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When the applicable regulations interpreting section 83(h)
were issued in 1978, neither the preamble in the Treasury
decision nor the regulations contained anything indicating that
deductibility under section 83(h) depends on an employee or
independent contractor's actually reporting the compensation. On
July 11, 1978, final regulations were issued dealing with section
83(h). T.D. 7554, 1978-2 C.B. 71. The general rule for
deductions under section 83(h) was stated as follows:
(1) General rule. In the case of a transfer of
property in connection with the performance of
services, or a compensatory cancellation of a nonlapse
restriction described in section 83(d) and �1.83-5, a
deduction is allowable under sections 162 or 212, to
the person for whom such services were performed. The
amount of the deduction is equal to the amount
includible as compensation in the gross income of the
service provider, under section 83(a), (b), or (d)(2),
but only to the extent such amount meets the
requirements of section 162 or 212 and the regulations
thereunder. Such deduction shall be allowed only for
the taxable year of such person in which or with which
ends the taxable year of the service provider in which
such amount is includible as compensation. For
purposes of this paragraph, any amount excluded from
gross income under section 79 or section 101(b) or
subchapter N shall be considered to have been
includible in gross income. [Sec. 1.83-6(a)(1), Income
Tax Regs.; emphasis added.]
The explanation of the difference between these final regulations
and those previously proposed in 1971 was as follows:
Subject to the requirements of sections 162 and
212, a deduction is allowed to the person for whom
services were performed, in an amount equal to the
amount of compensation includible in the gross income
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