IRS revisits personal use of aircraft

Aviation International News » February 2004
February 1, 2007, 5:05 AM

Although an article in The Washington Post last month implied that the Internal Revenue Service now sanctions the extensive personal use of company aircraft by owners and employees while the company takes a full deduction for the costs of owning and operating the airplane, several aviation tax attorneys counter that it merely sheds new light on the way the IRS views such matters.

They say the memo–called Chief Counsel Advice–that was issued by the IRS last July merely extends to S corporations and limited-liability companies what a 2001 federal court decision granted to C corporations in a separate case. “This interpretation shows how the service views those cases,” said one. “They view them as apparently applying to S corporations and to corporations where there is virtually no business use of the aircraft at all.”

The Post article said that “sharp-eyed tax lawyers and corporate jet salesmen” have just noticed that the IRS ruling could result in deductions that are substantially larger than the reported income, and it further claimed the memo has caught the attention of potential aircraft owners, advisors to wealthy families, accountants and lawyers.

“Owners and employees who use company airplanes for pleasure instead of business are required to report the value of their trips as taxable income,” the Post said, “though under a long-standing formula that does not necessarily reflect the actual cost.” That formula is the Transportation Department’s own standard industry fare level (SIFL) and is determined by aircraft weight and distance flown.

According to the Post, the IRS ruling could result in deductions that are substantially larger than the reported income. In cases of S corporations, which pass profits and losses through to the owners, “That means the owner of such a business could report the income under [the SIFL] formula while receiving an even bigger deduction as his share of the company’s gains and losses,” it said.

As one aviation tax advisor explained to AIN, “I’m the guy using the airplane and I own the company, and so all of the deductions flow through to me. They reduce the amount of taxes that I pay.” He admitted that it could lead to abuses and shows that the IRS is willing to countenance that abuse.

Keith Swirsky of Galland, Kharasch, Greenberg, Fellman & Swirsky, a specialist in aircraft taxation, told AIN that in the case of an S-corporation shareholder using the aircraft for a very high percent of personal use, those expenses are being deducted by the company although they relate to personal use. “So the net is a huge tax benefit,” he said, equating it to tax shelters in the 1980s.

In the federal court case that started all of this, there was a high percentage of personal use of a corporate aircraft, which was computed as personal income using SIFL. But the IRS thought the deduction for operating the aircraft should be limited to the SIFL calculation. The federal court disagreed, and ruled that all of the aircraft operating costs could be deducted.

The Post claimed that the effect of the memo “could be a substantial windfall” for private jet owners, wealthy families and family businesses. And, while the recent IRS interpretation was specific to an S corporation, it could also reflect the agency’s views for other “pass-through entities,” such as partnerships and limited-liability companies, he said.

According to the article, “it is too early to estimate how much the new interpretation might cost the government, but several attorneys and accountants who advise wealthy clients said they expect personal use of corporate airplanes to rise sharply.”
Previously, the IRS took the position that a company could deduct purely business use of an airplane, but where the airplane was used for personal travel the deduction was limited to the income as reported under SIFL.

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