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If the service provider is an employee of the person
for whom services were performed, such deduction is
allowed for the taxable year of the employer in which
or with which ends the taxable year of the employee in
which such amount is includible as compensation, but
only if the employer deducts and withholds upon such
amount in accordance with section 3402. * * * [Sec.
1.83-6(a)(2), Income Tax Regs.]
The literal terms of the withholding requirement in the
above-quoted regulation apply only where the deduction is allowed
for the employer's taxable year in which or with which ends the
taxable year in which the compensation is includible in the
employees' income; i.e., where the timing rules of section 83(h)
apply. The withholding requirement does not purport to apply to
other situations, such as where the deduction is allowed in
accordance with the employer's own accounting method pursuant to
subparagraph (3).
The majority states that the regulations under section 83(h)
implement the following three requirements for deductibility:
(1) The requirements of sections 162 or 212; (2) the requirements
of section 83(h) regarding the amount of the deduction; and (3)
the requirements of section 83(h) regarding the timing of the
deduction. There is no question in this case that the transfer
of property qualifies for deduction under section 162.
Deductions under section 162 are not conditioned on withholding.
There is also no question in this case regarding the amount of
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