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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.
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