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The purpose of this exception in section 274(e)(3) is “to
prevent the double disallowance of a single expenditure, once to
the employee or practitioner, etc., and a second time to the
employer or client, etc.” H. Rept. 1447, 87th Cong., 2d Sess.
(1962), 1962-3 C.B. 405, 429. The regulations under section
274(e)(3) provide as follows:
(iv) Reimbursed entertainment expenses–-(a)
Introductory. In the case of any expenditure for
entertainment paid or incurred by one person in
connection with the performance by him of services for
another person (whether or not such other person is an
employer) under a reimbursement or other expense
allowance arrangement, the limitations on allowability
of deductions provided for in paragraphs (a) through
(e) of this section shall be applied only once, either
(1) to the person who makes the expenditure or (2) to
the person who actually bears the expense, but not to
both. * * *
(b) Reimbursement arrangements between employee
and employer. In the case of an expenditure for
entertainment paid or incurred by an employee under a
reimbursement or other expense allowance arrangement
with his employer, the limitations on deductions
provided for in paragraphs (a) through (e) of this
section shall not apply–-
(1) Employees. To the employee except to
the extent his employer has treated the expenditure on
the employer’s income tax return as originally filed as
compensation paid to the employee and as wages to such
employee for purposes of withholding under chapter 24
(relating to collection of income tax at source on
wages).
(2) Employers. To the employer to the
extent he has treated the expenditure as compensation
and wages paid to an employee in the manner provided in
(b)(1) of this subdivision. [Sec. 1.274-2(f)(2)(iv)(a)
and (b), Income Tax Regs.]
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