendor to the hotel. In return the recipient agrees to purchase product for a given time period or the recipient agrees to purchase a stated amount of product in the future with no time period mentioned. The contracts will usually stipulate that the vendor will either be the exclusive supplier of the product or that the vendor is the primary vendor and will receive preferential placement of the product for an extended period of time. Typically in hotels you may see this from the soft drink provider.Lobbying Deductions

The principal issue is whether costs incurred to influence legislation that impacts a taxpayer's business or industry are deductible as ordinary and necessary business expenses under IRC § 162(a).

The general audit approach is to determine if the activity is covered by IRC § 162(e). If yes, no deduction is permitted. If no, the activity is deductible to the extent it meets the requirements of IRC § 162(a).

Generally, IRC § 162(e)(1) provides for no deduction of amounts paid or incurred in connection with any of the following four activities:

"Influencing legislation" (i.e., direct lobbying of the legislature);Participating in a political campaign of a candidate for public office;Attempting to influence the public regarding elections, legislative matters, or referendums (i.e. grassroots lobbying); or;Communicating with "covered executive branch officials."

Treas. Reg. § 1.162-29 defines "influencing legislation" as any attempt to influence legislation through a lobbying communication and all ancillary activities engaged in for the purpose of making or supporting a lobbying communication.

One area that is often overlooked is dues paid to trade associations.

The following website allows you to search by company name and see who is registered to lobby on the company's behalf and the amount of lobbying-related income from the company/client.http://sopr.senate.gov.

C. Recent or Pending Legislation

Effective Date

Title

Summary and Impact of Legislation

N/A

D. Specific Industry Related Tax Law

Effective Date

Code Section

Summary and Impact of Law

Temporary Provision that is Usually Renewed PeriodicallySections 51 and 51AEmployers who hire certain targeted low-income groups may be eligible for an annual tax credit of up to $2,400 for each qualifying employee who works at least 400 hours during the tax year. Additionally, a maximum credit of $1,200 may be available for each qualifying summer youth employee. These credits are known as the Work Opportunity Tax Credit and Welfare to Work Tax Credit.CurrentSection 170(e)(3)Allows C Corporations an enhanced deduction for qualified contributions of inventory to qualified organizations.CurrentSection 190This annual deduction of up to$15,000 is available to businesses of any size for the costs of removing barriers for people with disabilities, including the following: providing accessible parking spaces, ramps, and curb cuts; providing wheelchair-accessible telephones, water fountains, and restrooms; making walkways at least 48 inches wide; and making entrances accessible.

July 25, 1991

Section 197Generally, section 197 intangibles include designs (package designs). However, if the design is self-created, the asset is a Section 197 intangible, but not an amortizable Section 197 intangible. Therefore, the 15-year recovery period does not apply. The aforementioned Coordinated Issue Paper discusses the methods available for cost recovery.

E. Important Revenue Rulings or Revenue Procedures

Effective Date

Title and Number

Summary and Impact of Ruling and Procedure

RetroactiveRevenue Ruling 98-39Ruling discusses year end accruals relating to outstanding liability a manufacturer has under cooperative advertising arrangements with retailers, specifically the ruling states that the fact of liability is established when a retailer conducts qualified advertising vs. when a claim for reimbursement is received from the retailer. Revenue Ruling 98-39 was the desirable method of announcing that the Service has changed its position on the issues addressed in TAM's, 9320001, 9343006, 9204003 and 9416004.2002Revenue Procedure 2002-12On January 7, 2002, the Service issued guidance (Rev. Proc. 2002-12) on a safe harbor method of accounting for the cost of smallwares for restaurants. The IRS will now allow for the cost of certain restaurant smallwares to be current year deductible expenses.

F. Important Court Cases

Date Opinion Issued

Name of Court Case and Citation

Summary of Importance of Court Case

1990Jefferson Pilot Corp. v. Comm. 98 T.C. 435 (1992), affd. 995 F2d 530 (4^th Cir. 1993)

The court determined that a license is a franchise as defined in IRC Section 1253(b)(1). The Courts looked to the legislative history of IRC Section 1253 and found that it does not limit the application of IRC Section 1253 to private commercial franchises. This has resulted in taxpayers filing Forms 3115 to change their method of accounting for the cost of liquor licenses. Previously the Service's position was that a liquor license had an indeterminate life and therefore costs were not recoverable through depreciation or amortization. As a result of this decision, taxpayers can amortize the cost of their liquor license. See also

Tele-Communications Inc. (TCI) v. Comm. 95 T.C. 495 (1990)

Affd. 12F 3d 1005 (10^th Cir. 1993)

1999H Group Holding, Inc. v. Commissioner, T.C. Memo 1999-334The court modified the IRS's holding that petitioner subsidiary for mark licensing outside the United States should be increased by 1.5 percent of the gross revenues of those hotels whose management fees were remitted to two subsidiaries in Hong Kong and Singapore that were also hotel management companies, taking into consideration adjustments.2001WestPac Pacific Hotels, et. Al. V. Commissioner, T.C. Memo 2001-175The Tax Court has held that a partnership that distributed goods to related grocery chains wasn't entitled to defer recognition of upfront cash payments as income from various manufacturers beyond the year of receipt.

G. Technical Advice Memorandums - Field Service Advices

PLRs AND TAMs ARE ADDRESSED ONLY TO THE TAXPAYERS WHOREQUESTED THEM. FSAs ARE NOT BINDING ON EXAMINATION ORAPPEALS, NOR ARE THEY FINAL DETERMINATIONS. FURTHERMORE,SECTION 6110(k)(3) PROVIDES THAT PLRs, TAMs, AND FSAs MAY NOTBE USED OR CITED AS PRECEDENT.

Number

Description

FSA200203009Recovery Period for various components of a hotel/casino

back to table of contents

Alternative Issue Resolution Considerations

Cost Segregation Studies Relating to Hotel StructuresMembers of the industry have expressed an interest in developing an industry wide agreement on the treatment of the costs of a building used as a hotel or it may be a good pre-filing candidate.

Industry Resources

A. Websites

Name of Site

Summary and Available Information

Int'l Assn of Amusement Parks and AttractionsProvides a variety of information about this industry segment.Travel Industry Assn of AmericaGives an overview of this related industry.Cornell, School of Hotel Admin.Links to hospitality education links around the country.Hotel Resource"The Resource for Hospitality Professionals sponsored by The Buyer's Guide"Int'l Tax Treatment of REITSSelf explanatoryFASB SummariesFASB SummariesAICPA Home PageInformation from the AICPARutgers ResourcesInformation from business libraryAssociation for Accounting AdministrationSelf-explanatoryCPA Journal Home PageSelf-explanatoryWall Street Journal Home PageSelf-explanatoryInternal Auditing Web PageSelf-explanatoryStock HistorySelf-explanatoryCompany ProfilesSelf-explanatoryTax and Accounting SitesLinks to CPA SitesSearch SEC documentsSelf-explanatorySEC home pageSelf-explanatoryLibrary of CongressSelf-explanatoryThomas Legislative ResearchSelf-explanatoryTCU Professor-Tax LinksProvides links to various tax sitesNews ArticlesSelf-explanatoryNews ArticlesSelf-explanatoryTax GatewayProvides links to various sitesWall Street Research NetInformation on publicly traded hotelsCorporate InformationInformation on companies

B. Trade Associations

Name

Address

Purpose, Goals, Objectives, etc.

International Hotel & Restaurant Assn.48, Boulevard de Sebastopol, 75003
Paris, FranceNon-profit organization which represents industry issues before policymakers, monitors tourism issues, creates programs to serve the industry, etc.American Hotel & Lodging Assn1201 New York Ave, NW, #600
Washington, DC 20005-3931Represents lodging industry's business interests on Capitol Hill. It is the largest national trade association for the U.S. hotel and lodging industry.Hotel Tax Executives CommitteeNoneOrganization is affiliated with the American Hotel & Lodging Assn.'s governmental affairs unit.Tax Executive Institute1200 G. St. Suite 300
Washington, DC 20005-3814A professional organization of business executives who are responsible for taxation matters on an administrative or policymaking level, or whose work is otherwise primarily concerned with the problems of business taxation.

C. IRS and Other Training Courses/Videotapes

Name of Course

Course Number

Delivery Method

Developer of Course and Procedures to Secure Material

None

D. Trade Magazines and Newsletters

Title

Frequency of Publishing

Summary of Purpose/Information Included/Availability

HotelsMonthlySubscription is free to industry people. Contains information about the global hotel marketplace.Hotel Business ReviewWeeklySubscription rate is $295.00/yr. Contains information about the industry's best practices, insights and trends.Lodging MagazineOnlineFree.Hotel & Motel ManagementOnlineFree.Advertising AgeWeeklySubscription rate is $99.00/yr. Contains information about corporate advertising strategies, new products, etc.

E. Industry Books

Date of Latest Edition

Title

Summary of Contents

2004Hospitality Sales: Selling Smarter by Judy A. Siguaw and David Bojanic, Publisher: Thomson Delmar LearningThis book addresses the process of selling in the Hospitality Market.2004Hospitality Strategic Management: Concepts and Cases by Jeffrey S. Harrison and Cathy A. Enz, Publisher: WileyThis book provides a practical view of the field. It provides the reader a glimpse into the strategic manager's role, including acquisition, development, and management of internal resources, in addition to relationships with external stakeholders.2003Hospitality Management Accounting by Martin G. Jagels and Michael M. Coltman, Publisher: WileyAs the hospitality industry continues to grow and become more competitive, it must become increasingly profit and cost-conscious in order to maximize revenue and minimize costs. This book combines essential information, illustrative examples, and useful problems and exercises.2002Convention Sales and Services, 6^thEdition by Milton T. Astroff and James R. Abbey, Publisher: Culinary and Hospitality Industry Publications Services

This book provides a guide in reaching and servicing the meetings market. The book provides a step-by-step process to both sell and service to groups.

2001Hospitality & Travel Marketing by Alastair M. Morrison, Publisher: DelmarThe book provides a thorough and current look at marketing theory and techniques for the hospitality industry. It provides a glimpse into the collaborative efforts between hotels, airlines, restaurants and travel agencies.1995Hospitality Accounting by William S. Gray, Publisher: Prentice HallThis book addresses the practical accounting requirements for some of the latest developments in hotel operations. It looks at all phases of hospitality accounting and finance from basic recording to long-range projections.1995Co-Op Advertising by Bob Houk, available from the Association of National AdvertisersThe book describes marketing activities, development of marketing budgets, cost controls, marketing jargon, legal considerations for price structures, etc. Helps the reader understand the motivations and internal procedures relative to marketing strategies.1993Great Advertising CampaignsDiscusses successful marketing strategies, brand building, etc.1991Internal Control: A Fraud-Prevention Handbook for Hotel and Restaurant Managers by A. Neal Geller, Publisher:Self-explanatory.1988Negotiation and Administration of Hotel Management Contracts by James Eyster, Publisher:Self-explanatory.Annual

Thomas Hotel Registry

Lists companies and their products and brands, d/b/a names and other statistical information.

F. Internal Revenue Manual Citations

IRM Section

Title

Summary of Information Included

None

G. AICPA Auditing Standards and Publications

Date of Issuance

Title

Summary of Information Included

3/81S45 – Accounting for Franchise Fee RevenueDiscusses treatment of franchise fee revenue. Since many hotel chains are franchisers, this statement provides guidance.6/99S121- LeasesAccounting for leases: Sale-Leaseback Transaction, Involves R/E, Sales-Type Leases of Real Estate- Definition of the lease term and Initial direct costs of direct financing leases-an amendment of FASB 's #13, 66, 911993SOP 93-7Discusses the treatment of advertising costs for financial accounting purposes.2001FASB 144FASB 144 is effective for fiscal years beginning after December 15, 2001. It provides for asset impairment losses to be recognized for financial accounting purposes

H. Market Segment Specialization Program (MSSP)

Guide Name

Number

Bed and Breakfasts#3149-105, 5/93 TDPS 83186H

Page Last Reviewed or Updated: 05-Mar-2015

Our Agency

About Us Work at IRS Help & Resources Contact Your Local Office Tax Stats, Facts & Figures

Know Your Rights

Taxpayer Bill of Rights Taxpayer Advocate Accessibility Civil Rights Freedom of Information Act No FEAR Act Privacy Policy

Resolve an Issue

Respond to a Notice Office of Appeals Identity Theft Report Phishing Tax Fraud & Abuse

Other Languages

Español 中文 한국어 Pусский TiếngViệt

Could this Doctrine of Determinism be the Real Freedom with the Fruit Fly and 1st Amendment of The Bill of Rights?

1 The Doctrine of Determinism

Determinism is a far-reaching term affecting many areas of concern, that most widely and radically states that all events in the world are the result of some previous event, or events. In this view, all of reality is already in a sense pre-determined or pre-existent and, therefore, nothing new can come into existence. This closed view of the universe and of our world holds all events to be simply the effects of other prior effects. This has radical and far-reaching implications for morality, science, and religion. If general, radical, determinism is correct, then all events in the future are unalterable, as are all events in the past. A major consequence of this is that human freedom is simply an illusion.
2 Genetic Determinism
One area of contemporary discourse in science that relates to the issue of human freedom is the notion of genetic determinism. Here, the concept of determinism is linked directly to the genes in the DNA of a person. Because we already know that aberrations in certain genes can lead to various forms of physical and mental disease in humans, we can say with some certainty that people are physically determined by their genes. But genetic determinists want to extend this further, by claiming that even our behaviour is determined by our genes. In this line of thinking, we are but victims of our genetic makeup, and any effort to change our moral nature or behavioural patterns is useless. This is sometimes termed "puppet determinism," meaning metaphorically that we dance on the strings of our genes.
There are two principle forms of genetic determinism; Genetic Fixity and Innate Capacity. Together they link-up to produce the doctrine of statistical variation. These are discussed below.
a) Genetic Fixity: Sphexishness

The first variety of genetic determinism is the rather unsophisticated doctrine of genetic fixity, which holds that the genes of parents inevitably determine the characteristics of their children. Dan Dennett [1996] encapsulates this simple form of determinism under the label SPHEXISHNESS from the powerful example of the digger wasp, Sphex ichneumoneus:
"When the time comes for egg laying, the wasp Sphex builds a burrow for the purpose and seeks out a cricket which she stings in such a way as to paralyze but not kill it. She drags the cricket into the burrow, lays her eggs alongside, closes the burrow, then flies away, never to return. In due course, the eggs hatch and the wasp grubs feed off the paralyzed cricket, which has not decayed, having been kept in the wasp equivalent of deep freeze. To the human mind, such an elaborately organized and seemingly purposeful routine conveys a convincing flavor of logic and thoughtfulness--until more details are examined. For example, the Wasp's routine is to bring the paralyzed cricket to the burrow, leave it on the threshold, go inside to see that all is well, emerge, and then drag the cricket in. If the cricket is moved a few inches away while the wasp is inside making her preliminary inspection, the wasp, on emerging from the burrow, will bring the cricket back to the threshold, but not ins ide, and will then repeat the preparatory procedure of entering the burrow to see that everything is all right. If again the cricket is removed a few inches while the wasp is inside, once again she will move the cricket up to the threshold and re-enter the burrow for a final check. The wasp never thinks of pulling the cricket straight in. On one occasion this procedure was repeated forty times, always with the same result."
- D. Woodridge, 1963, p. 82.
Dennett (1996), following Hofstadter (1982), calls this kind of very simply determined behaviour 'sphexish', but believes that too much has been made of emblematic stories (or intuition pumps) like the one above, because human behaviour is much more complexly determined.
Genes, of course, do influence human development. The differences between humans and chimps are almost entirely genetic. However, even the completion of the human genome project will not enable scientists to predict how a child will develop. Indeed, even a complete knowledge of a child's genes and developmental environment would not allow the complete specification of the organism: chance also plays a significant role in development. This can be seen, for example, in the number of bristles under a fruit fly's wing: this number varies from the left wing to the right, despite the fact that the fruit fly has the same genes and environment on both sides of its body (Lewontin, 1991). Such differences may not be due to pure chance, however, but rather to non-linear dynamic (chaotic) deterministic processes (Molenaar, Boomsma, & Dolan, 1993). Such processes have been shown possible using computer simulations, but whether they operate in real organisms remains an empirical question.
b) Innate Capacity

The second variety of genetic determinism is the slightly more sophisticated doctrine of innate capacity, according to which people are like buckets waiting to be filled (Lewontin, 1991). In an impoverished environment, all people will end up with similar characteristics (wealth, knowledge, etc.); but in an enriched environment, those who naturally have big buckets will end up with more than those with small buckets could possibly hold. For example, people who are malnourished will show smaller individual differences in height than those who are well nourished.
The Doctrine of Statistical Variation

Genetic fixity and innate capacity lead the genetic determinist to the doctrine of statistical variation. This doctrine states that all individual differences can be parsed into either genetic determinants or environmental determinants in some proportion (Lewontin, 1991). For example, it might be said that 80 percent of the variance in children's performance on I.Q. tests is due to genetic influences, and only 20 percent is due to environment. The practical implication seems to be that even a radical change in environment will have only a modest effect on performance. However, this is not the case, as can be seen from the following examples:
i) An ordinary student in primary school today can add a column of numbers much faster than even the most intelligent ancient Roman mathematician, who had to deal with cumbersome X's, V's, and I's. Further, the same student, using an inexpensive calculator, can multiply two five-digit numbers faster than even the most intelligent mathematician a century ago (Lewontin, 1991).
ii) Heritability does not imply immutability. This can be seen from the example of PKU (phenylketonuria), a form of retardation. PKU can be cured by stopping people from eating phenylalanine. One hundred years ago the proportion of genetic variation in acquiring PKU was 100 percent; now individual differences in acquiring PKU are almost completely non-genetic (Plomin, DeFries, & McClern, 1990).
Further Considerations

Genetic determinism gains additional support and wider influence from the popular notion that, since we can now establish a scientific connection between one's genes and one's actual and/or potential physical traits (hair and eye colour, disease susceptibility, etc), then we should use this knowledge to restructure the genetic make-up of certain individuals. In other words, genetic determinism does not just show us how we are victims of our genes; it also shows us how we can use the knowledge of our genes in order to change them and, therefore, change ourselves. This understanding of GENETICS and human freedom, or unfreedom as it were, illustrates the extent to which genetic determinists place the influence of nature (biology and genetics) over nurture (society and family). The fundamental premises of genetic determinism, therefore, come to be that:
We are victims of our genes and have no ultimate freedom, and
With proper knowledge, we can take charge of our genes so that we are no longer their victim, but rather, are their architect. This premise has been termed "Promethean determinism," meaning that with the proper knowledge we can take charge of our genetic and, therefore, moral/ behavioural makeup.
Though a fascinating and long-debated theory, determinism raises serious difficulties regarding the nature of human knowledge and its bearing on our understanding of morality. For example, if one adheres to the idea of determinism and believes that one's life is simply the mechanical and unchangeable outplay of forces beyond one's control, then how does this affect one's relationship to the world and other people. Further questions arise: Does adherence to determinism not lead one into a sense of meaninglessness and impotence regarding one's fate and actions? Does determinism not also lead one into the belief that whatever one does is morally acceptable, by virtue of the fact that whatever one does is already pre-determined, and therefore, meant to be?
If determinism is in fact true, then our whole conception of morality is a pointless illusion. Since everything in existence is the result of necessary and pre-determined causes, then even something like murder can be considered normal. Here, determinism fails to take into account human freedom and choice. The majority of humans would choose not to be killed, just as most humans would choose not to kill another human. Determinists can claim that our choice to be killed or not to kill is itself already a determined effect, but this is only of theoretical interest since the issue of one's life or death is of extreme existential significance. In other words, in relation to issues of morality, determinism is an interesting theory, but in practice it is quite untenable. In essence, the acceptance of determinism makes one into a mere thing, a mechanical and non-autonomous entity without the power to deliberate or change one's direction in life.
3 Free Will

The alternatives to determinism are non-deteminsm, freedom or free will. Here we shall focus on the notion of free will, the doctrine that we as conscious human beings are free to make genuinely undetermined choices in circumstances where we are genuinely able to do so, and where we so freely, or (relavently) unconstrainedly, choose to do so.
Like determinism, free will comes in a variety of types and strengths. Here we shall consider the general scientific view of free will and two common types of philosophical approach to this notion.
3a Free Will: The Scientific View

There is a general scientific picture of the world that lends itself to predictability and certainty of outcomes and hence more to determinism than any notions of freedom or free will. Indeed in many minds, science is still associated with the deterministic picture of the world, as it was in the nineteenth century. Modern science, however, draws a picture that is quite different.
The world according to nineteenth century science was, broadly, as follows. Very small particles of matter move about in virtually empty three-dimensional space. These particles act on one another with forces that are uniquely determined by their positioning and velocities. The forces of interaction, in their turn, uniquely determine, in accordance with Newton's laws, the subsequent movement of particles. Thus each subsequent state of the world is determined, in a unique way, by its preceding state. Determinism was an intrinsic feature of the scientific WORLDVIEW of that time. In such a world there was no room for freedom: it was illusory. Human beings, themselves merely aggregates of particles, had as much freedom as wound-up watch mechanisms.
In the twentieth century the scientific worldview underwent a radical change. It has turned out that subatomic physics cannot be understood within the framework of the Naive Realism of the preceding scientists. The Theory of Relativity and, especially, Quantum Mechanics require that our worldview be based on a critical (scientific) philosophy, according to which all our theories and mental pictures of the world are only devices to organise and foresee our experience, and not the images of the world as it "really" is. Thus along with the twentieth-century's specific discoveries in the physics of the micro-world, we should consider the emergence of a properly critical philosophy as a scientific discovery, and as one of the greatest scientific discoveries of the twentieth century.
We now know the notion that 'the world is "really" space in which small particles move along definite trajectories', is illusory: it is contradicted by experimental facts. We also know that determinism, i.e. the notion that in the last analysis all the events in the world must have specific causes, is illusory too. On the contrary, freedom, which was banned from the science of the nineteenth century as an illusion, became a part, if not the essence, of reality. The mechanistic worldview saw the laws of nature as something that uniquely prescribes how events should develop, with indeterminacy resulting only from our lack of knowledge; contemporary science regards the laws of nature as only restrictions imposed on a basically non-deterministic world. It is not an accident that the most general laws of nature are conservation laws, which do not prescribe how things must be, but only put certain restrictions or constraints upon them.
There is genuine freedom in the world. When we observe it from the outside, it takes the form of quantum-mechanical unpredictability; when we observe it from within, we call it our free will. We know that the reason why our behaviour is unpredictable from the outside is that we have ultimate freedom of choice. This freedom is the very essence of our personalities, the treasure of our lives. It is given us as the first element of the world we come into.
Logically, the concept of free will is primary, impossible to derive or to explain from anything else. The concept of necessity, including the concept of a natural law, is a derivative: we call necessary, or predetermined, those things which cannot be changed at will, or by will.
3b Free Will: The Philosophical View

Most people, if asked, would like genuine freedom of choice, proper free will, but can we really have it? Philosophy offers a more complex analysis of this issue than the general scientific view outlined above. Within the philosophical tradition, and given the general set of philosophical principles belonging to this tradition, there are two main strands of argument for free will, i) ethical and, ii) psychological. It is the set of psychological considerations that concern us more directly here, though, of course the ethical concerns are always present in the background to any debate.
As the main features of the doctrine of free will have been sketched in the history of the problem, a very brief account of the argument for moral freedom will now suffice. Will, where viewed as a free power, is defined by defenders of free will as the capacity of self-determination. By self is here understood not a single present mental state (William James), nor a series of mental states (David Hume and JS Mill), but an abiding rational being which is the subject and cause of these states. We should distinguish between:
Spontaneous acts, those proceeding from an internal principle (e.g. the growth of plants and impulsive movements of animals);
Voluntary acts in a wide sense, those proceeding from an internal principle with apprehension of an end (e.g. all conscious desires); and, finally
Those voluntary in the strict sense, that is, deliberate or free acts.
What distinguishes a voluntary act from a non-voluntary one is that there is a self-conscious advertence (to turn one's attention to) to our own causality or an awareness that we are choosing the act, or acquiescing in the desire of it.
Spontaneous acts and desires are opposed to coaction or external compulsion, but they are not thereby morally free acts. They may still be the necessary outcome of the nature of the agent as, e.g. the actions of lower animals, of the insane, of young children, and many impulsive acts of mature life. The essential feature of free volition is the element of choice - the vis electiva, as St. Thomas Aquinas calls it, or 'because we want to' as Billie Piper puts it. There is a concomitant interrogative awareness in the form of the query "Shall I acquiesce or shall I resist?", "Shall I do it or shall I do something else?", and the consequent acceptance or refusal, ratification or rejection, though either may be of varying degrees of completeness. It is this act of consent or approval, which converts a mere involuntary impulse or desire into a free volition and makes me accountable for it.
A train of thought or volition deliberately initiated or acquiesced in, but afterward continued merely spontaneously, without reflective advertence to our elective adoption of it, remains free in causa (for there was a choice, a free choice, about bringing it about). I am therefore responsible for it, though actually the process has passed into the department of merely spontaneous or automatic activity. A large part of the operation of carrying out a resolution, once the decision is made, is commonly of this kind.
The question of free will may now be stated thus. "Given all the conditions requisite for eliciting an act of will except the act itself, does the act necessarily follow?" Or, "Are all my volitions the inevitable outcome of my character and the motives acting on me at the time?" Fatalists, necessarians, and determinists answer "Yes" to this question. Libertarians, indeterminists and anti-determinists reply "No" to it. The mind or soul in deliberate actions is a free cause. Given all of the conditions requisite for action, we (in virtue or our mind or soul) can either act or abstain from action. It can, and sometimes does, exercise its own causality against the weight of character and present motives.
Ethics and Psychology in Free Will

The evidence for the existence of genuine free will usually consists of one of two kinds, the ethical and the psychological, though the psychological arguments often appeal to ethical considerations, and even the ethical arguments themselves are, in some sense, psychological.
i) Ethical Arguments for Free Will

Necessarianism, fatalism or determinism in any form are usually held to be in conflict with the chief moral notions and convictions of mankind at large. The actual universality of such moral ideas is indisputable. Duty, moral obligation, responsibility, merit, and justice signify notions universally present in the consciousness of normally developed human beings. Further, these notions, as universally understood, imply that human beings really are the master of some of their acts, that they are, at least at times, capable of self-determination, that all their volitions are not the inevitable outcome of their circumstances. This implies that when I say that I ought not to have performed some forbidden act, that it was my duty to obey the law, I imply that I could have done so. The judgement of all human beings is the same on this point. When we say that a person is held justly responsible for a crime, or that they deserve praise or reward for an heroic act of self-sacrifice, we mean th at they were the author and cause of that act in such fashion that they had it in their power not to perform the act.
We exempt the insane or the child, because we believe them devoid of moral freedom and determined inevitably by the motives that happened to act on them. This belief is so strong, or ingrained, or just plain true that determinists have to admit that the meaning of these terms will, according to their view, have to be changed. But this is to admit that their theory is in direct conflict with universal psychological facts. It thereby stands disproved. Again, it may be argued that, if logically followed out, the determinist doctrine would annihilate, or leave no room for, human morality, and consequently that such a theory cannot be true. (Such a view would then correspond to fatalism).
ii) Psychological Arguments for Free Will

Consciousness testifies to our moral freedom. We feel ourselves to be free when exercising certain acts. We judge afterwards that we acted freely in those acts. We distinguish them quite clearly from experiences in which we believe we were not free or responsible. The conviction is not confined to the ignorant; even the determinist psychologist is governed in practical life by this belief. Henry Sidgwick states the fact in the most moderate terms, when he says:
"Certainly in the case of actions in which I have a distinct consciousness of choosing between alternatives of conduct, one of which I conceive as right or reasonable, I find it impossible not to think that I can now choose to do what I so conceive, however strong may be my inclination to act unreasonably, and however uniformly I may have yielded to such inclinations in the past "
- H. Sidgwick, Methods of Ethics
The weight of such evidence is best judged by carefully studying the various mental activities in which freedom is exercised. Amongst the chief of these are: voluntary attention, deliberation, choice, and sustained resistance to temptation. These mental activities have been analysed at length by philosophers such as David Hume, JS Mill, William James, and of course Sidgwick himself. (You may, nonetheless, prefer to think them out with concrete examples of your own inner experience and feel or intuit the force or power of the notions raised for examination.)
The main objection to the range of psychological arguments for free will is stated in the assertion that we can be conscious only of what we actually do, not of our ability to do something else. The reply is that we can be conscious not only of what we do, but of how we do it; not only of the act but of the mode of the act. Observation reveals to us that we are subjects of different kinds of processes of thought and volition. Sometimes the line of conscious activity follows the direction of spontaneous impulse, the preponderating force of present motive and desire; at other times we intervene and exert personal causality (in other words, we do something about it).
Consciousness testifies (through our being conscious of some relevant such and such) that we freely and actively strengthen one set of motives, resist the stronger inclination, and not only drift to one side but actively choose it. In fact, we are sure that we sometimes exert free volition, because at other times we are the subject of conscious activities that are not free, and we know the difference. Again, it is urged that experience shows that human beings are determined by motives, and that we always act on this assumption. The reply is that experience proves, or at least shows, that human beings are influenced by motives, but not that they are always inexorably determined by the strongest motive. It is alleged that we always decide in favour of the strongest motive. This is either untrue, or the barren statement that we always choose what we choose. A free volition is "a causeless volition". Our self, or our mind itself, is the cause. (Other objections include philosophical ones from the point of view of fatalism and scientific ones from such general principles as the Law of the Conservation of Energy.)
4 The Nature and Range of Free Will: Have We Moral Liberty?

Free will does not mean capability of willing in the absence of all motive, or of arbitrarily choosing anything whatever. It is not non-determinism, randomness or non-causality, in any shape or form. The rational being is always attracted by what is apprehended as good. Pure evil, misery as such, is something a human being could not properly, rationally, desire. However, the good presents itself in many forms and under many aspects such as the pleasant, the prudent, the right, the noble, the beautiful, and in reflective or deliberate action we can choose among these.
Nor does the doctrine of free will imply that a human being is constantly exerting this power at every waking moment, any more than the statement that 'we are rational animals' implies that we are always reasoning. Much the larger part of our ordinary lives are administered by the machinery of reflex action, the automatic working of the organism, and acquired habits. In the series of customary acts which fill up our day, such as rising, meals, study, work, etc., the large majority are, by and large, merely "spontaneous" and are proximately determined by their antecedents, according to the combined force of character and motive. There is nothing to arouse special volition, or call for interference with the natural current, so the stream of consciousness flows smoothly along the channel of least resistance. For such a series of acts we are responsible, though not because we exert deliberate volition at each step, but because each step is free in causa (there is/was a choice about bringing them about). They are so free in causa, because we have either freely initiated them, or approved them from time to time when we adverted to their ethical quality, or because we freely acquired the habits that now accomplish these acts. It is then especially when some act with a specially moral complexion is recognised and acknowledged as good or evil that the exertion of our freedom and the exercise of our free will is brought into play. This may not, of course, occur to everyone at the same time or in the same way. It is open to individual circumstance and is in no way rigidly determined.
In sum, with reflective advertence to the moral quality of the act comes the apprehension that we are called on to decide between right and wrong. It is then that the consciousness, or awareness, arises within us that we are choosing freely, and this carries with it the subsequent conviction both that the act was in the strictest sense our own, and that we are responsible for it; and as for moral actions, so for all other free actions of human beings.
References

D Dennett, 1984, Elbow Room: The Varieties of Free Will Worth Wanting. The MIT Press
D Hofstadter, 1982, Can creativity be mechanized?, Scientific American, 247, 20-29
D Hume, 1748, An Enquiry Concerning Human Understanding, Harvard Classics Volume 37, Click here for online edition
W James, 1890, Principles of Psychology Click here for online edition
R Lewontin, 1991, Biology as Ideology: The doctrine of DNA. New York: Harper Collins
JS Mill - On Liberty (1869) and Utilitarianism
P Molenaar, D Boomsma and C Dolan, 1993, A third source of developmental differences, Behavior Genetics, 23, 519-524
R Plomin, J DeFries, and G McClearn, 1990, Behavioral Genetics: A primer (2nd ed.). New York: Freeman. Click Here to buy from Amazon
H. Sidgwick, 1874, The Methods of Ethics Click here for online edition
D Woodridge - The Machinery of the Brain

GDACS daily newsletter for 19/12/2015

---------- Forwarded message ----------
From: "GDACS" <gdacs-noreply@jrc.ec.europa.eu>
Date: Dec 19, 2015 2:05 AM
Subject: GDACS daily newsletter for 19/12/2015
To: <gdacs-noreply@jrc.ec.europa.eu>
Cc:

Global Disaster Alert and Coordination System — Newsletter 19/12/2015

This daily newsletter provides an overview of the natural disasters that happened in the last 24 hours and response measures for ongoing disasters. GDACS currently covers earthquakes, tsunamis, tropical cyclones, volcanic eruptions and floods. The color coding (red, orange, green) is related to the estimated humanitarian impact of the event.

Disaster events in the last 24 hours

GDACS detected the following potential disasters. For up-to-date media coverage, latest maps and ReliefWeb content related to these disasters, please go to GDACS homepage.

	White earthquake alert (Magnitude 6.2M, Depth:10km) in Vanuatu 19/12/2015 02:10 UTC, About 9076 people within 100km.
	On 12/19/2015 2:10:53 AM, an earthquake occurred in Vanuatu potentially affecting About 9076 people within 100km. The earthquake had Magnitude 6.2M, Depth:10km.

	Green earthquake alert (Magnitude 5.4M, Depth:15.53km) in Nepal 18/12/2015 22:16 UTC, 2083042 people within 100km.
	On 12/18/2015 10:16:57 PM, an earthquake occurred in Nepal potentially affecting 2083042 people within 100km. The earthquake had Magnitude 5.4M, Depth:15.53km.

	Green earthquake alert (Magnitude 4.7M, Depth:63.46km) in Japan 18/12/2015 18:41 UTC, 1939879 people within 100km.
	On 12/18/2015 6:41:05 PM, an earthquake occurred in Japan potentially affecting 1939879 people within 100km. The earthquake had Magnitude 4.7M, Depth:63.46km.

Discussions in Virtual OSOCC

The GDACS Virtual OSOCC is a forum for emergency managers. If you are involved in an ongoing emergency as a local emergency management authority or as an international responder, please provide your information in the GDACS Virtual OSOCC. The following emergencies are currently open.

Open emergencies

Myanmar Floods

3-August-2015

updated: 13-August-2015

7.9M Earthquake in Nepal on 25 Apr 2015 06:11 UTC

25-Apr-2015

updated: 9-August-2015

EQ-2015-000048-NPL

Typhoon Maysak - FS Micronesia

31-March-2015

updated: 14-Apr-2015

Chile - floods

26-March-2015

updated: 27-Apr-2015

FL-2015-000027-CHL

Tropical Cyclone Pam

11-March-2015

updated: 30-July-2015

TC-2015-000023-VUT

Typhoon Chan-hom

11-July-2015

updated: 11-July-2015

You receive this newsletter because you subscribed on GDACS. To change your notification settings, please log in at http://register.gdacs.org. The information of GDACS is provided by the following partners: European Commission JRC, United Nations OCHA, Dartmouth Flood Observatory, Pacific Disaster Centre, USGS National Earthquake Information Centre, European Mediterranean Seismological Centre, Global Volcanism Program and UNOSAT.

Created on 19 Dec 2015 08:00 +01:00.

Joint Initiative of the United Nations and the European Commission

Reproduction authorised provided the source is acknowledged, except for commercial purposes.
©European Commission 2004-2012

Total Pageviews

Saturday, December 19, 2015

Internal Revenue Service on Average Daily Rate "ADR" of examples Wyndham as Administration to Knights Inn Extended Stay Increases

Could this Doctrine of Determinism be the Real Freedom with the Fruit Fly and 1st Amendment of The Bill of Rights?

GDACS daily newsletter for 19/12/2015

Global Disaster Alert and Coordination System — Newsletter 19/12/2015

Disaster events in the last 24 hours

Discussions in Virtual OSOCC