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Christmas Bonuses
In 1993, R&J distributed Christmas bonuses in the form of
one $100 bill to each of 42 employees. The $4,200 expended in
this manner was deducted by R&J in 1993 as an “Administrative”
expense and was not included in the wages of the recipients.
This deduction was disallowed in full by respondent.
Discussion
I. General Rules
Deductions are a matter of “legislative grace”, and “a
taxpayer seeking a deduction must be able to point to an
applicable statute and show that he comes within its terms.” New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also
Rule 142(a). As a general rule, section 162(a) authorizes a
deduction for “all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business”. An expense is ordinary for purposes of this section
if it is normal or customary within a particular trade, business,
or industry. See Deputy v. du Pont, 308 U.S. 488, 495 (1940).
An expense is necessary if it is appropriate and helpful for the
development of the business. See Commissioner v. Heininger, 320
U.S. 467, 471 (1943).
In addition to the above criteria for deductibility under
section 162, certain categories of expenses must also satisfy the
strict substantiation requirements of section 274 in order for a
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Last modified: May 25, 2011