                        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).
                               - 2 -

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”.
                                 - 3 -

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.
                                 - 4 -

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
                               - 5 -

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.”
                               - 6 -

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
                                - 7 -

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.
