Double Taxation: A Take On All Things Taxes

If You’re Going to Own A Corporate Jet, You May Want to Have Someone Around Who Can Actually Fly It

Such was the lesson learned from Douglas v. Commissioner, T.C. Memo 2011-214, decided by the Tax Court today.

Douglas was the sole shareholder of an S corporation engaged in the trucking business. As timely delivery was crucial to a successful business, in 2007 the S corporation purchased a Cessna for $135,000 to use in the event that drivers grew ill or were otherwise unable to meet their delivery schedule.

Douglas spent the better part of 2007 taking flying lessons in the Cessna, though she never advanced beyond the level of obtaining a “student license,” a level of proficiency which, quite frankly, probably shouldn’t exist when the required task involves flying a multi-ton metal object 20,000 feet above the earth’s surface. 

 None of the S corporation’s employees held a pilot’s license, nor did the corporation have “stand-by” pilots at the ready should the trucking business need one on an expedited schedule. As a result, at no point was the plane actually used in any of the S corporation’s business during 2007.

On the S corporation’s 2007 tax-return, however, it took a full Section 179 deduction of $125,000 related to the purchase of the Cessna. The IRS, as you might imagine, had other ideas. 

Section 179, it turns out, has this pesky little requirement that a property must be used more than 50% for business in order to benefit from the first year expensing election. (Treas. Reg. 1.179-1(d)). The IRS argued that the property was never used for business, and thus ineligible for any depreciation, let alone the Section 179 deduction.

The Tax Court sided with the IRS, but not before examining the little-known “idle asset” rule, under which an asset, while not in actual use, may nonetheless be depreciated if it is “devoted to the business of the taxpayer and ready for use should the occasion arise.” (Piggly Wiggle S., Inc. v. Commissioner, 84 T.C. 739 (1975)).

Unfortunately for Douglas, the court held that the plane did not benefit from the “idle asset” rule, as it was being used for Douglas’ flight lessons, and thus simply never available for its alleged business function. In reaching its decision, the court stated the obvious:

An aircraft cannot be considered ready and available for business use without a suitable pilot to fly it. During 2007 no employees or officers of Bantam held a pilot’s license that would have enabled them to use the aircraft to transport a replacement driver. There is no evidence in the record of any agreement between a qualified pilot and Bantam that might suggest his or her availability for the purpose of flying drivers to disabled vehicles on short notice.