T.C. Memo. 2001-202
UNITED STATES TAX COURT
NATIONAL BANCORP OF ALASKA, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6388-00. Filed August 1, 2001.
William H. Hippee, Jr., Irwin L. Treiger, Andrew T. Gardner,
Mark Alan Hagar, William Kenneth Wilcox, and Jeffrey A. Sloan,
for petitioner.
Jack Forsberg and Reid M. Huey, for respondent.
MEMORANDUM OPINION
RUWE, Judge: Respondent determined a deficiency of $216,918
in petitioner’s 1996 Federal income tax. After a concession,1
1
Petitioner concedes that it is not entitled to deduct
$17,244 of expenditures incurred in connection with a Cessna 206
prop aircraft owned by NB Aviation, Inc. (Aviation).
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the issue for decision is whether petitioner’s deduction for
expenses incurred in providing employees with nonbusiness flights
on a company-owned airplane is limited by section 2742 to the
amount reported as imputed income to the recipient employees.
Background
The parties submitted this case fully stipulated. The
stipulation of facts and the attached exhibits are incorporated
herein by this reference. Petitioner is a corporation that had
its principal place of business in Anchorage, Alaska, at the time
it filed its petition. At all relevant times, petitioner had a
fiscal and taxable year ending December 31 and used the accrual
method of accounting for both financial reporting and tax
purposes.
For the year in issue, petitioner was the parent corporation
of an affiliated group of corporations that provided banking and
other financial services and filed consolidated Federal income
tax returns. NB Aviation, Inc. (Aviation) was a wholly owned
subsidiary of petitioner and was a member of petitioner’s
consolidated group.3
Aviation owned a 1974 Gulfstream G-11B jet aircraft (the
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
3
Petitioner and Aviation are collectively referred to as
“NBA”.
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Gulfstream). During 1996, the Gulfstream was used partly in
pursuit of NBA’s trade or business for transportation purposes
and partly for personal entertainment use by certain employees
(the employees) of NBA.4 The net expenditures, including
depreciation, incurred by Aviation during the taxable year 1996
in connection with the operation and ownership of the Gulfstream
totaled $2,548,990. On the basis of an allocation according to
flight miles, $1,814,894, or approximately 71.2 percent, of the
net expenditures was attributed to business use. The remaining
portion, $734,096, or approximately 28.8 percent, was attributed
to personal entertainment use. Petitioner deducted the entire
$2,548,990 related to the operation and ownership of the
Gulfstream on its 1996 Federal income tax return.
The personal entertainment use of the Gulfstream was treated
as fringe benefit compensation to the recipient employees. On
the basis of the valuation rules set forth in section 1.61-21(g),
Income Tax Regs., NBA determinated that the value of the fringe
benefits received by the employees on account of the personal
entertainment use of the Gulfstream totaled $131,575 for the
taxable year 1996. The amount of the fringe benefits
attributable to each employee was included on the employees’
respective Forms W-2, Wage and Tax Statement. The $2,548,990
4
The personal entertainment use consisted of hunting,
fishing, vacation, and other similar trips for certain employees
of NBA.
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deducted by petitioner includes the $131,575 treated as fringe
benefit compensation.
Discussion
The parties agree that the value of the personal
entertainment use of the Gulfstream is reportable by the
employees as compensation and that petitioner is entitled to
deduct some amount in connection with that use. Respondent
argues that the portion of petitioner’s deduction for personal
entertainment use reported on its 1996 Federal income tax return
is limited to $131,575, the amount treated as fringe benefit
compensation to the employees. Petitioner argues that it is
entitled to deduct the entire amount of expenses incurred in
owning and operating the Gulfstream, including any amounts
attributable to personal entertainment use of the aircraft.
Section 162(a) generally provides that a taxpayer may deduct
all ordinary and necessary expenses paid or incurred by the
taxpayer 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, the
taxpayer’s trade or business activities. Bingham’s Trust v.
Commissioner, 325 U.S. 365, 370 (1945).
As an ordinary expense of carrying on a trade or business, a
taxpayer/employer may deduct expenses paid as compensation for
personal services. Sec. 162(a)(1). If the compensation is in
the form of a noncash fringe benefit, the employer may take a
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deduction for expenses incurred in providing the benefit if the
value of the noncash fringe benefit is includable in the
recipient employee’s gross income. Sec. 1.162-25T, Temporary
Income Tax Regs., 50 Fed. Reg. 755 (Jan. 7, 1985), amended 50
Fed. Reg. 46013 (Nov. 6, 1985); see sec. 1.61-21(b), Income Tax
Regs. (employee is required to include in gross income the value
of any fringe benefit received). The employer may not deduct the
value reported to an employee as compensation; rather, the
employer is required to deduct its costs incurred in providing
the benefit to the employee. Sec. 1.162-25T, Temporary Income
Tax Regs., supra.
Some deductions previously allowable under section 162 were
disallowed by the enactment of section 274. Section 274(a)(1)(A)
generally provides for the disallowance of deductions involving
an entertainment, amusement, or recreation activity. Section
274(a)(1)(B) disallows the deduction of otherwise allowable
expenses incurred with respect to a facility used in connection
with such activity.5 However, section 274(e)(2) provides that
5
For purposes of this analysis, we assume without deciding,
that the Gulfstream was a facility within the meaning of sec.
274(a)(1)(B). The parties dispute whether the Gulfstream was a
“facility” used in connection with “an activity which is of a
type generally considered to constitute entertainment, amusement,
or recreation”. Sec. 274(a)(1)(A) and (B). However, as we noted
in Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C.
197, 202 n.3 (2000), affd. per curiam __ F.3d __ (8th Cir., July
3, 2001), we need not decide this because sec. 274(e)(2) removes
petitioner’s deduction from the reach of sec. 274 and “provides a
universal answer to the controversy between the parties here.”
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the general disallowance provision of section 274(a) will not
apply to:
Expenses treated as compensation.--Expenses for goods,
services, and facilities, to the extent that the
expenses are treated by the taxpayer, with respect to
the recipient of the entertainment, amusement, or
recreation, as compensation to an employee on the
taxpayer’s return of tax under this chapter and as
wages to such employee for purposes of chapter 24
(relating to withholding of income tax at source on
wages). [Emphasis added.]
Respondent argues that the “to the extent” language limits
petitioner’s deduction to the amounts includable in income by its
employees.
This is not an issue of first impression. In Sutherland
Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 197, 206 (2000),
affd. per curiam __ F.3d __ (8th Cir., July 3, 2001), we held
that “section 274(e)(2) acts to except the deductions in
controversy from the effect of section 274, and, accordingly,
petitioner’s deduction for operation of the aircraft is not
limited to the value reportable by its employees.” Respondent
recognizes that Sutherland Lumber-Southwest, Inc. precludes us
from limiting petitioner’s deduction to the amount treated as
fringe benefit compensation to the employees, unless we choose to
overrule our prior opinion. Respondent urges us to do just that.
In Sutherland Lumber-Southwest, Inc., we provided an
extensive analysis of the statute, the context in which it
appears, its legislative history, and relevant regulations. In
affirming our opinion, the Court of Appeals for the Eighth
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Circuit stated:
After a complete review de novo, we agree with the Tax
Court’s well-reasoned opinion, and affirm on the basis
of the analysis set forth therein. * * * Because we
have nothing of substance to add to the Tax Court’s
thorough analysis, further discussion is superfluous.
[Sutherland Lumber-Southwest, Inc. v. Commissioner, __
F.3d at __.]
The above quote applies to the case before us. No purpose would
be served by repeating the statutory analysis that led us to hold
that an employer’s deduction is not limited to the amount
reportable by its employees.
The doctrine of stare decisis generally requires that we
follow the holding of a previously decided case, absent special
justification. Sec. State Bank v. Commissioner, 111 T.C. 210,
213 (1998), affd. 214 F.3d 1254 (10th Cir. 2000). While
respondent has thoroughly rearticulated his arguments in support
of a different interpretation of the statute, we find nothing
therein that would cause us to refrain from applying the doctrine
of stare decisis in the instant case. Accordingly, we hold that
petitioner’s deduction for operation of the Gulfstream is in no
way limited by the value reportable by its employees.
Decision will be entered
under Rule 155.