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the general disallowance provision of section 274(a) will not
apply to:
Expenses treated as compensation.--Expenses for goods,
services, and facilities, to the extent that the
expenses are treated by the taxpayer, with respect to
the recipient of the entertainment, amusement, or
recreation, as compensation to an employee on the
taxpayer’s return of tax under this chapter and as
wages to such employee for purposes of chapter 24
(relating to withholding of income tax at source on
wages). [Emphasis added.]
Respondent argues that the “to the extent” language limits
petitioner’s deduction to the amounts includable in income by its
employees.
This is not an issue of first impression. In Sutherland
Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 197, 206 (2000),
affd. per curiam __ F.3d __ (8th Cir., July 3, 2001), we held
that “section 274(e)(2) acts to except the deductions in
controversy from the effect of section 274, and, accordingly,
petitioner’s deduction for operation of the aircraft is not
limited to the value reportable by its employees.” Respondent
recognizes that Sutherland Lumber-Southwest, Inc. precludes us
from limiting petitioner’s deduction to the amount treated as
fringe benefit compensation to the employees, unless we choose to
overrule our prior opinion. Respondent urges us to do just that.
In Sutherland Lumber-Southwest, Inc., we provided an
extensive analysis of the statute, the context in which it
appears, its legislative history, and relevant regulations. In
affirming our opinion, the Court of Appeals for the Eighth
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Last modified: May 25, 2011