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thereunder, with respect to that amount of
compensation. * * *
(3) Exceptions. Where property is substantially
vested upon transfer, the deduction shall be allowed to
such person in accordance with his method of accounting
(in conformity with sections 446 and 461). * * *
As stated by the Commissioner in the preamble to these
regulations:
Under section 83(h) of the Code, in the case of a
transfer of property to which section 83(a) applies,
the person for whom services were provided may deduct
an amount equal to the amount included in the service
provider's gross income. In light of the difficulty
that a service recipient may have in demonstrating
that an amount has actually been included in the
service provider's gross income, the general rule in
former �1.83-6(a)(1) permitted the deduction for the
amount "includible" in the service provider's gross
income. Thus, the deduction was allowed to the service
recipient even if the service provider did not properly
report the includible amount. Where the service
provider was an employee of the service recipient,
however, the special rule in �1.83-6(a)(2) provided
that a deduction could be claimed only if the service
recipient (employer) deducted and withheld income tax
in accordance with section 3402. The special rule was
designed to ensure that the service recipient's
deduction was in fact offset by a corresponding
inclusion in the service provider's gross income.
The special rule was limited to employer-employee
situations because in other situations there was no
underlying withholding requirement upon which the
deduction could be conditioned.
Taxpayers expressed concern that it was often
difficult to satisfy the prerequisite that employers
must deduct and withhold income tax from payments in
kind as a condition for claiming a deduction. These
regulations address this concern by eliminating this
prerequisite, while still ensuring consistent treatment
between service recipients and service providers as
required by the statute. In addition, because the
deduction no longer is conditioned on withholding,
there no longer is a need to have different rules for
those who receive services from employees and those who
receive services from others.
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