Employer's travel deduction not limited to amount reportable by employees.

• Author: Fiore, Nicholas J.

Corporation T is in the retail lumber business, with outlets in eight Texas cities. T owns a Lear Jet, which is used for travel related to its lumber business and an air charter business. In addition, T's president and vice president use the plane for travel related to their positions as directors of other businesses, for business and charitable purposes and for vacation travel.

The use of the plane for all the non-T business flights was reported by T's president and vice president as compensation. T reported the amount of imputed income in accordance with Regs. Sec. 1.61-21(g). T deducted all its costs incurred in operating the plane, including the non-T business flights.

Citing Sec. 274(e)(2), the IRS limited T's deductions to the value of the

income imputed to T's president and vice president (i.e., the value of the benefit received); T challenged this assessment.

The Tax Court (opinion Gerber, J.) holds for T; Sec. 274(e)(2) excepts deductions of an employer's expenses in connection with an entertainment facility from the effects of Sec. 274, and does not limit the deduction to the amount reportable by employees.

Sec. 162(a) generally provides that a taxpayer is allowed a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. An expenditure is "ordinary and necessary" if the taxpayer establishes that it is directly connected with (or proximately related to) his activities.

As an ordinary expense of carrying on a trade or business, an employer may deduct expenses paid as compensation for personal services. If the compensation is paid in the form of noncash fringe benefits, Temp. Regs. Sec. 1.162-25T provides that an employer may take a deduction for expenses incurred in providing the benefit if the value of the noncash fringe benefit is includible in the recipient employee's gross income. The employer may not deduct the amount included by the employee as compensation, but is required to deduct the employer's costs incurred in providing the benefit to the employee.

Some deductions previously allowable under Sec. 162 are disallowed by Sec. 274, which was enacted to eliminate or curb perceived abuses for business expense deductions for entertainment, travel and gifts. Sec. 274(a)(1)(A) generally provides for the disallowance of deductions otherwise allowable under chapter 1 of the Code, involving an entertainment, amusement or reaction activity; Sec. 274(a)(1)(B) disallows the deduction of...