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Judicially Created Loophole
The majority opinion appears to create a broad loophole for
corporations and would circumvent Congress' intent with regard to
the substantiation requirements of section 274(d).
The opinion appears to allow expenses that would be
disallowed under section 274(d) to be recharacterized as
deductible compensation, provided the expenses are paid by an
employer to an employee in the context of any employment
relationship. See majority op. p. 6, where the “but for”
analysis is set forth. Because corporations generally have
periods of limitation held open longer than individuals, the
opinion would allow corporations on their tax returns to treat
expenses as travel expenses and to avoid income and employment
tax withholdings thereon. After the periods of limitations have
expired for the employees, the corporations could recharacterize
the travel expenses as compensation. The corporations would
obtain an income tax deduction for the recharacterized
compensation, but the employees would avoid income and employment
taxes on the compensation.
The majority opinion erroneously relies on Commissioner v.
Kowalski, 434 U.S. 77 (1977), in which the Supreme Court held
that cash meal allowances provided to a State trooper were to be
included in the trooper’s gross income. The meal allowances were
not claimed as travel expenses, and substantiation of the
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