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deduction for expenses incurred in providing the benefit if the
value of the noncash fringe benefit is includable in the
recipient employee’s gross income. Sec. 1.162-25T, Temporary
Income Tax Regs., 50 Fed. Reg. 755 (Jan. 7, 1985), amended 50
Fed. Reg. 46013 (Nov. 6, 1985); see sec. 1.61-21(b), Income Tax
Regs. (employee is required to include in gross income the value
of any fringe benefit received). The employer may not deduct the
value reported to an employee as compensation; rather, the
employer is required to deduct its costs incurred in providing
the benefit to the employee. Sec. 1.162-25T, Temporary Income
Tax Regs., supra.
Some deductions previously allowable under section 162 were
disallowed by the enactment of section 274. Section 274(a)(1)(A)
generally provides for the disallowance of deductions involving
an entertainment, amusement, or recreation activity. Section
274(a)(1)(B) disallows the deduction of otherwise allowable
expenses incurred with respect to a facility used in connection
with such activity.5 However, section 274(e)(2) provides that
5For purposes of this analysis, we assume without deciding,
that the Gulfstream was a facility within the meaning of sec.
274(a)(1)(B). The parties dispute whether the Gulfstream was a
“facility” used in connection with “an activity which is of a
type generally considered to constitute entertainment, amusement,
or recreation”. Sec. 274(a)(1)(A) and (B). However, as we noted
in Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C.
197, 202 n.3 (2000), affd. per curiam __ F.3d __ (8th Cir., July
3, 2001), we need not decide this because sec. 274(e)(2) removes
petitioner’s deduction from the reach of sec. 274 and “provides a
universal answer to the controversy between the parties here.”
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