Pilot Counsel

An important tax case

February 1, 1993

Many aircraft owners write off, for federal income tax purposes, the cost of flying their aircraft in connection with their jobs. Many more would like to learn more about it.

Several months ago, the U.S. Tax Court decided a case that provides a good illustration of what the tax law will allow.

The case involved a U.S. Air Force lieutenant colonel who traveled in his own 1965 Piper Twin Comanche in connection with his military assignment. Even though the case arose in a military setting, the colonel's tax situation is the same as of any civilian employee who uses his or her private aircraft partly for travel in connection with employment. A typical problem is that the employer reimburses the employee for the business use of the aircraft on some basis that doesn't cover the total cost of the business use of the aircraft. Frequently, the reimbursement will be based on commercial air fares. Often, it will be based on "so many cents per mile" traveled. The employee would like to deduct for federal income tax purposes the difference between the cost for business use and the amount the employer has reimbursed.

And so it was with the colonel. On his tax returns for the years 1984, 1985, and 1986, he deducted the excess of the business travel portion of the costs of his airplane over his reimbursement. The Internal Revenue Service disallowed these deductions and determined deficiencies of $2,851, $6,194, and $2,070 for the respective taxable years. A U.S. Tax Court was called upon to decide the dispute, and it decided it in the colonel's favor.

The colonel was director of a program office charged with developing equipment to protect military personnel and others from the effects of chemical warfare. As such, he was to develop new products for decontamination, treatment, and evacuation of military personnel exposed to chemical warfare, and for the mass evacuation of the injured back to the United States. His program had an annual budget of approximately $10 million for research and development and a $50-million budget for production of the equipment.

This job required him to travel extensively to find and to meet with qualified civilian contractors who could aid in the development of such equipment and technology. He also had to travel to remain in contact with a number of Air Force commanders to keep them abreast of progress and problems in the program. He was authorized to travel by commercial means, and he was also specifically authorized to use his own aircraft. The Air Force recognized that it was advantageous to the government for the colonel to travel in his own aircraft. It enabled him to land directly at the military airfields that were his ultimate destinations rather than the airports that the commercial air carriers used. In addition, the use of his own airplane often resulted in considerable time savings, especially when meetings ran late, and the use of his airplane enabled the colonel to return the same night in order to report for duty at his office the next morning. In many cases, the use of commercial air carriers would have required the colonel to remain out of town overnight.

During 1984, the colonel made 11 business trips for the Air Force, using his airplane for eight of them. During 1985, he made a total of 14 trips, using his airplane for eight of those. And in 1986, he made a total of 11 trips, using his airplane for two. When he did not use his own airplane, he took regularly scheduled airline flights.

When he used his own airplane on Air Force business, sometimes he carried other Air Force personnel. He didn't conduct any personal business while on those trips, although on one trip to California, he extended his stay for a short vacation.

He was reimbursed by the Air Force for the business use of his airplane at the rate of 16 cents per mile until mid-1986, when the reimbursement rate was raised to 45 cents per mile.

On his federal income tax returns for the years 1984, 1985, and 1986, the colonel claimed a deduction for the amount that the business portion of his actual expenses and depreciation exceeded the amount of his reimbursements. For 1984, he claimed $9,295, of which $5,437 was depreciation. For 1985, he claimed $13,682, of which $6,999 was depreciation. He claimed $1,836 for 1986, of which $766 was depreciation.

In deciding the case in favor of the colonel, the Tax Court reaffirmed some very important tax law principles. Section 162 of the Internal Revenue Code permits a taxpayer to deduct all of his or her "ordinary and necessary" expenses incurred in the taxpayer's "trade or business." That includes travel expenses, including travel by private aircraft, so long as they meet these requirements. Performing services as an employee is considered to be a tradeor business.

The court said that the test as to whether an expense is ordinary is if it is a common or accepted practice. "In this day and age, there is no doubt that the use of private airplanes by executives in charge of large projects is a common practice. The popularity of their use is reflected by the number of cases in which the expenses incurred in the use of a private airplane arises."

The IRS argued that the Air Force did not require the use of his airplane, and therefore, the expenses he incurred in excess of his reimbursement were not "necessary" to the colonel's business of being an employee of the Air Force. The IRS cited a case that held that when an employer does not reimburse an employee for a particular expense, that expense is prima facie personal, either because it was voluntarily assumed or because it did not arise directly out of the exigencies of the business of the employer. In answer to this argument, the court said that the test as to whether an expense is "necessary" is if it is appropriate and helpful in carrying on the trade or business. "Under the circumstances of this case, there is little doubt that the use of his airplane was appropriate and helpful to petitioner in the performance of his duties. It provided him with direct access to his destinations. In this respect, on many occasions, petitioner was able to arrive at his destination on time whereas, had he used a commercial flight, he may not have been able to do so. Further, instead of having to wait for a commercial flight the next day, petitioner's direct access frequently enabled him to leave promptly after completing his assignment and report to work at his home base the next morning."

The court also looked into the question of whether the claimed deductions were reasonable in amount. This inquiry led to a very favorable holding. It is not uncommon for private aircraft operating costs to appear excessive when depreciation is included. The court held that in determining reasonableness, the deductions for depreciation are not to be taken into account. The court cited a 1991 Tax Court case in which an employee claimed a deduction of $139,000, of which $112,000 was depreciation on a Cessna Citation jet, as compared to the employee's salary of $105,000. In the 1991 case, depreciation was excluded from the computation to determine the reasonableness of the aircraft expense deductions. "The authority for deducting an allowance for depreciation in this case is section 168. Therefore, depreciation does not fall under the regulatory rubric of trade or business expense [allowed under section 162]. As such, the section 168 depreciation deduction amount should not be included in the amount of business expense, the reasonableness of which is to be determined. To hold otherwise would raise serious problems since allowable deductions for depreciation will often not be reflective of economic depreciation. If we were to look simply at the combination of allowable depreciation deductions and other expenditures for a particular year, the combination of these amounts might often seem exorbitant in amount, especially in the early years of operation."

There are a few other things in this case that serve as a reminder as to how to put one's best foot forward in claiming an employee business expense for the use of a privately owned aircraft. The colonel maintained a log of his trips and submitted detailed expense vouchers to the Air Force for each trip. As any tax lawyer will tell you, good contemporaneous records are a must in persuading the IRS (or a Tax Court judge) of the legitimacy of business deductions. Also, on all of the trips, the use of his airplane was authorized by the Air Force and most of the travel vouchers acknowledged that, under the circumstances, "travel by privately owned aircraft has been determined as more advantageous to the government." A contemporaneous acknowledgment by the employer of the benefits of the use of the employee's aircraft can also go a long way.

Marshall v. Commissioner, Tax Court Memoranda, 1992-65.

John S. Yodice