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deduct some amount in connection with that same use. We consider
whether petitioner, under section 274, may deduct its aircraft
operating costs in full or whether petitioner’s deduction is
limited to the amount reportable as compensation by the
employees. In that regard, the parties agree that, without
considering section 274, petitioner has correctly deducted its
expenses incurred in operating the aircraft and notified its
employees to report the value of the use of the aircraft.
Section 162(a) generally provides that a taxpayer is
allowed a deduction for all ordinary and necessary expenses paid
or incurred by the taxpayer in carrying on a trade or business.
An expenditure is “ordinary and necessary” if the taxpayer
establishes that it is directly connected with, or proximately
related to, the taxpayer’s activities. See Bingham’s Trust v.
Commissioner, 325 U.S. 365, 370 (1945). Deductions are a matter
of legislative grace, and petitioner must prove that it is
entitled to the claimed deductions. See Rule 142(a); INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice
Co. v. Helvering, 292 U.S. 435 (1934).
As an ordinary expense of carrying on a trade or business, a
taxpayer/employer may deduct expenses paid as compensation for
personal services. See sec. 162(a)(1). If the compensation is
paid in the form of noncash fringe benefits, section 1.162-25T,
Temporary Income Tax Regs., 50 Fed. Reg. 747, 755 (Jan. 7, 1985),
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