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Concerning the baskets given to employees, petitioners again
assert that the related expenditures are fully deductible and are
not limited to $25 by section 274(b). Their rationale for doing
so differs, however, from that advocated in conjunction with the
gift certificates. Principally, petitioners maintain that
because gifts to employees are not excludable from income under
section 102, they are not “gifts” for purposes of the limitation
imposed by section 274(b). In the alternative, petitioners argue
that the baskets should be characterized as fully deductible
compensation, rather than as gifts.
In addition to contentions regarding lack of adequate
substantiation, which we rejected above, respondent cites section
1.274-2(b)(1)(iii)(b)(1), Income Tax Regs., in support of the
position that any deduction available to R&J is limited by
section 274(b). This regulation establishes, for purposes of
applying the appropriate set of strict substantiation rules under
section 274, the label to be adopted in cases where an expense
might be considered either as a gift or for entertainment.
Specifically, an “expenditure for packaged food or beverages
transferred directly or indirectly to another person intended for
consumption at a later time” is deemed a gift. Sec. 1.274-
2(b)(1)(iii)(b)(1), Income Tax Regs. From that statement,
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