- 5 - United did not withhold Federal income tax on its payment of the per diem allowances, and it neither withheld nor paid Federal Insurance Contribution Act (FICA) tax with respect to the per diem allowances. United did not report the per diem allowances as wages or nonwage compensation on the employees’ Forms W-2, Wage and Tax Statement. OPINION We must decide whether petitioner may deduct the per diem allowances paid to the employees. Petitioner argues it may deduct the per diem allowances as personal service compensation because they arose out of an employer/employee relationship. Respondent argues that petitioner may not deduct the per diem allowances as personal service compensation because it lacked the requisite compensatory intent at the time of payment. We agree with petitioner. Our inquiry begins with the relevant text. Section 162(a) lets a taxpayer deduct all ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business. Section 162(a)(1) includes within the ambit of section 162(a) “a reasonable allowance for salaries or other compensation for personal services actually rendered”. Payments are deductible under section 162(a)(1) to the extent they are “reasonable and * * * in fact payments purely for services.” Sec. 1.162-7(a), Income Tax Regs.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011