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deducted by petitioner includes the $131,575 treated as fringe
benefit compensation.
Discussion
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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