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Marshall v. Commissioner of Internal Revenue, T.C. Memo 1992-65.
Marshall was a Lieutenant Colonel in the United States Air Force (Air Force). He was assigned to a special project that required travel, and he used his Piper Twin Comanche for certain work-related trips. The Air Force reimbursed Marshall for a portion of his aircraft expenses on these trips. However, a substantial portion of his aircraft expenses were not reimbursed, so he claimed the un-reimbursed portion of his total expenses as a deduction on his 1984, 1985, and 1986 tax returns. The IRS challenged these deductions, claiming that Marshall's aircraft expenses were not "ordinary or necessary" under the Internal Revenue Code.
In reviewing this case, the Tax Court first found that Marshall's aircraft expenses were "necessary" because they were appropriate and helpful to his conducting Air Force duties. The court recognized the direct access to destinations allowed by his aircraft which permitted him to save time on travel and increase productivity. It was also noted that the Air Force acknowledged that "[travel] by privately owned aircraft has been determined as more advantageous to the government."
The court also found that Marshall's travel expenses were "ordinary." The court stated that "[i]n 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."
Finally, the court determined that besides being "ordinary and necessary," Marshall's aircraft expenses were also "reasonable." In drawing this conclusion, depreciation deductions, although allowable, were not considered for the purpose of analyzing the reasonableness of his deduction for aircraft expenses.
Noyce v. Commissioner of Internal Revenue, 97 T.C. No. 46 (1991)
Noyce was vice chairman of Intel Corporation. His position required frequent and extensive travel. Noyce purchased a Cessna Citation in order to help him meet his demanding travel schedule. The aircraft helped him increase the number of meetings he could attend on behalf of his employer. However, pursuant to Intel's policies, Noyce's travel was reimbursable only to the extent of commercial airline coach rates. Also, as a matter of corporate policy, Intel officers were expected to bear certain travel expenses without reimbursement. In 1983, Noyce claimed $139,369 in deductions for the un-reimbursed expense of operating the Cessna Citation. Of this amount, $112,463 was depreciation expense. The IRS disallowed Noyce's aircraft deductions in total.
Noyce petitioned the U.S. Tax Court to review his case. The court first ruled that Noyce's use of the Cessna Citation in the course of his employment for Intel was a part of his "trade or business" of being a corporate official. The court went on to rule that Noyce's aircraft expenses were "ordinary and necessary" because the aircraft clearly allowed Noyce to travel on a more flexible and productive schedule. Significantly, this case also marks the first time that the Tax Court clearly states that when determining whether expenses are reasonable in amount, the amount of expenses considered does not include amounts deducted for depreciation.
Sartor v. Commissioner of Internal Revenue, T.C. Memo 1984-274
Sartor serviced a sales territory including Utah; Idaho; Colorado; Washington; Oregon; Montana; and Vancouver, Canada. He used a private aircraft to travel on customer visits throughout his wide sales territory and deducted his associated aircraft expenses on his income tax return for 1980. Although his company did not reimburse him for all of his aircraft expenses, they did pay him what it would have cost him to fly commercially.
In ruling in favor of Sartor's tax deductions for aircraft expenses, the court stated: "We find that the travel expenses were very helpful to petitioner in his business of being a salesman. The record shows that petitioner was given a large sales territory with customers located several hours from major airports. Due to the deregulation of the airlines, there were less frequent flights to the petitioner's sales areas and alternate methods of transportation were inadequate and time consuming. By using the airplane, petitioner was able to arrange a more flexible schedule [that] enabled him to maximize his sales opportunities. Under these circumstances, we think it is clear that petitioner's additional travel expenses incurred by using the airplane were appropriate and helpful in his business as a salesman. Thus we conclude that the travel expenses were necessary within the meaning of section 162."
Sherman v. Commissioner of Internal Revenue, T.C. Memo 1982-582
Sherman was employed as a salesman covering a six-state sales territory. He used his personal aircraft to service his customers, and in 1976 he claimed deductions for aircraft operating expenses totaling $17,787. The IRS claimed that Sherman's aircraft expenses should not be deductible, because they were not ordinary and necessary employee business expenses.
The Tax Court held in favor of Sherman and confirmed that his aircraft expenses were ordinary and necessary employee business expenses. The court was particularly impressed with the fact that since only 2 of the 24 airports Sherman frequented were serviced by commercial flights, he had no practical alternative other than to use his private aircraft.
Knudtson v. Commissioner of Internal Revenue, T.C. Memo 1980-455
Knudtson owned and operated a business that rebuilt automobile windshield wiper motors. In operating his business, it was important that Knudtson maintain a close association with his suppliers, who were located throughout the United States. In order to meet his extensive travel demands, Knudtson purchased a 1975 A-36 Beech Bonanza. The IRS disallowed aircraft expense deductions taken by Knudtson for 1975 and 1976, and Knudtson petitioned the Tax Court.
In supporting Knudtson's position, the Court said that it was clear that the cost of owning and operating the Bonanza was an ordinary and necessary expense of Knudtson's business. The court focused on the fact that Knudtson's suppliers and customers were located throughout a large geographic area and Knudtson had to maintain a close working relationship with suppliers. Therefore, the court said that Knudtson aptly described his airplane as a business tool. The aircraft expenses were necessary in the sense that they were appropriate and helpful to the development of his business. The expenses were also deemed ordinary as a normal and rational response to specific business conditions under which Knudtson operated.
Rev. Rul. 70-558
A federal employee who traveled extensively for work-related purposes was authorized to travel by "private owned auto or aircraft," among other possible means of transportation. This employee was reimbursed for his travel at a standard rate based on miles traveled. However, the employee was able to properly substantiate all his aircraft operation expenses in excess of reimbursement.
After considering these facts, the IRS ruled that the employee's expenses in excess of his reimbursements were deductible as ordinary and necessary business expenses. The IRS also ruled that deductible expenses included depreciation to the extent it is properly allocated to business use of the aircraft.
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