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-6 - deduct some amount in connection with that same use. We consider whether petitioner, under section 274, may deduct its aircraft operating costs in full or whether petitioner’s deduction is limited to the amount reportable as compensation by the employees. In that regard, the parties agree that, without considering section 274, petitioner has correctly deducted its expenses incurred in operating the aircraft and notified its employees to report the value of the use of the aircraft. Section 162(a) generally provides that a taxpayer is allowed a deduction for 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 activities. See Bingham’s Trust v. Commissioner, 325 U.S. 365, 370 (1945). Deductions are a matter of legislative grace, and petitioner must prove that it is entitled to the claimed deductions. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934). As an ordinary expense of carrying on a trade or business, a taxpayer/employer may deduct expenses paid as compensation for personal services. See sec. 162(a)(1). If the compensation is paid in the form of noncash fringe benefits, section 1.162-25T, Temporary Income Tax Regs., 50 Fed. Reg. 747, 755 (Jan. 7, 1985),PDF Image | SUTHERLAND LUMBER-SOUTHWEST
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