National Bancorp of Alaska, Inc. - Page 6

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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           
               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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