tax research paper

Date: June 21, 2016

Facts

The president of Alvarez Tech Corporation, Juan Alvarez, plans to purchase a new corporate jet to be used by corporate officers and other employees to attend business meetings around the country. Providing employees the use of a corporate jet reduces time lost waiting in airport security and allows employees to conduct work more efficiently. The corporate jet will also be available to the top four officers for their own personal uses. All of these officers own at least 5% of the corporate stock.

Issues

1. Will all the expenses for the aircraft be fully deductible by the corporation?

2. What types of records are needed to determine the value of the personal travel?

a. What is considered acceptable to determine the valuation of personal travel?

3. Will there be any limits placed on the company’s deduction for the jet?

4. What will the amount of taxable compensation be for the employees that use the jet for personal travel?

Conclusions

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Discussion of Reasoning and Authorities

- Generally, section 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Under section 274(a)(1)(A), no deduction is allowed for an activity generally considered to be entertainment, amusement, or recreation, unless the taxpayer establishes that the activity is directly related to or (in certain cases) associated with the active conduct of the taxpayer’s trade or business.

- Generally, §1.61-21(b)(1) requires an employee to include in gross income the fair market value of a fringe benefit, such as an entertainment flight, after subtracting amounts paid, by or on behalf of the employee, for the fringe benefit, as well as amounts excluded from income by another section of the Code. If an employee takes a personal flight on an employer’s aircraft, and the employer also provides a pilot, the general rule under §1.61-21(b)(6) is that the fair market value of the flight is equal to the amount that an individual would have to pay in an arm’s-length transaction to charter the same or a comparable piloted aircraft for that period for the same or a comparable flight. If the employer does not provide a pilot, the general rule under §1.61-21(b)(7) is that the fair market value of the flight is equal to the amount that an individual would have to pay in an arm’s-length transaction to rent a comparable aircraft for that period in the geographic area in which the aircraft is used. The regulations do not permit valuation of a flight by reference to the employer’s costs.

- As an alternative to the general valuation rules just described, §1.61-21(g) provides that an employee’s personal flights on an employer’s aircraft may be valued using an optional special valuation rule, the non-commercial flight valuation rule. In order to use the non-commercial flight valuation rule, applying the applicable aircraft multiple from §1.61-21(g)(7), it is necessary to know the weight of the employer’s aircraft, the number of miles for the flight being valued, and whether the employee receiving the benefit is a control employee within the meaning of §1.61-21(g)(8) or (9). The value of an employee’s personal use of a company aircraft is computed by multiplying the Standard Industry Fare Level (SIFL) by the terminal charge to arrive at the value of the flight (the SIFL formula). SIFL is a cents-per-mile factor that, taken with the aircraft multiple and the terminal charge, is intended to approximate coach and first class fares on commercial aircraft.

- Section 274(a)(1)(B) disallows all the expenses, direct and indirect, associated with the ownership and operation of an aircraft that is an entertainment facility, except for expenses for business travel and expenses that meet the exceptions of section 274(e). Thus, expenses for personal, non-entertainment travel (such as for medical purposes or attending funerals), as well as for entertainment travel, are disallowed, unless an exception such as 274(e)(2) applies.

The IRS and Treasury Department believe that Congress, in adding section 274(e)(2)(B), contemplated entertainment use of aircraft by specified individuals without specifically considering circumstances in which aircraft may be regarded as entertainment facilities. Therefore, these proposed regulations are limited to use of taxpayer-provided aircraft in entertainment activities under section 274(a)(1)(A), and do not provide rules relating to the application of section 274(e)(2)(B) in circumstances under which aircraft may be regarded as entertainment facilities under section 274(a)(1)(B). Comments are requested on whether the IRS and Treasury Department should issue guidance on aircraft as entertainment facilities and the content of the guidance.