Deductible personal costs: IRS Chief Counsel Advice allows favorable treatment.

• Author: Josephs, Stuart R.
• Position: FederalTax

IRS Chief Counsel Advice 200344008 considered whether IRC Sec. 274(a)(1)(A) disallows an S corporation's deductions for expenses of providing corporate aircraft for personal use by shareholders or employees, where these expenses exceed the value of flights included in these individuals' incomes under the methodology prescribed by Regs. Sec. 1.61-21(g).

This Chief Counsel Advice concluded that Sec. 274(a) did not disallow those deductions.

Facts

S, an S corporation whose shareholders are all members of one family, owns fractional interests in two jet aircrafts. S presented flight logs documenting the aircrafts' use as follows:

* Business percentage--5

* Personal percentage--95

The personal use was by the shareholders and two non-family employees.

S incurred operating expenses and depreciation attributable to maintaining these aircrafts, which it deducted on its S corporation income tax return. Therefore, these deductions flowed through to the shareholders on their individual income tax returns.

S properly determined the standard industry fare level (SIFL) value of each personal flight under Regs. Sec. 1.61-21 and reported that value as compensation for the shareholder or employee. More than 75 percent of the value of these personal flights was attributable to shareholders; the balance was attributable to employees.

The shareholders' income for personal use of the aircrafts was offset by the deductions for the aircrafts' expenses and depreciation flowing through to shareholders from their S corp's tax return.

Because these deductions were more than 10 times the amount of income reported by the shareholders and employees, the shareholders claimed a very "significant" net deduction for the costs of the personal use of the S corporation's aircrafts--much of which was attributable to use by these shareholders or other family members.

Relevant Statutes and Regulation

Sec. 274(a)(1)(A) generally disallows deductions for entertainment, amusement or recreation unless directly related to, or associated with (under certain conditions), the active conduct of the taxpayer's trade or business.

Sec. 274(e)(2) provides that Sec. 274(a) does not apply to expenses for goods, services and facilities to the extent that the taxpayer treats the expenses, with respect to the recipient of the entertainment, amusement or recreation, as compensation to an employee on the taxpayer's income tax return and as wages to that employee for income tax withholding purposes.

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