For small businesses with fractional jet ownership or for any business owner who leases aircraft for travel here are some important changes to your flight plan before we take off for a tax deductible and enjoyable summer business trip. Attention all business travelers: The IRS has control of the flight paths right now so proceed with caution on the runway before takeoff. The Government has been winning big in US Tax Court proving rather easily that the taxpayer’s travel is personal in nature and therefore not deductible. Landing in Tax Court without an approved flight plan ends your trip before you even take off. So power off your phones and listen up as you receive your new and revised flight instructions to bullet proof your tax return against a crash landing if audited by the government. Before we take off, please follow along with me as we go over the necessary safety instructions in the event of adverse IRS weather: Your survival in case of crash landing into US Tax Court will depend on the unique facts that you record to create a credible history of the business nature of your trip. So go ahead and record extemporaneously and contemporaneously the facts needed to prove the business nature of the trip, even if by video or audible recorded by your spouse and kids. Your tax deduction may depend on it.
As we gain altitude you can see on your left the US Tax Court in Washington DC. We observe through the cloud cover DIDONATO v Commissioner Docket No. 1_14_2013. Dr. Didonato and his wife headed south directly into an IRS audit. Their Tax Advisor thought nothing of it until the audit turned into a full fledged Tax Court twister of doom. Judge Laro of the US Tax Court did not find Dr. Didonato’s testimony credible and disallowed all Didonato’s plane trips. By the way, you can turn on your electronic devices now. As you can see, the cross examination by Judge Laro of Didonato from page 46 to 58 allows you a clear observation on this taxpayer’s credibility. If you want to avoid the 130 page grand view, go directly to page 85 as you hear Judge Laro in the distance: “As to trips 2, 4, 5, 7, and 10, Didonato testified at trial that each of these trips were for the sale of his personal shares of ASC stock. As explained in this opinion, expenses related to the sale of a shareholder’s stock in a corporation are not deductible by the corporation as a business expense of the corporation. See Snyder Bros. Co. v. Commissioner, 40 T.C.M.
Remember the safety instructions? If Didonato’s CPA or Tax Attorney had simply documented with the company that trips 2, 4, 5, 7 and 10 were not for the personal benefit of the shareholders but were to be trips to benefit the corporation for possible merger or acquisition I believe these trips would have been 100% deductible. These facts or “history” should have been documented in the actual tax return prior to filing that tax return. In other words Didonato could have deactivated auto pilot and manually made a critical turn to safety based on better record keeping before takeoff if his CPA documented these facts in the actual filed tax return. Without the facts or history of the trip inserted into the tax return Didonato was certain to crash land into enemy IRS territory.
But we are not out of this storm yet as we still have to land in what looks like a major tropical depression. Judge Laro thunders: “Even if we were to believe that one or more of the trips taken had a legitimate business purpose, we agree with respondent that no deductions are allowed because the heightened substantiation requirements of section 274(d) have not been met. See Lysford v. Commissioner, T.C. Memo. 2012-41, 103 T.C.M. (CCH) 1217, 1220-1221 (2012), See Weekend Warrior Trailers, Inc. v. Commissioner, T.C. Memo. 2011-105, 101 T.C.M. (CCH) 1506, 1521 (2011) See Sanford v. Commissioner, 50 T.C. at 827.
Let’s get a read on these cases to see if there are any crosswinds up ahead before landing:
“Sanford provided receipts and credibly testified……Therefore, petitioner is entitled to a deduction in that amount for travel expenses, lodging expenses, and registration fees associated with the conferences he attended….”
“Mr. Lysford testified that all of his airplane flights and his automobile trips to Forest Lake were for business….Other than Mr. Lysford’s very general testimony, petitioners provided no credible evidence that Mr. Lysford sold any mortgages or met with specific clients, mortgage brokers, or title companies in or around Forest Lake…”
Weekend Warrior Trailers case:
“Petitioners introduced into evidence a list of the people who allegedly flew on the airplane and their alleged business relationships, which Mr. Warmoth created from memory….. Such general testimony is insufficient to meet the strict substantiation requirements of section 274(d). We conclude that Weekend Warrior failed to substantiate the business use of the airplane by other sufficient evidence and is not entitled to depreciation deductions with respect to the airplane…..”
Note that only Sanford’s testimony was credited as truthful by the Court. Sanford’s deductions were allowed. I believe Sanford had created a record of facts and history at the time of travel so that years later he could accurately testify to those facts and history. So if you are planning to deduct private business air travel on your tax return this summer, I recommend that prior to any flight make sure you consult your tax professional on how to keep the necessary records all throughout the trip so that your tax return will be bullet proofed in the unlikely event of a crash landing into IRS audit territory. Such contemporaneously created records inserted into a tax return before filing will position your plane safely on course allowing for you all to enjoy a pleasurable and tax deductible business trip. Happy July 4th and safe travel.
Thanks for visiting us at TaxView with Chris Moss CPA. See you next time on TaxView.
Chris Moss CPA