Notice 2005-45: the IRS takes aim at executives' entertainment use of company aircraft.

Some might say that it is a classic case of the revenge of the nerds. As a result of the legislative change to section 274(e)(2) of the Internal Revenue Code in the American Jobs Creation Act of 2004 (AJCA), the same able lawyers within IRS Chief Counsel who had unsuccessfully advocated the government's position in Sutherland Lumber-Southwest, Inc. v. Commissioner (1) found themselves empowered to write guidance implementing the new deduction disallowance with respect to such expenses. In May of this year, the Internal Revenue Service (IRS) released Notice 2005-45, (2) which, if nothing else, clearly communicates to taxpayers who the real winners of the case ultimately were.

But Notice 2005-45 is more than that. Because of its method of pro rata allocation of aircraft expenses based on passenger use, Notice 2005-45 goes well beyond simply reversing the Sutherland. In its apparent zeal both to issue guidance quickly and also to change company behavior by imposing a deduction disallowance on all "entertainment" use of company aircraft by "specified individuals," the IRS conjured a methodology for allocating expenses to any entertainment use that can yield surprising results. Moreover, the IRS left open a number of questions of how this methodology is to be applied and how it interacts with the historical body of law surrounding fringe benefits, the valuation and deduction treatment of travel expenses, including the application of section 274 of the Code, and the accelerated depreciation rules.

This article summarizes the main points of the Notice, which took effect on July 1, with particular attention to the issues raised by the new expense allocation method and its application.

I. Background

A. Pyrrhic Victory in Sutherland

Reacting with indignation to the taxpayer's victory in Sutherland (and to media reports of excessive executive use of corporate aircraft for personal purposes), in 2004 Congress amended section 274(e)(2) of the Code to staunch the perceived abuse. (3) Section 274(e)(2) operates as an exception to the general deduction disallowance rule applicable to entertainment expenses in section 274(a) of the Code. Section 274(a) limits the deductibility of expenses otherwise deductible under section 162, barring the deduction of expenses for (i) an activity generally considered to be entertainment, amusement, or recreation, unless the taxpayer proves that the expense is directly related to or, in certain cases, associated with the taxpayer's trade or business, or (ii) a facility used in connection with such entertainment activity. Section 274(e)(2) provides in very general terms that the bar on deduction of entertainment expenses in section 274(a) will not apply to expenses that are reported as compensation to the employee.

Section 274(e)(2) of the Code was the centerpiece of the dispute in Sutherland, which involved the taxpayer's deduction of expenses for its executives' entertainment flights on company aircraft that were valued for compensation purposes using the special valuation rules for flights on noncommercial aircraft. At issue was whether section 274(e)(2) (before its 2004 amendment) allowed the employer to deduct all the expenses related to the executives' personal use of the corporate aircraft, even though the value of the personal trips for compensation purposes that was reported as income to the executives was less than the cost of providing the trips. (4) The Tax Court held that if a plane is an "entertainment facility" potentially subject to deduction disallowance under section 274(a) of the Code, then section 274(e)(2) operates as an exception, as long as the value of the personal use of the aircraft is properly imputed to the employee and reported as compensation on the company's return. In Sutherland, the taxpayer had used the special valuation rules applicable to flights on noncommercial aircraft under Treas. Reg. [section] 1.61-21(g) (known as the Standard Industry Fare Level or SIFL rules) to determine the value of the executives' entertainment trips. The result was that the expenses deducted by the company far exceeded the income imputed to the executives.

Effective for expenses incurred after October 22, 2004, section 907 of the AJCA revised section 274(e)(2) to limit the deduction for expenses for entertainment goods, services and facilities (including airplanes used for certain personal reasons) provided to "specified individuals" to the amount that the company treats as compensation to the recipient and reports as compensation on its corporate return. (5) In other words, in the case of a "specified individual," the amount of the company's deduction for entertainment is limited to the amount treated as wages for income tax withholding purposes with respect to the employee receiving the entertainment goods, services, or facilities or, in the case of a director or other independent contractor, the amount reported as compensation income on a Form 1099-MISC. Moreover. these amounts must be reported on the company income tax return as compensation. (6) Although the amendment was "intended to overturn the decision in Sutherland," (7) the restriction on deductibility now codified in section 274(e)(2) is not limited to expenses attributable to corporate aircraft and has a much broader reach, including potentially the personal use of automobiles. Moreover, in its current form, it could be extended to other expenses already addressed in section 274, including (a) the 100-percent deduction disallowances applicable to spousal travel and luxury cruises and (b) the 50-percent deduction disallowance applicable to business meals and entertainment, thereby forcing a deduction disallowance with respect to any affected expenditures that exceed the value treated as compensation paid to the specified individual.

B. Congress Is "Shocked, Shocked" to Find a Mismatch between Deduction and Income

Congress's motivation in amending section 274(e) is reflected in the conference report on the AJCA as concern over the arbitrage aspect of the mismatch between the income reported for personal flights (when the flights are valued using the SIFL rules) and the deductibility of the costs associated with providing such taxable fringe benefits. (8) The conference report expresses seeming surprise about this mismatch--"a deduction multiple times larger than the amount required to be included in income"--though there is no doubt that this potential for mismatch was clearly understood and acknowledged by Congress 20 years ago when the SIFL rules for income imputation were first introduced. (9)

C. Historical Treatment of Fringe Benefit Value and Costs--"East Is East and West Is West"

This mismatch or lack of correlation between the (i) value of the fringe benefits for purposes of imputing income to employees and independent contractors and (ii) the cost of the fringe benefits to the employer for deduction treatment has been clearly recognized, and even required, in the fringe benefits regulations. The fringe benefit regulations specifically provide that cost is irrelevant when determining the value of a fringe benefit to be taxed to the employee or independent contractor, (10) while mandating that the employer may only deduct the cost (not the value) of a fringe benefit. (11) In no event, under these rules, may the amount of the deduction exceed the actual cost of providing the benefit, even if the value of the fringe benefit included in the service provider's income is greater than the cost of providing the benefit. (12)

D. What Congress Did (and Didn't Do) in the AJCA

With the AJCA amendment to section 274(e)(2), Congress altered this approach and provided a limited exception, in the case of "specified individuals," to the rule that deductions for the cost of providing fringe benefits to recipients are conceptually separate and distinct from the value of the benefit that is included in the recipients' income. In so doing, Congress eliminated any risk of a company's deducting more in entertainment expenses than the amount imputed in the specified individual's compensation.

In describing congressional concern about the mismatch between income and deduction inherent in the Sutherland case and the intent to overturn the Tax Court's decision, the AJCA Conference Report offers the following example of how new section 274(e)(2) should operate to disallow all or a portion of the expenses associated with using the aircraft for entertainment purposes:

   For example, a company's deduction attributable
   to aircraft operating costs for a covered employee's
   vacation use of a company aircraft is limited to
   the amount reported as compensation to the employee.
   (13)

In other words, the legislative history illustrates the situation in which the executive controls the destination of the aircraft and, pursuant to that control, uses the aircraft for an entertainment purpose, that is to say, a vacation.

It is important to note, however, what Congress did not do. The legislative history does not identify as an abuse the situation in which the aircraft is flying for bona fide business purposes, and a specified individual happens to "hitchhike" a ride on the aircraft for personal purposes. (14) Nor does it identify as abusive the situation in which the executive is flying for business purposes, and his or her spouse flies along for personal purposes. In both of these cases, the plane is flying for business purposes, and allowing the hitchhiker or the guest of the specified individual to board the flight results in little or no incremental cost to the company. (15) Thus, it may be argued that in amending section 274(e)(2), Congress did not purport to revise what constituted entertainment use of corporate aircraft or to create a new method for determining what expenses are attributable to entertainment.

In other words, Congress did not intend the exception in section 274(e)(2) to become more powerful than the general disallowance rule of section 274(a).

II. Analysis of Notice 2005-45

A. The IRS's Determination of Expenses Allocable to Entertainment Use--Rational Method or Flying by the Seat (of its Pants)?

In contrast to the conference report's single example of vacation use of the company aircraft and the methodology used by the government and the taxpayer in Sutherland, Notice 2005-45 does not employ a flight-by-flight analysis in allocating aircraft costs to entertainment use, whereby the first inquiry would be to determine the purpose of the flight, followed by a determination of who was on the flight and for what purpose. This is surprising, inasmuch as a flight-by-flight approach would, at least at first blush, be more intuitively appealing for apportioning costs with respect to a company's use of an aircraft, particularly since the number of passengers on a specific flight would not seem to materially change the operating costs of the aircraft during the taxable year.

Instead, the Notice adopts an occupied-seat analysis, which effectively prorates the cost of maintaining and operating the costs of the aircraft among all aircraft passengers. It directs companies to base their determination of the expenses allocable to entertainment use of the aircraft by tracking and aggregating all expenses attributable to its maintenance and operation (i.e., all fixed and operating costs) for the year and dividing these total expenses by either occupied seat hours or occupied seat miles flown by the aircraft in order to come up with the cost of each occupied seat hour or mile for the entire year. (16) Once the occupied seat hour or mile cost is determined for the year, that cost is multiplied by the number of entertainment seat hours or miles for the year; the amounts treated as compensation or reimbursed by the specified individual are then subtracted to come up with the total expenses to be disallowed for the year.

To illustrate, assume that pursuant to the Notice the taxpayer uses occupied seat hours as its unit of measurement and that the company aircraft is flown from Atlanta to New York and back with a full load of 10 passengers, and is in the air 2-1/2 hours each way. Under the Notice, this 5-hour flight by 10 employees yields 50 occupied seat hours. If this flight is the only flight for the taxable year and the total fixed and variable costs of the aircraft are $100,000, each occupied seat hour would have a value of $2,000. Further assume that 6 of the 10 passengers are traveling for bona fide business purposes and the remaining 4, who consist of a specified individual and 3 family members, are traveling for personal purposes. Because the value of the 4 passengers' personal trips is deemed to be zero under the 50-percent regular seating capacity rule of Treas. Reg. [section] 1.61-21(g)(12), nothing is imputed in income for the personal trips and, for purposes of this example, it should also be assumed that nothing is reimbursed to the taxpayer by the specified individual with respect to these personal trips.

Under these facts, the costs attributable to 20 occupied seat hours would be disallowed (20 x $2,000 = $40,000), since no compensation was included in the specified individual's wages and no reimbursements were made to the company. This is the result under the Notice, even though the aircraft was flying to New York for business purposes in any event, and even though, had the specified individual and the three family members not hitchhiked a ride, the entire cost of the flight would have been deductible.

Likewise, the Notice's occupied-seat approach skews the calculation of the deduction disallowance for the year in any situation in which the specified employee's spouse flies along on a business trip. For example, assume that all the flights by the company's aircraft for the year would be considered business trips by the executive under a flight-by-flight analysis. If the spouse accompanies the executive on every business trip as the only other passenger, and the company imputes the value of the spouse's trips in the executive's income using the SIFL rules, one-half of the aircraft costs for the year, less the amounts included in the executive's compensation attributable to the spouse's travel, will be disallowed, even though the airplane was, on these facts, flying for business purposes and the company likely incurred very little or no extra expenses for the spouse's travel.

The Notice's method of allocating expenses on a pro-rata basis has a random, unpredictable aspect, in that it apportions airplane cost to passengers on an equal basis, no matter whether all the passengers are on the same flight or on separate flights. This method ensures that any use of a company aircraft for entertainment purposes will potentially result in some lost deduction by the company, even if that use does not incrementally affect or increase costs. Thus, if companies do not want to lose deductions for their corporate aircraft, the Notice's methodology will prompt them into adopting a total ban on any entertainment use by specified individuals (whether or not the use would otherwise affect their aircraft costs). Short of that, companies wishing to minimize the impact of the Notice's methodology will have an incentive to make sure that when the aircraft flies for business purposes, every seat on the plane is, to the extent possible, filled with a business passenger.

The Notice ends speculation over the treatment under the new law of regularly scheduled flights between business centers where specified individuals are on board for personal/entertainment purposes, as well as flights by executives who are required to fly on the company aircraft because of security concerns. (17) It specifically provides that the costs associated with those flights are subject to the disallowance provisions of section 274(e)(2) of the Code. Thus, the Notice rejects any argument that these flights are implicitly non-entertainment flights.

B. "That's Entertainment!" or Is It?

One of the most disappointing aspects to the Notice is its failure to provide any additional insight into either the meaning of "entertainment" or when a transportation facility (such as an aircraft) is being used for entertainment purposes and the consequences of such use. The Notice effectively defaults to the definition of "entertainment" set forth in Treas. Reg. [section] 1.274-2(b)(1), which has been in the regulations since 1963 with little change. Notice 2005-45 describes "entertainment" as:

   any activity of a type generally considered to constitute
   entertainment, amusement, or recreation,
   such as entertaining at night clubs, cocktail lounges,
   theaters, country clubs, golf and athletic clubs,
   sporting events, and on hunting, fishing, vacation
   and similar trips. Similar activities relating solely
   to the taxpayer's family also may constitute entertainment.
   Entertainment may include an activity
   that satisfies the personal, living, or family needs
   of an individual, such as providing food and beverages
   or a hotel suite to a business customer or the
   customer's family. Entertainment does not include
   activities, however, that are clearly not regarded as
   constituting entertainment, such as the provision
   of supper money by an employer to an employee
   working overtime, the maintenance of a hotel room
   by an employer for lodging of employees while in
   business travel status, or the use of an automobile
   in the active conduct of a trade or business even
   though also used for routine personal purposes
   such as commuting to and from work. Under
   [section] 1.274-2(b)(1)(ii), an objective test is used to determine
   whether an activity is of a type generally
   considered to constitute entertainment.

Certainly, it appears that activities that would ordinarily be considered to be fun constitute "entertainment," but the definition quickly becomes muddled when it attempts to distinguish between personal benefits that rise to the level of entertainment and those that do not. It is an objective test, but the circuitous observation of Treas. Reg. [section] 1.274-2(b)(1) that "[e]ntertainment does not include activities, however, that are clearly not regarded as constituting entertainment" merely obfuscates at a time when it is critical to be able to distinguish between entertainment and non-entertainment. For example, the Notice paraphrases the statement in Treas. Reg. [section] 1.274-2(b)(1)(i) that commuting use of an automobile does not rise to the level of entertainment, but fails to answer the obvious next question of whether commuting use of a company aircraft by an executive would be viewed similarly. (18) Nor does the Notice offer additional insight into when or whether certain activities or the usage of certain facilities could morph into entertainment use, such as the use of a car for personal use, other than for just commuting or routine use as noted in the definition. (19)

The Notice does not conclude, however, that all personal use of an aircraft is presumed to be entertainment or that personal use converts the aircraft into an entertainment facility. In fact, in its discussion of relief from the consistency rule (see Part II(I), below), the Notice acknowledges that there may be a category of personal use by a specified individual that does not rise to the level of "entertainment," but offers no guidance on what that use might be other than the general observation that the determination is an objective one. Moreover, the Notice does not cross-reference the examples in the working condition fringe benefit rules that permit exclusion for certain flights that appear to be personal, but are deemed to be related to the employer's trade or business or to provide a substantial business benefit to the employer. (20)

C. Forty Years in the Section 274 Wilderness

The Notice dredges up a number of questions about the proper application of section 274 to transportation facilities such as airplanes, which pre-date the changes made by Congress in AJCA. Over the last 40 years, Congress has responded to various perceived abuses involving entertainment by grafting specific anti-abuse rules upon section 274 and leaving it to the IRS to make sense of them. In some instances, the IRS was, for the most part, successful in resolving the major issues that emerged after Congress inserted a particular anti-abuse rule--such as when guidance was issued on spousal travel and club dues--but in other instances, the guidance left open as many questions as it answered. One lurking issue that is highlighted by the Notice is how section 274(a) applies when a corporate aircraft is used to fly employees to an activity that would constitute entertainment, but for the fact that it qualifies as an item directly related to the active conduct of a trade or business. Assuming the entertainment, such as taking customers to the Super Bowl, can be tied directly to the taxpayer's trade or business, the question is whether, under Treas. Reg. [section] 1.274-2(b)(1)(iii)(c)(1), the aircraft in that particular instance is to be treated as an entertainment facility, triggering denial of the deduction for costs associated with it, or whether the aircraft nonetheless remains a transportation facility in such instance but with the costs associated with the flight being treated as expenditures in connection with section 274(a).

The IRS does not appear to have taken a formal position on this question, so it is not clear how it will respond to the issue, though one guess is that the IRS would shy away from treating the aircraft as an entertainment facility, except perhaps in the most extreme cases. Certainly that interpretation (i.e., not treating the aircraft as an entertainment facility) would more likely accord with how companies have probably treated such flights in the past.

D. Specified Individuals--The "Happy Few"?

A "specified individual" is defined by amended section 274(e)(2)(B)(ii) as any individual who is subject to the reporting requirements of section 16(a) of the Securities Exchange Act of 1934 or would be subject to those requirements if the provider of the benefit were publicly traded. In most instances, even for very large corporations, the official list of individuals subject to these reporting requirements is not very long. The Notice, however, has expanded the definition to include every person who:

(a) is the direct or indirect beneficial owner of more than 10 percent of any class of any registered equity security (other than an exempted security),

(b) is a director or officer of the issuer of the security,

(c) would be the direct or indirect beneficial owner of more than 10 percent of any class of a registered equity security if the taxpayer were an issuer of equity securities, or

(d) is comparable to an officer or director of an issuer of equity securities.

As explained by the Notice, a specified individual is an officer, director, or more than 10-percent owner of a corporation taxed under subchapter C or subchapter S of the Code, or a personal service corporation. For partnership purposes, a specified individual includes any partner holding more than a 10-percent equity interest, general partner, officer, or managing member of a partnership. The definition also includes a director or officer of a tax-exempt entity. Moreover, the specified individual is the recipient of the entertainment provided to a spouse, family member or another person because of the person's relationship to the specified individual, and all entertainment costs are allocable to that specified individual. (21)

The Notice also has a "related party" rule whereby the disallowance provisions apply to the use of an aircraft for the entertainment of a specified individual of a party related to the taxpayer within the meaning of section 267(b) or 707(b) of the Code. Thus, if Corporations A and B are brother-sister subsidiaries and Corporation A provides an entertainment flight to B's employee S, who is a specified individual, A's costs will be disallowed, except to the extent the benefit is treated as compensation to S or reimbursed by S. The Notice is silent on who would be responsible for treating the personal trip as compensation in that situation, but presumably B, the common law employer of S, would be treated as the provider of the benefit for fringe benefits purposes regardless of the fact that the other subsidiary actually provided the benefit. (22) Thus, B would have to inform A of the amount treated as compensation for purposes of computing the amount that would be disallowed.

It appears that, in the case of large publicly held companies with many affiliates, the IRS is inclined to interpret the definition of a specified individual broadly to include officers of lower-tiered subsidiaries, even if those individuals are not subject to the reporting requirements of section 16(a). Informally, the IRS has indicated that the fourth element of the general definition (i.e., a person who "is comparable to an officer or director of an issuer of equity securities") means that officers of lower-tiered subsidiaries of a publicly traded company, who are not likely to be listed as 16(a) individuals, could be treated as specified individuals simply because they are officers. It is unclear whether this expansive interpretation is based on the IRS's belief that any officer within the corporate structure could effectively "control" the use of an aircraft and, thus, if he or she takes a personal trip (even if invited by an officer of the parent corporation), the portion of the expenses attributable to the flight are subject to the new limitations of section 274(e)(2) of the Code. [In other words,] the Notice applies the definition mechanically, based on job titles, whereas section 16(a) is designed to cover significant policy-makers (e.g., someone who would be able to control the use of the aircraft). Such an interpretation has the potential for expanding significantly the administrative burden of the provision as well as the size of the disallowance. For companies that allow corporate employees to hitchhike on corporate aircraft with open seats, this interpretation will likely significantly increase the cost of continuing such a policy. (23)

E. Aircraft Ownership

The ownership of the aircraft is irrelevant for purposes of applying the rules of Notice 2005-45 to a specified individual's entertainment use of the aircraft. Therefore, the costs of leased or chartered aircraft are also subject to the disallowance rules, unless otherwise excepted, if the provider of the benefit leases or charters the aircraft.

The allocation rules of the Notice become significantly more difficult to administer in any situation in which the owner of the aircraft has a separate charter business. Presumably, the annual expenses of the aircraft would be allocated between its use in the taxpayer's general business (including entertainment expenses) and its use in the separate charter business (i.e., when the aircraft is chartered by others in an arm's-length transaction).

F. Types of Expenses Subject to Deduction Disallowance

The types of expenses that, according to Notice 2005-45, must be included in the year-end allocation of allowable and disallowed expenses consist of all fixed and operating costs, including but not limited to--

* fuel costs;

* salaries for pilots, maintenance personnel, and other personnel assigned to the aircraft;

* meal and lodging expenses of flight personnel;

* take-off and landing fees;

* costs for maintenance and maintenance flights;

* costs of on-board refreshments, amenities, or gifts;

* hangar fees (at home and away);

* management fees;

* depreciation;

* amounts deductible under section 179;

* all costs billed for chartering an aircraft (including amounts for flight time, waiting time, fuel, and overnight expenses); and

* in the case of leased aircraft or other leased equipment, lease payments.

Interest and taxes on the aircraft do not appear to be included in the list of expenses subject to allocation, presumably because they are deductible under other provisions of the Code, even if the aircraft is used solely for personal purposes. (24) It is unclear why insurance expenses were not included in this list, however.

G. Deadhead Flight Rule May Lead to Dead End

One of the more administratively troubling aspects of the Notice is the rule designed to capture the costs associated with "deadhead flights." Under the Notice, companies must account for the costs associated with deadhead flights in the total allocation of expenses. An aircraft "returning empty from a flight after discharging passengers or traveling empty to pick up passengers" is defined as a "deadhead flight," which is deemed to have the same number and character of occupied seat miles or hours as the leg or legs of the trip on which passengers are aboard. (25) In other words, if an executive were to fly alone on the company aircraft for a four-hour flight, the total number of occupied seat hours attributable to his trip will be eight, if the aircraft returns to the origination point with no passengers. This is the result, regardless of whether the executive's trip was for business or personal/entertainment reasons.

The Notice, however, offers no examples explaining the operation of the deadhead rule when the facts are more complicated than the situation where the aircraft makes a roundtrip with respect to the specified individual's trip. Consequently, it is not clear how the deadhead trip is treated, if the aircraft flies to a different destination after dropping off the executive. For example, if the aircraft flies an executive from Dallas to Aspen for personal purposes, then flies to Seattle without passengers to pick up a business traveler before returning to Dallas, the Notice does not tell the taxpayer how the segment of the trip without passengers should be allocated to the other segments that are both business and personal.

H. Allocation Rule for Trips with Both Business and Personal Segments--Incremental Approach Redux

Interestingly, even though the Notice generally rejects an incremental approach to determining the allocation of costs, the Notice does retain such an approach to allocation of costs when a trip includes both business and personal segments. The Notice directs the taxpayer to compare the costs of the total flights taken (based on occupied seat hours or miles) to the cost of the flights that would have been taken (again looking to the number of occupied seat hours or miles) without the entertainment segment or segments. The costs attributable to the excess occupied seat hours or miles is the amount disallowed, less any amounts treated as compensation or reimbursed by the specified individual to the taxpayer. This comparison approach is similar to the rule available for determining the value of the personal portion of a trip under the SIFL rules of Treas. Reg. [section] 1.61-21(g)(4)(ii) when the trip is primarily for business purposes.

I. Relief from the Consistency Rule when Applying the SIFL Rules

The Notice permits taxpayers who have elected to value their employees' personal flights using the SIFL rules to value the entertainment use of the aircraft by specified individuals using general valuation principles, (26) without violating the requirement to use only the special valuation rules once elected. In other words, the consistency requirement of the noncommercial flight valuation rule (27) (requiring a taxpayer electing to use the SIFL rules must use those rules to value all flights provided to employees during the year) will not be violated if the taxpayer values the entertainment use of the aircraft by specified individuals under fair market value, but continues to value flights for other employees and for specified individuals not traveling for entertainment using the SIFL formula.

This relief from the consistency requirement effectively permits companies to minimize the effect of the deduction disallowance by applying fair market valuation to determine the amount to be treated and reported as compensation paid to the specified individual or the amount that the specified individual may reimburse. Companies should be careful, however, of the potential collateral complications the use of this rule could create, as revealed in the Notice's warning that "[i]f the amount treated as compensation is greater than the amount of the taxpayer's costs (as determined under this notice) for a flight, the taxpayer's deduction is limited to the taxpayer's costs."

Specifically, the choice permitted by the Notice appears to be limited to calculating the specified individual's compensation using either the SIFL rules or general valuation principles, but not an amount in between the two that would equal or approximate costs allocated to the entertainment use under the Notice's methodology. In other words, the company would not be permitted to include in the specified individual's compensation an amount equivalent to the company's costs in any situation where the fair market value exceeds those costs. The result for taxpayers is a "lose/lose" situation, because they are limited to a deduction based on costs if the value imputed (or reimbursed) is greater than the costs of maintaining and operating the aircraft, and limited to value if the costs of operating the aircraft are greater than the value imputed to specified individuals or reimbursed by them using either the SIFL valuation method or charter value.

III. The Collateral Effects Caused By the Changes to Section 274(e)(2) and the Pro Rata Allocation Method of Notice 2005-45

A. Depreciation Puzzle

It is unclear whether the IRS intended to modify the mechanical rules related to the depreciation of aircraft through the issuance of Notice 2005-45, (28) but the Notice leaves in its wake a number of unanswered questions in this area. Paramount is whether the statutory changes to sections 274(e)(2) and (9) also indirectly reduce the percentage of business/investment use of a taxpayer's aircraft for depreciation purposes, and reduce the amount of aircraft depreciation that can be taken, even before the application of the disallowance rules described in Notice 2005-45. This issue arises because the computation of depreciation in Treas. Reg. [section] 1.280F-6(d)(3)(ii) is predicated upon the treatment of related entertainment expenditures under section 274. (29)

The IRS should address whether the method for allocating expenses (occupied seat hours or occupied seat miles) is now the method for determining the business use percentage of an aircraft. Before enactment of AJCA and the issuance of Notice 2005-45, it was likely that most corporate aircraft qualified for 100-percent business use because even when used in connection with entertainment, the aircraft was considered a means of compensating employees, which itself qualified as a business use. (30) It is no longer clear whether this approach continues to apply if the compensatory use by the employee results in some disallowance of depreciation under section 274 and the new rules in Notice 2005-45. Until this issue is addressed, taxpayers should avoid having the business use of an aircraft drop to the level of 50 percent or below under the Notice's expense allocation method for any depreciable year because such a drop could require the recapture of all previous accelerated depreciation in excess of the straight-line amount. (31)

Another area of uncertainty is the calculation and treatment of gain (recapture) or loss on a subsequent disposition of an aircraft for which depreciation deductions were previously disallowed. This issue arises because the methodologies for determining nondeductible depreciation under the Notice and ultimately the gain or loss on a disposition do not fit neatly within the existing statutory and regulatory framework, in that the amount of depreciation disallowance under the Notice results at least in part from a failure to impute sufficient income to "specified individuals," which does not easily translate into a nonbusiness use percentage.

If the IRS concludes that taxpayers should continue to compute depreciation deductions on corporate aircraft as though the entire use of the asset is business use, (32) there remains the issue of how taxpayers will compute gain or loss on a subsequent disposition of the aircraft given Treas. Reg. [section] 1.274-7. (33) While Treas. Reg. [section] 1.274-7 seems to preserve basis for the taxpayer, it is unclear what "portion" of an aircraft would be treated as personal use. It will be important in this instance for the IRS to provide guidance that will harmonize the section 274 rules with the section 280F rules, rather than leave taxpayers to guess at the proper result.

B. "Heads, the IRS Wins; Tails, the Taxpayer Loses"--The Interaction with Section 162(m)

Any amount for the entertainment use of an aircraft that is treated as compensation to a specified individual who is also a "covered employee" is subject to the deduction disallowance of section 162(m) of the Code. Thus, to the extent the covered employee's "applicable employee remuneration" for section 162(m) purposes exceeds $1 million, the taxpayer's deduction is disallowed under section 162(m). The Notice thereby blurs the conceptual distinction between deductions based on aircraft cost and employee income based on the value of aircraft use, by applying the compensation deduction disallowance rules of section 162(m) to amounts that are treated as compensation because of entertainment use of corporate aircraft, even though corporate deductions are otherwise based on the cost of the aircraft, rather than the value imputed to the employee.

C. Double Hammer when Entertainment Flights Are Mischaracterized as Business Flights

Given the effect of the new deduction disallowance rules on any entertainment use of their aircraft, companies might be tempted to be aggressive in characterizing aircraft use by specified individuals as business use, instead of personal or entertainment use. Companies should be aware of the consequences of being wrong in such instances. If a company takes the position that a flight by a specified individual is a business flight and therefore it does not apply the deduction disallowance rules of new section 274(e)(2) to the expenses, and the IRS subsequently challenges the company's treatment of the flight as business, there could be both a retroactive payroll tax assessment based on charter value (for failing to treat the flight as a taxable benefit) and a deduction disallowance with respect to the expenses.

The SIFL valuation rule of Treas. Reg. [section] 1.61-21(g) is a "special valuation rule" that may only be used if the employer and employee meet the requirements of Treas. Reg. [subsection] 1.61-21(c)(2)(ii) and 1.61-21(c)(3)(ii). Where the IRS takes the position that a flight provided to a "control employee" (a definition that will overlap with the definition of a "specified individual" in most cases) was wrongly characterized as business, the IRS is not required to base its retroactive payroll tax assessment on the value determined under SIFL rules if certain conditions have not been met. This is because neither the employer nor the control employee may use a special valuation rule unless one of the following is true:

* the employer treated the value of the benefit as wages for reporting purposes within the time for filing the returns for the taxable year (including extensions) in which the benefit is provided;

* the employee included the value of the benefit in income within the time for filing the returns for the taxable year (including extensions) in which the benefit is provided: or

* the employer demonstrates a good faith effort to treat the benefit correctly for reporting purposes.

Assuming that the prescribed time for filing the returns has elapsed by the time the IRS challenges the treatment of the flight as a business flight, the regulations permit the IRS to apply fair market valuation (i.e., the charter rate) for purposes of assessing the payroll taxes thereon. Moreover, Treas. Reg. [section] 1.274-2(f)(2)(iii)(A) applies a "double hammer"; the employer, in addition to being assessed payroll taxes based on charter valuation, will not be permitted to deduct expenses incurred in connection with the use of the entertainment facility, because the benefit was not treated as compensation on the company's income tax return as originally filed and was not treated as wages for income tax withholding purposes. It is not entirely clear how this total deduction disallowance rule in the existing regulations interacts with the partial deduction disallowance rule of section 274(e)(2) of the Code, which would ordinarily permit a portion of the deduction equal to the amount included in the specified individual's compensation. In other words, if the employer mischaracterizes a flight as business and the IRS recharacterizes the flight as entertainment for payroll tax purposes, it is possible that the employer may not get "credit" for the amount retroactively treated as compensation when it calculates the deduction disallowance attributable to the recharacterized entertainment flight. Optimally, this will be clarified when the IRS issues regulations under amended section 274(e)(2).

D. "Come Fly with Me"--Treatment of Spousal Travel

It is not clear how the deduction disallowance rules under section 274(m)(3) of the Code pertaining to spousal and guest travel (34) interface with amended section 274(e)(2). The regulations under section 132(d) provide that the disallowance under section 274(m)(3) for the taxpayer's provision of spousal travel expenses does not preclude those amounts from qualifying as an excludable working condition fringe benefit to the extent that:

(i) the employer has not treated such amounts as compensation under section 274(e)(2);

(ii) the amounts, if incurred by the employee, would be deductible by the employee under section 162(a) (without regard to section 274(m)(3));

(iii) it can be adequately shown that the spouse's presence on the employee's business trip has a bona fide business purpose; and

(iv) the employee substantiates the travel within the meaning of Treas. Reg. [section] 1.132-5(c). (35)

Therefore, assuming the spouse's presence on the trip is for bona fide business purposes, the employer may effectively choose who should bear the tax burden of the section 274(m)(3) deduction disallowance. For any travel expenses that are business-related, the employer can deduct such amounts as compensation if the employer chooses to include the "amount paid or incurred" for the employer-provided spousal travel in the employee's income. Alternatively, if the employer chooses to absorb the section 274(m)(3) deduction disallowance, it can exclude from the employee's income, as a working condition fringe benefit, any reimbursements or payments for spousal travel that has a bona fide business purpose. Ideally, the proposed regulations will confirm that the reference to section 274(e)(2) in Treas. Reg. [section] 1.132-5(t)(1) does not mean that the disallowance rules of section 274(e)(2) (as opposed to section 274(m)(3)) would apply in any situation in which the spouse or guest is flying for bona fide business reasons, even if he or she is deemed to be a specified individual by virtue of his or her relationship to the service provider, because entertainment is not involved.

The treatment of spousal travel expenses and the interaction with the new rules for specified individuals in section 274(e)(2) becomes more confusing in the case of spousal travel expenses that are not for bona fide business purposes (and therefore the basic test for a "working condition exclusion" under Treas. Reg. [section] 1.132-5(t)(1) has not been met). In such a circumstance, the employer may not utilize the election procedure described above (i.e., it cannot elect to exclude the cost of the trip from the employee's income, in exchange for forgoing the tax deduction). The regulations provide that "the value of the employer's payment of travel expenses" must be included in the service provider's income. This language appears to base inclusion on incremental costs rather than on the value of the spousal travel, even though most employers value personal flights on company aircraft using the SIFL valuation rules. (36) In the case of spousal travel provided to a specified individual who is not for bona fide business purposes (i.e., the purpose of the travel is considered to be the entertainment of the spouse), the proposed regulations should clarify which deduction disallowance rules--section 274(m)(3) or 274(e)(2)--when the benefit is treated as compensation. If the disallowance rules of section 274(e)(2) apply, the company will apparently be subject to a deduction disallowance under section 274(e)(2) in the amount by which the costs allocated under the Notice's methodology exceed the incremental costs included in income.

E. Avoiding an Excise Tax Complication and an FAA Trap

The Notice permits companies to determine the specified individual's compensation related to entertainment use of the aircraft based on fair market value, which reduces the amount of the deduction disallowance. Although reimbursement sounds like a good idea for reducing the amount of the deduction disallowance, the Notice does not mention the complications that can arise in complying with the excise tax and Federal Aviation Administration rules if the taxpayer accepts reimbursements from specified individuals.

First, section 4261(a) of the Code imposes an excise tax on amounts paid for air transportation and that tax can be triggered when an employee reimburses his employer for a flight. For 2005, the tax is 7.5 percent of the fare paid plus $3.20 per domestic flight segment. Thus, if a specified individual were to reimburse the company for a personal/entertainment flight, the excise tax under section 4261(a) would apply to the amount paid by him or her for air transportation. If the value of the flight is only imputed to the specified individual, however, the excise tax does not apply because no amount has been paid for the transportation. (37)

Second, entities operating aircrafts under Part 91 of Federal Aviation regulations (38) are not subject to the more stringent safety and certification requirements that apply to commercial operators responsible for transporting the public. Consequently, there are rules limiting the extent to which operators under Part 91 may charge passengers for air transportation (including employees of the entity that owns the aircraft). Federal Aviation regulations do permit "time-share" agreements, (39) but the maximum amount that can be charged under such an agreement is strictly limited under the regulations, to two times the gasoline, plus a few additional incremental costs. (40) Consequently, any reimbursement under a time-share agreement will not equal the charter value, so that such reimbursement is unlikely to insulate the company from the impact of the new deduction disallowance rules in section 274(e)(2) in the case of specified individuals. (41)

F. Waiting for the Other Shoe to Drop--SEC Reporting

Although officials of the Securities and Exchange Commission have acknowledged that the proxy reporting rules pertaining to executive compensation are in need of revision, the project is apparently only in its early stages. Based on informal conversations with SEC staff, it does not appear that the tax costs of the lost deduction for personal flights by specified individuals would be considered part of the "aggregate incremental costs" of providing "perquisites and other personal benefits" that must be reported in the Summary Compensation Table if the incremental costs of a top executive's non-cash fringe benefits exceed the lesser of either 10 percent of his or her total salary or $50,000. (42)

In light of the attention that executive fringe benefits have received in recent years, however, corporations would be well served to pay close attention to SEC guidance and enforcement actions and to consult securities counsel on this subject.

IV. Effective Date and Transition Rules

Section 274(e)(2) applies to expenses incurred after October 22, 2004. The pro rata allocation method of Notice 2005-45 applies to expenses incurred after June 30, 2005. The Service will not challenge a reasonable method of determining disallowed expenses incurred after Oct. 22, 2004, and before July 1, 2005. Application of the Notice to determine disallowed expenses is deemed to be a reasonable method.

Taxpayers with a taxable year ending after October 22, 2004 (the date of AJCA's enactment) and on or before May 27, 2005 (the date of the Notice) may apply the disallowance of expenses for that (earlier) taxable year against expenses incurred in the first taxable year ending after May 27, 2005. Thus, a calendar-year taxpayer may choose to adjust its taxable income either (a) for its 2005 taxable year to reflect the disallowance of expenses incurred after October 22, 2004, and before January 1, 2006, or (b) for its 2004 taxable year to reflect the disallowance of the portion of the expenses incurred after October 22, 2004, and before January 1, 2005, and for its 2005 taxable year to reflect the disallowance of the portion of the expenses incurred after December 31, 2004, and before January 1, 2006.

If the taxpayer chooses to include the post-October 22 disallowance of expenses in its 2005 year, it is possible that it would be considered "a reasonable method" if the taxpayer simply performs one deduction disallowance calculation including the expenses for the last 10 weeks of 2004 with the expenses for 2005, rather than separate calculations for the last 10 weeks of 2004 and 2005.

V. Conclusion

The new deduction disallowance rules reflected in Notice 2005-45 go well beyond simply reversing the outcome in the Sutherland case. They are broad in scope and, from the taxpayer's perspective, harsh in their application. In particular, the expense allocation method set forth in the Notice, which is used for attributing aircraft operating expenses to entertainment use, has the effect of penalizing any entertainment use of the aircraft by a specified individual, regardless of who else is on the particular flight and the business reasons necessitating that flight. The Notice may be viewed as an attempt by the IRS, not just to implement the statutory changes made by the AJCA to section 274, but to change corporate behavior in general with regard to entertainment use of corporate aircraft by executives.

(1) 114 T.C. 197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq. AOD 2002-02 (Feb. 11, 2002). See also Midland Financial Co. v. Commissioner, T.C. Memo. 2001-203; National Bancorp of Alaska, Inc. v. Commissioner, T.C. Memo. 2001-201; and Chief Counsel Advice 200344008 (October 31, 2003) (applying Sutherland, IRS allowed S corporation's deductions for personal use of corporate aircraft by shareholders and employees that made up 95 percent of aircraft's use, where value of each flight was included in income using the special valuation rules applicable to flights on noncommercial aircraft).

(2) 2005-24 I.R.B. 1228 (June 13, 2005).

(3) American Jobs Creation Act of 2004, Pub. L. No. 108-357, [section] 907(a), 118 Star. 1418, 1654-55.

(4) Section 274(e)(2) previously provided that section 274(a) did not apply to "[e]xpenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of the entertainment, amusement, or recreation, as compensation to an employee on the taxpayer's return of tax under this chapter and as wages to such employee for purposes of chapter 24 (relating to withholding of income tax at source on wages)." (Emphasis added.) The Tax Court observed in Sutherland that, had Congress intended to limit the taxpayer's deduction to the amount included in the employee's compensation as opposed to providing an exception, it knew how to use language like "to the extent of." 114 T.C. at 205.

(5) The provision amending section 274(e)(2) also includes a cross reference to section 274(e)(9), which pertains to non-employees; the same deduction disallowance occurs with respect to entertainment flights provided to independent contractors who happen to be specified individuals. I.R.C. [section] 274(e)(2)(B)(i).

(6) See I.R.C. [section] 274(e)(2)(A).

(7) H.R. Rep. No. 108-755, 108 Cong., 2d Sess. 784 (2004) (Conference Report).

(8) A mismatch between the value imputed in compensation and the employer's deduction for the expense of providing the benefit also occurs to a lesser degree in the case of company cars, when the employer uses the special valuation rules of Treas. Reg. [subsection] 1.61-21(d) (automobile lease valuation rule), (e) (vehicle-cents-per-mile rules), and (f) (commuting valuation rule) to value the employee's personal use.

(9) The use of the SIFL rules to value executives' personal use of air craft was the result of a compromise between congressional leaders and the Treasury's Office of Tax Policy, during the debate over the repeal of the contemporaneous recordkeeping requirements added by the Tax Reform Act of 1984. Pub. L. 99-44 (1985), reprinted at 1985-2 C.B. 350. The congressional record makes it clear that Senate leaders were aware of the mismatch. See 131 Cong. Rec. S6367-S6371 (daily ed. May 16, 1985).

(10) Treas. Reg. [section] 1.61-21(b)(2) (1989); Temp. Reg. [section] 1.61-2T(b)(2) (1985).

(11) Section 162 allows a deduction for ordinary and necessary business expenses, including compensation paid for personal services. When the compensation is paid in form of a noncash fringe benefit, Temp. Reg. [section] 1.162-25T provides that the employer may deduct its cost to provide the benefit if the value of the benefit is included in the employee's gross income. In measuring the amount of the deduction, however, the employer is precluded from deducting the amount included in the employee's compensation.

(12) Temp. Reg. [section] 1.162-25T.

(13) H.R. Rep. No. 108-755, at 784.

(14) The noncommercial flight valuation rule of Treas. Reg. [section] 1.61-21(g)(12) provides a special valuation rule if at least half the "regular seating capacity" of the aircraft is filled with business travelers (i.e., service providers for the company who could exclude their flights as working condition fringe benefits) at the time the individual whose personal flight is being valued both boards and deplanes. If this test is met, current and retired employees or partners of the employer and their spouses and dependent children may fly in the remaining seats for free.

(15) To the extent, the express purpose of the amendment was to overturn the decision in Sutherland, it is instructive to look at how expenses were allocated in that case. There, the taxpayer and the government had stipulated to the expenses allocated to the vacation flights and had determined those expenses by apportioning the flight miles that the plane flew, without apparent regard to the number of passengers on the plane for any given trip.

(15) The taxpayer may choose either occupied seat hours or occupied seat miles for this purpose, but must use the chosen method consistently for all usage for the taxable year. Moreover, the cost per occupied seat hour or mile may be calculated for each aircraft or aircraft with "similar cost profiles" may be aggregated. Other than the examples in the Notice that neither turboprop aircraft and jet aircraft, nor two-engine jet aircraft and four-engine jet aircraft may be aggregated, though, the Notice does not provide any commercial or regulatory reference that would shed light on the interpretation of what is a similar cost profile.

(17) Pursuant to Treas. Reg. [section] 1.132-5(m), a working condition fringe exclusion applies to the value of a personal flight provided to an executive covered by an independent security study (because of a bona fide business-oriented security concern) in excess of 200 percent of the SIFL rate. The Notice's application to such flights results in a greater deduction disallowance under section 274(e)(2), if the lower SIFL valuation is included in the protected executive's income rather than fair market value.

(18) See also Rev. Rul. 63-144, 1963-2 C.B. 129, Q&A 10. The Notice arguably modifies the regulations' reference to commuting use of an automobile by adding the word "use," which potentially distinguishes commuting use as a form of entertainment use.

(19) In contrast, Q & A 11 of Rev. Rul. 63-144 observes that vacation use of an automobile constitutes entertainment.

(20) See Treas. Reg. [section] 1.132-5(a)(2)(ii) (flights provided to employee in conjunction with serving on the board of an unrelated company doing business with the employer or on the board of a charity treated as working condition fringe benefits).

(21) Curiously, the Notice does not address whether entertainment flights provided to a former service provider, who would have been a specified individual when he or she performed services (e.g., a former officer or a director), are subject to the new deduction disallowance rules. This is surprising in light of the fact that the fringe benefit rules were careful to provide that for purposes of valuing personal flights, retirees who became "control employees" after reaching age 55, or within three years before their retirement, must always be treated as control employees, which means that higher SIFL values will apply to their personal trips. Treas. Reg. [section] 1.61-21(g)(11). The linkage to section 16(a), however, may demand a different result. In addition, the Notice does not address how to treat flights provided to individuals who are less than two years old. For fringe benefits purposes, the value of their flights is deemed to be zero. Treas. Reg. [section] 1.61-21(g)(1).

(22) Treas. Reg. [section] 1.61-21(b)(5) states that "[t]he 'provider' of a fringe benefit is that person for whom the services are performed, regardless of whether that person actually provides the fringe benefit to the recipient." Thus, under certain situations, the common law employer is treated as the provider of the noncash benefit for payroll tax purposes, even though a third party actually furnishes the benefit.

(23) The issues associated with the determination of "specified individuals" would have been rendered moot if a proposal passed by the Senate in May 2005 had been enacted. Under in the Senate version of the 2005 Highway Bill, the disallowance would be extended to expenses for all persons using the facility or benefit for entertainment purposes. Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2005 (Engrossed Amendment as Agreed to by Senate), H.R. 3, 109th Cong., [section] 5516 (2005). The provision, however, was not included in the final legislation, though it might be reintroduced at a later time.

(24) See I.R.C. [section] 274(f); see also Rev. Rul. 63-144, Q&A 49.

(25) Deadhead flights attributable to personal flights are not valued for income inclusion purposes under Treas. Reg. [section] 1.61-21(g). Also, the Notice's definition of deadhead flights leaves open questions about the treatment of maintenance flights for purposes of the allocation rule.

(26) See Treas. Reg. [section] 1.61-21(b)(6) (fair market value of employer provided piloted flight is equal to the amount that an individual would have to pay in an arm's-length transaction to charter the same or a comparable piloted aircraft for that period for the same or comparable flight).

(27) Treas. Reg. [section] 1.61-21(g)(14)(i).

(28) Sections 167 and 168 combine to provide for the depreciation of assets used in a trade or business or held for the production of income. Section 280F limits accelerated depreciation for assets considered "listed property." Aircraft that is not used substantially in a trade or business for the transportation of goods or property is listed property. I.R.C. [section] 280F(d)(4)(C). Only the business use of such aircraft is depreciable. Listed property that is used 50 percent or less for business use may not be depreciated using an accelerated depreciation method. Further, taxpayers must recapture all previously claimed excess depreciation and 179 deductions claimed on listed property over the straight-line amount if the business use percentage falls to 50 percent or below and utilize the straight-line depreciation method thereafter. Temp. Reg. [section] 1.280F-3T(c).

(29) Treas. Reg. [section] 1.274F-6(d)(3)(ii) provides that listed property used for entertainment, recreation, or amusement purposes is treated as business use "to the extent that expenses (other than interest and property tax) attributable to that use are deductible after application of section 274." Stated differently, if the expenses for the use of an aircraft are deductible by the taxpayer and not disallowed by section 274, the use of the aircraft is treated as business use.

(30) See Temp. Reg. [section] 1.162-25T; CCA 200344008 (July 1, 2003).

(31) See Temp. Reg. [section] 1.280F-3T(c).

(32) See CCA 200344008 (July 1, 2003).

(33) Treas. Reg. [section] 1.274-7 states, "If deductions are disallowed under [section] 1.274-2 with respect to any portion of a facility, such portion shall be treated as an asset which is used for personal, living, and family purposes (and not as an asset used in trade or business). Thus, the basis of such a facility will be adjusted for purposes of computing depreciation deductions and determining gain or loss on the sale of such facility in the same manner as other property (for example, a residence) which is regarded as used partly for business and partly for personal purposes."

(34) This disallowance for spousal travel applies to 100 percent of the travel expenses incurred. Travel expenses include cost of transportation, lodging and meals while away from home overnight, and expenses incidental to travel. Treas. Reg. [section] 1.162-2(a).

(35) Treas. Reg. [section] 1.132-5(t)(1).

(36) The IRS has never specifically addressed in conjunction with spousal travel what amounts should be disallowed if working condition fringe benefit treatment is elected, or what amounts should be included in wages or deducted if compensation treatment is elected. The language of Treas. Reg. [section] 1.132-5(t)(1) suggests an incremental approach, that is to say, the additional cost of a second person in the hotel room or to accompany the employee on the company aircraft or in the company car, which is traveling for business purposes. See also Rev. Rul. 56-158, 1956-1 C.B. 94; Marlin v. Commissioner, 54 T.C. 560 (1970).

(37) See Rev. Rul. 72-245, 1972-1 C.B. 347, and Private Letter Ruling 9028027 (April 5, 1990).

(38) 14 C.F.R. [section] 91, et.seq.

(39) 14 C.F.R. [section] 91.501(c)(1).

(40) 14 C.F.R. [section] 91.501(d).

(41) Of course, any amounts reimbursed under a time-share arrangement would be subject to the excise tax under section 4261(a) of the Code.

(42) See Instructions to 17 C.F.R. [section] 229.402(b)(2)(iii)(C).

MARIANNA G. DYSON and C. FREDERICK OLIPHANT III are members of the Washington law firm of Miller & Chevalier Chartered. They write and speak frequently about issues relating to executive compensation and employee benefits. They gratefully acknowledge the assistance of Michael M. Lloyd and Dwight N. Mersereau in preparing this article.