IRC §274(d) provides additional documentation requirements for a taxpayer to obtain a deduction for certain items, including travel related to listed property—which, in the case at hand, was an airplane. The decision in the case of Peterson v. Commissioner, TC Memo 2015-1 deals with the fact that it’s not enough to have records—those records also have to support the deduction in question.
Mr. Peterson was an attorney in Southern California and an amateur pilot. In 2005 he purchased a Cessna Turbo Skylane for $332,000, ostensibly to be used in his business. The cost of the plane was such that he decided to abandon renting office space and instead conducted his practice out of his home.
The taxpayer also decided to become “instrument rated” as a pilot which would enable him to fly in diverse conditions. To obtain and maintain this rating the taxpayer had to complete special training and then fly the plane regularly, insuring he performed certain tasks and then logged those tasks.
Mr. Peterson kept a detailed log of his flights that included a record of which airport he departed from, the airports he visited, the time the flight took place and the tasks relevant to maintaining his instrument rating. He labeled each flight as a training flight (those to secure and maintain his instrument rating), maintenance flight (flights made to insure the Cessna was in working order) and business flights. The latter category ended up being any flight that wasn’t in the first two categories—he showed no personal flights.
That turned out to be where things began to go wrong for Mr. Peterson. The court determined that many of his flights (including one to see his parents in North Dakota) were clearly personal in nature. He also flew many very short flights—60-65% of his flights were to airports within 100 miles of his home. While Mr. Peterson claimed he did so to avoid Los Angeles traffic, the court did not find that explanation reasonable given the high cost of the aircraft and the fact that many of those trips, even in the Los Angeles area, would have taken less than hour to drive at a much lower cost.
The Court also found that Mr. Peterson flew primarily because he enjoyed flying. The Court specifically found that he only real justification for Mr. Peterson’s instrument rating was not driven by business need, but rather because it posed a challenge for him.
Only in a very few occasions were the flights Mr. Peterson flew related to things such as court appearances, witness interviews or depositions—all other “business” travel ended up being of a type the Court did not find truly constituted business travel. He failed to provide evidence for any of these flights of a relationship to work for an actual client, and trips he labeled as “marketing” and “client development” often ended up with flights to resort locations—with the Court clearly suggesting that Mr. Peterson was there for personal pleasure.
The Court summarized its view of Mr. Peterson’s “business flights” as follows:
These flights can be grouped into the following main categories: (1) trips on which he visited or was accompanied by family members, engaged in volunteer work, or discharged other personal duties; (2) trips to investigate supposed investment opportunities; (3) trips related to pilot safety, airplane insurance, aircraft fuel, FAA medical exams, and other aviation-related matters; (4) trips to alleged conventions, conferences, and similar events; and (5) trips to engage in supposed "marketing" or "potential client development." Flights in the first three categories were clearly personal, reflecting petitioner's family or personal obligations, personal finances, or love of flying. As to the fourth category, petitioner produced no convincing evidence of actual attendance at any conventions or conferences or any direct connection between such meetings and his law practice. As to the fifth (and largest) category, petitioner produced no documentary evidence and no credible testimony that any of these flights, many of which were to resort destinations, had a bona fide business purpose.
The Court found that the training and maintenance flights were not deductible, since they represented personal expenses. As the Court noted:
The evidence established that petitioner immensely enjoys flying. Becoming an instrument-rated pilot represented a challenge and a personal accomplishment and enabled him to fly more often to more places. His “training” and “maintenance” flights constituted his pursuit of a hobby or represented the costs of engaging in this hobby. Section 262 expressly disallows a deduction for “personal, living, or family expenses.”
The Court found that, in fact, the IRS appeared to have been overly generous. Based on the facts, the Court found it difficult to consider the aircraft expenses to be “ordinary and necessary” under §162 in any amount, noting:
A powerful argument can be advanced that none of these expenses should be regarded as “ordinary and necessary.” The cost of owning and operating a private airplane would not appear to be “normal, usual, and customary” for an attorney in solo practice, especially one who makes 60% to 65% of his flights to destinations within 100 miles of his home. Nor would it seem “reasonable,” at the cost of $236 to $433 per flight hour, to fly to destinations that can be reached by car in less than an hour.
Nevertheless, the Court concluded the IRS had conceded, at least to the extent of the 27% of the costs the agency allowed as a deduction, that the expenses met the ordinary and necessary test.