T.C. Memo. 2015-1 Tulane Meredith Peterson v. Commissioner of Internal Revenue (Issued January 5, 2015)
Arcadia, California resident Tulane Peterson loved to fly. While licensed as an attorney since 1997, his first true and abiding love was flying; by the time of this court opinion he had been an amateur flyer for forty years. Specializing in personal injury law, in 2005 Peterson decided to upgrade his practice and so he purchased a new chariot: a 2005 Cessna Turbo Skylane. At $332,000, it was reasonably priced and available for only $10,000 down and $1,400 a month thereafter. It was also around this time that Peterson decided to up his game by becoming “instrument rated” as a pilot, which means that he becomes certified to fly solely by relying on his instruments rather than by sight and thus enabling him to handle more diverse weather conditions.
As can be imagined, the expenses of purchasing and maintaining the aircraft and obtaining the certification added up. For tax years 2006 and 2007, Mr. Peterson claimed 100% of his costs as being for business, totaling $115,620 and $123,012, respectively. Peterson maintained a list of trips he took in the plane as well as the business purpose of the trip. The court, helpfully, provided a list of Peterson’s various “business” flights; here is a sampling:
• 17 trips to Big Bear, a resort only 90 miles from his home. The ostensible purposes for these flights were: purchasing aviation fuel; business development; informal law office marketing (as opposed to formal law office marketing); reconnoitering an office location; entertaining for business; practicing high-altitude landings; AND attending FAA pilot safety meetings. Wow! That is a lot of business in only 17 trips!
• Flights to and from his parents’ home in Bismarck, North Dakota. The taxpayer said the purpose of the trip was to provide his parents with estate planning advice, for which he never charged them, and to resolve a “mold complaint.” Such a good boy.
• Flights with his son to take aerial photographs related to several personal injury cases he was working on; the court notes that no evidence was submitted by the taxpayer as to how these photos were necessary for litigating those cases (or even what the photos were of, for that matter).
• A Flight to Santa Monica, California, to “return a defective portable bike purchased for use with aircraft.” Ok, you got me there.
• Flights to various airports to discuss complaints regarding the price of aviation fuel at meetings of the Five County Pilots Association. A problem to be sure.
The IRS was understandably skeptical of Peterson’s claim that 100% of airplane expenses were for business and so it conducted an audit on his taxes for both years. In 2006, the IRS denied all of Peterson’s aircraft related expenses as being personal and not business. 2007, ended up a bit better, and a new IRS agent allowed Peterson to claim 27% of his expenses as being business related; subsequently, the IRS conceded that 18% of Peterson’s airplane expenses were deductible for 2006. Unhappy with the results, Peterson appealed to the United States Tax Court but the tax court was no more sympathetic to Mr. Peterson’s arguments. If the IRS had not conceded that some of the airplane expenses were business, the court appeared ready to deny his expenses in full. The court rightly pointed out that most of the trips were to locations within 100 miles of his home office, close enough to justify the use of a car over an airplane.
Here the court make it clear that it was the taxpayer’s love of flying that motivated him to incur those expenses rather than a business reason. While the taxpayer here was likely a bit greedy, the mere fact that you derive some enjoyment from a business expense does not make it non-deductible but it does mean that taxpayer will need to do more to show that the expense was ultimately motivated by a business purpose. This case was about an aviator who flew too close to the sun and got burnt (forgive the pun).
While this case had some interesting facts, it actually has a good discussion of what constitutes a business expense and how a taxpayer goes about substantiating such expenses. If you want the crib notes, here is a quick summary:
A taxpayer can deduct the ordinary and necessary expenses incurred or paid in furtherance of running a business, where the expenses can be properly substantiated by the taxpayer, on whom the burden rests.
Ordinary expenses are those expenses that are normal, usual, or customary in the business in which the taxpayer operates while necessary expenses are those expenses that are appropriate or helpful in a taxpayer’s business.
Proper substantiation requires some proof that an expense was incurred or paid in furtherance of a taxpayer’s business, usually through documentary evidence such as invoices, statements, and receipts; if the taxpayer cannot substantiate the exact amount of the expense then other evidence can be submitted to prove that expense, unless the Internal Revenue Code provides for a specific means to substantiate an expense.
I did a Google search on Tulane Peterson and it appears that Peterson now works with a law firm rather than in solo practice; no word on what happened to the Cessna.