The IRS has determined that the costs of personal flights on company aircraft may be deducted in full by the corporation, and that shareholders’ pass-through deduction is not limited to the aircraft expense reported as compensation to the shareholders for personal use. Sutherland Lumber Southwest, 225 F.3d 495 (8th Cir. 2002) addressed a similar fact pattern but the taxpayer operated as a C corp not an S corp. The IRS acquiesced in Sutherland.
The shareholders of the S corp, all members of a single family, used the planes for personal as well as business travel. Personal travel far outweighed business travel. The S corp deducted the costs of maintaining the planes, which ultimately passed through to its shareholders. The S corp also calculated the value of each personal flight using the Standard Industry Fare Level (SIFL) method, and reported those amounts as shareholder compensation. Actual costs would have been higher. The deductible aircraft expenses were more than 10 times the income generated by personal use creating substantial net deductions.
The advise held that Sutherland controls the deductibility of the Taxpayer’s expenses for its employees’ flight benefits under § 274(e)(2). IRC § 274(e)(2) excepts entertainment expenses from the general Sec.§ 274(a) disallowance of taxpayers’ deduction of entertainment, amusement and recreation expenses unless the expenses directly relate to the active conduct of a trade or business.
The advise further held that although benefits to the (greater than 2%) S corporation shareholders are governed by § 274(e)(9), rather than section 274(e)(2) which applies to employees, that the distinction is not significant, and Congress meant the § 274(e)(9) exception to apply to entertainment provided to partners and Subchapter S shareholders just as the § 274(e)(2) exception applies to entertainment provided to employees.
Chief Counsel Advisory, Issue: October 31, 2003, July 1, 2003, 2003 WL 22465736 (IRS CCA) [“this Chief Counsel Advice should not be cited as precedent”]