Travel on corporate jets is alluring. I’ve had the pleasure, and it really is a pleasure. No TSA, nobody squishing you on both sides. No worry about checked bags not getting there, and so on. It’s no wonder that people love it so much.
However, there can be too much of a good thing. My experience suggests – actually, it screams – that some executives literally can never get enough of it and become positively lustful for travel on “the plane.” In fact, someone once told me that the scent of jet fuel that one encounters when traveling on a corporate jet must be an aphrodisiac. Not for THAT, but rather for more travel on the corporate jet. And not only do executives turn themselves into pretzels to use the plane; they also do so to convince their employers (and themselves) that a trip that screams “personal use” is actually legitimate business travel.
The SEC has known about this for a long time; hence the frequency of enforcement actions against companies that under-report – sometimes by a lot – or totally fail to report executives’ personal use of corporate aircraft. But as is the case with so many SEC proceedings these days, a slap on the wrist or even a fine is a yawner without so much as a tinge of moral opprobrium.
That may soon change.
On February 21, 2024, the New York Times reported that the IRS “would begin cracking down on corporate jet owners that abused the tax codes by claiming millions of dollars in deductions on airplanes that were sometimes being used for personal travel.” As further explained in the article, “[t]he tax code allows businesses to deduct the cost of maintaining a corporate jet as long as it is being used for business purposes. Many companies, however, allow executives, shareholders and partners to use company planes on personal trips while continuing to claim the full value of those deductions.”
The article goes on to state that “[d]istinguishing between business and personal travel is not always simple, and the IRS could be forced to engage in lengthy litigation” to prove its point. That’s certainly true in some cases. But, in my experience, it’s not true in many cases. At the risk of mixing metaphors by citing SEC literature when the IRS is involved, the SEC has made it pretty clear what is and is not a perquisite – even if it has refused to define the term. For instance, when the SEC adopted the current rules regarding disclosure of personal benefits, it made the following statements:
- A benefit (such as aircraft usage) is “not a… personal benefit if it is integrally and directly related to the performance of the executive’s duties”.
- “[A]n item is a… personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”
- The “concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one” and would not be satisfied by a determination that the benefit would qualify as an “ordinary” or “necessary” expense for tax or other purposes or that the perquisite provides some benefit or convenience to the company, as well as to the executive.
- “If an item is not integrally and directly related to the performance of the executive’s duties, the second step of the analysis comes into play. Does the item confer a direct or indirect benefit that has a personal aspect (without regard to whether it may be provided for some business reason or for the convenience of the company)? If so, is it generally available on a non-discriminatory basis to all employees? For example, a company’s provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis” (emphasis added).
If, as seems apparent, the SEC doesn’t view the helicopter example as being a close call, what do you think it would say about an executive claiming that her husband’s travel on the company jet to a conference she is attending in Costa Rica is “integrally and directly related” to the company’s business? And many other examples would reach similar conclusions.
As suggested above, the SEC’s views may not be persuasive to the IRS. Among other things, the goals of the two agencies differ. However, executives who seek to justify use of “the plane” for personal travel would be well advised to avoid testing the issue.