T.C. Memo. 2001-203
UNITED STATES TAX COURT
MIDLAND FINANCIAL CO. AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 12302-99, 4574-00. Filed August 1, 2001.
Steven T. Ledgerwood and Alan G. Holloway, for petitioner.
Ann L. Darnold and Michael J. O’Brien, for respondent.
MEMORANDUM OPINION
RUWE, Judge: Respondent determined the following
deficiencies in petitioner’s Federal income taxes:
TYE Deficiency
July 31, 1995 $132,164
July 31, 1996 123,604
Dec. 31, 1996 52,851
After taking into consideration the agreed adjustments contained
in the notice of deficiency for the years ending July 31, 1995
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and 1996, the issue for decision is whether petitioner’s
deductions for expenses incurred in providing officers with
nonbusiness flights on a company-owned airplane are limited by
section 2741 to the amount reported as imputed income to the
recipient officers.
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 Oklahoma City, Oklahoma, at
the time it filed its petition.
For the period in issue, petitioner had fiscal years ending
July 31, 1995 and 1996. Petitioner also had a short taxable year
beginning August 1 and ending December 31, 1996. Petitioner
timely filed its Forms 1120, U.S. Corporation Income Tax Return,
for the years in issue. Petitioner uses the accrual method of
accounting for tax purposes.
Petitioner is principally engaged in the business of
providing financial services. Petitioner’s headquarters are
located in Oklahoma City, and, through its subsidiaries,
petitioner has retail bank locations throughout Oklahoma.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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Petitioner originates and services commercial, consumer, and
residential loans throughout the country.
Midland Aviation Co. (Aviation) was a subsidiary of
petitioner and filed consolidated Federal income tax returns with
petitioner. On April 20, 1995, Aviation was liquidated and a
Falcon 200 aircraft (the Falcon) owned by Aviation was
transferred to petitioner. During the years in issue, petitioner
used the Falcon predominantly for business travel, but it was
occasionally used for personal travel by George and Jeff Records
(the Recordses), two corporate officers of petitioner.
Petitioner kept accurate records that indicate the nature of the
flights of the Falcon.2
The personal use of the Falcon was treated as compensation
to the Recordses. On the basis of the valuation rules set forth
in section 1.61-21(g), Income Tax Regs., petitioner properly
determined that the value of the personal use to the Recordses
was $48,424, $45,076.57, and $14,916, respectively, for the
taxable years ending July 31, 1995, July 31, 1996, and the short
taxable year ending December 31, 1996. Petitioner reported these
2
On the basis of an allocation according to flight miles,
the percentages attributable to business use and personal use
during the years in issue were as follows:
TYE Business Personal
July 31, 1995 80% 20%
July 31, 1996 69 31
Dec. 31, 1996 68 32
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amounts on the Recordses’ respective Forms W-2, Wage and Tax
Statement, as wages subject to withholding, and the Recordses
reported these amounts as compensation on their respective
individual income tax returns. The personal use of the Falcon
served to compensate the Recordses for their services as
employees of petitioner and did not constitute constructive
dividends to them. The amounts of compensation paid to the
Recordses during the years in issue, including the value of the
personal use of the Falcon, were reasonable.
On its Federal income tax returns, petitioner deducted the
following amounts with respect to the operation of the Falcon:
TYE Amount
July 31, 1995 $2,126,223.00
July 31, 1996 1,282,081.52
Dec. 31, 1996 530,957.18
Total 3,939,261.70
The amounts deducted by petitioner include the amounts treated as
compensation to the Recordses for the personal use of the Falcon.
Respondent disallowed petitioner’s deductions related to the
Falcon to the extent that the portion of the deduction amounts
attributable to the personal use of the Falcon exceeded the
amounts treated as compensation to the Recordses for such use.3
3
Respondent determined the disallowed amount for each year
in issue by multiplying the total amount deducted by the
percentage attributable to personal use and then subtracting the
amounts included on the Recordses’ respective Forms W-2.
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Discussion
The parties agree that the value of the personal use of the
Falcon is reportable by the Recordses as compensation and that
petitioner is entitled to deduct some amount in connection with
that use. Respondent argues that the amounts of petitioner’s
deductions attributable to the personal use of the Falcon are
limited to the amounts reported as wages to the Recordses for
such use. Petitioner argues that the portion of petitioner’s
deduction attributable to the personal use of the Falcon is not
limited to the amounts reported as wages to the Recordses in
connection with the personal use.
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 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
deduction for expenses incurred in providing the benefit if the
value of the noncash fringe benefit is includable in the
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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. However, section 274(e)(2) provides that 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).
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Respondent argues that section 274 limits the amounts of
petitioner’s deductions attributable to the personal use of the
Falcon to the amounts reported by petitioner as wages
attributable to that personal use.
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
compensation to the Recordses, 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
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 __.]
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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 deductions for operation of the Falcon are in no way
limited by the value reportable by the Recordses.
Decisions will be entered
under Rule 155.