New prop. regs. clarify tax deductible entertainment use of private aircraft.

• Author: Pressey, Ora

The use of private aircraft eliminates the inconvenience of commercial flights, but clients do not normally call their CPAs in midflight to inquire about the tax ramifications of taking a detour with the family on the company jet to visit Aunt Margaret. Nevertheless, it is up to CPAs to sort it out and offer some planning tips to maximize the allowable tax deductions. New proposed regulations under Sec. 274 clarify old rules, introduce new ones, and require additional guidance on some of their applications.

In the American Jobs Creation Act of 2004, P.L. 108-357 (AJCA), Congress overturned Sutherland Lumber-Southwest Inc., 114TC 197 (2000), aff'd, 255 F3d 495 (8th Cir. 2001), by enacting Sec. 274(e)(2)(B). In Sutherland, the Tax Court held that a company's tax deduction in connection with the personal use of a company's aircraft was not limited to the amounts included as fringe benefits in the compensation of passenger employees. Congress saw this as a tax shelter because the total costs deducted by employers were far in excess of the fringe benefits included in income. Congress therefore limited the deductibility of personal entertainment use by those with control over entity costs (referred to as "specified individuals") to the amounts included in such persons' income or to the amounts of reimbursement.

Specified individuals include officers, directors, more-than-10% owners, 10% shareholders, 10% equity partners/members, and managing partners/members of a partnership/LLC. In addition, specified individuals do not have to be employees of the aircraft owner if the owner is related to the employer under Secs. 267(b) or 707(b). Both Notice 2005-45 and Prop. Regs. Sec. 1.274-9(b)(6) indicate that use of an airplane by family members or by other persons flying due to a relationship with specified individuals is attributable to the specified individual.

The IRS initially provided temporary guidance in Notice 2005-45 on the limitation computation. On June 15, 2007, the Service issued Prop. Regs. Secs. 1.274-9 and 1.274-10 and amended Prop. Regs. Sec. 1.61-21 to clarify the limitation's scope and the available computation options (REG-147171-05). The proposed regulations are not effective until they are finalized; however, taxpayers may rely on them before that time. In addition, until the proposed regulations are finalized, taxpayers may rely on either the proposed regulations or Notice 2005-45 if they contain different rules on a particular...