National Bancorp of Alaska, Inc. - Page 4

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          deducted by petitioner includes the $131,575 treated as fringe              
          benefit compensation.                                                       
               The parties agree that the value of the personal                       
          entertainment use of the Gulfstream is reportable by the                    
          employees as compensation and that petitioner is entitled to                
          deduct some amount in connection with that use.  Respondent                 
          argues that the portion of petitioner’s deduction for personal              
          entertainment use reported on its 1996 Federal income tax return            
          is limited to $131,575, the amount treated as fringe benefit                
          compensation to the employees.  Petitioner argues that it is                
          entitled to deduct the entire amount of expenses incurred in                
          owning and operating the Gulfstream, including any amounts                  
          attributable to personal entertainment use of the aircraft.                 
               Section 162(a) generally provides that a taxpayer may deduct           
          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 trade or business activities.  Bingham’s Trust v.                
          Commissioner, 325 U.S. 365, 370 (1945).                                     
               As an ordinary expense of carrying on a trade or business, a           
          taxpayer/employer may deduct expenses paid as compensation for              
          personal services.  Sec. 162(a)(1).  If the compensation is in              
          the form of a noncash fringe benefit, the employer may take a               

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Last modified: May 25, 2011