Deducting costs of flights on corporate jets.The Internal Revenue Service has disallowed a company's deductions for the costs of using its aircraft to transport a company officer/ shareholder and spouse to and from vacation sites in the United States (technical advice memorandum (TAM) 9715001). The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. views such travel as entertainment that is nondeductible under Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. section 274; therefore, the company's deductions are limited to the amounts it treated as compensation to the officer. Ninety percent of the company's use of the aircraft was for business purposes. With respect to the vacation flights, the company fully complied with income and payroll tax Payroll Tax Tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the U.S., both state and federal authorities collect some form of payroll tax. rules for personal flights, using the 1985 special valuation rules of section 1.61-21(g) to determine the amounts to be treated as compensation. For more than a decade, taxpayers have assumed that the personal use of a corporate jet will not jeopardize deductions if the special valuation rules are properly followed. The IRS, however, says that while the section 274 disallowance dis·al·low tr.v. dis·al·lowed, dis·al·low·ing, dis·al·lows 1. To refuse to allow: "[The government] rules may preserve the deduction for the compensation that is imputed Attributed vicariously. In the legal sense, the term imputed is used to describe an action, fact, or quality, the knowledge of which is charged to an individual based upon the actions of another for whom the individual is responsible rather than on the individual's , the rules are otherwise unaffected by the company's compliance with the special valuation rules. Therefore, the excess of the expenses incurred -- dollar for dollar -- over the value imputed to the employee is nondeductible. Observation: According to the TAM, the personal flights clearly are the type of entertainment expenses Congress targeted with the enactment of the section 274. Thus the expenses should be subject to disallowance provisions regardless of the special valuation rules. Many taxpayers win argue that the 1985 compromise settled both the income and the deduction issues, and that the IRS should not be pursuing a disallowance theory inconsistent with the compromise. It is possible that the IRS will search for other ways to disallow To exclude; reject; deny the force or validity of. The term disallow is applied to such things as an insurance company's refusal to pay a claim. deductions for costs that have some relationship to fringe benefits fringe benefits, n.pl the benefits, other than wages or salary, provided by an employer for employees (e.g., health insurance, vacation time, disability income). when there is a difference between costs incurred and the value imputed to the employee. This could include company cars and spousal travel. It would be better for such new interpretations of the tax law to be presented in proposed regulations that alert taxpayers prospectively than to be introduced as part of an IRS audit, where the application is retroactive. |
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