In Brown v. Commissioner, T.C. Memo. 2013-275, the U.S. Tax Court denied an insurance salesman’s bonus depreciation deduction for his private jet as it was not placed in service in the tax year. The case highlights the highly factual nature of determining when an asset is deemed to have been placed in service for tax depreciation purposes.
Facts & Procedural History
Mr. Brown was in the insurance business.
He focused on selling life insurance policies worth more than $10 million, having sold several insurance policies worth $300 million.
Mr. Brown had to constantly prospect for clients given the high-end market he focused on.
Mr. Brown needed to be able to travel to multiple states in a single day. He was not able to use chartered airplanes as they were too unreliable.
His first private jet was not satisfactory as it could not travel across the U.S. without refueling. Mr. Brown searched for an airplane that could travel longer distances without refueling.
Mr. Brown signed a contract to buy a Challenger airplane in December of 2003, which required delivery of the jet that month.
Mr. Brown made make it clear that he needed to have the airplane delivered in December of 2003 to take advantage of the favorable bonus depreciation tax rules.
Mr. Brown also had several modifications made to the airplane, including replacing chairs with a conference table and replacing the standard 17-inch display screens with 20-inch screens so he could display power point presentations.
Mr. Brown and the seller agreed that Mr. Brown would take delivery of the airplane before the end of the year and the plane would return to the seller on January 5 or 6 of the next year–which was the following month–to start the modifications.
Mr. Brown signed the closing documents and accepted delivery of the Challenger on December 30th.
Mr. Brown reported the airplane on his 2003 income tax returns and claimed almost $11.2 million of bonus depreciation for it.
Congress added the bonus depreciation rules to stimulate the economy. To qualify under these rules, the Challenger must have been both qualified property and qualified property that was acquired and placed in service that year.
The IRS disallowed the bonus depreciation deduction, asserting that the airplane was not placed in service in 2003.
Mr. Brown argued that he had not only taken delivery of the airplane in 2003, he had used it in his business. Mr. Brown testified in court to say that after fueling the plane around noon, a pilot certified to fly the Challenger flew Mr. Brown and his aviation attorney from Portland to Seattle, landing just before 1 p.m. He flew there to have a business lunch with a real-estate developer to whom he had sold a large insurance policy earlier in the year, and a couple that the developer wanted to introduce to him as potential clients.
Mr. Brown also introduced a letter from the real estate developer that seemed to confirm these details.
The IRS referred to these end-of-year trips as “tax trips,” suggesting that Mr. Brown and his tax attorneys had a plan to arrange the trips so Mr. Brown could qualify for the first year bonus depreciation deduction in 2003.
The tax court had this to say about Mr. Brown’s testimony and letter:
[W]e sense something doesn’t smell quite right with the whole Seattle visit. First, Brown’s testimony didn’t jibe with the flight logs he submitted at audit. Although Brown said his lunch meeting lasted between 90 minutes and two hours, the flight logs show that the Challenger was on the ground in Seattle for only 66 minutes. With respect to the timeframe, we find the flights logs submitted at audit more credible than Brown’s testimony.
We also give zero credence to the letter. Brown acknowledged that the letter was neither contemporaneous nor even prepared by Mastro. He admitted his CFO/CPA, Gary Fitzgerald, drafted the letter sometime much later and had Mastro sign it. Although at one point Brown said he thought he had told Fitzgerald to write the letter “several months” after year end, we find more credible his later testimony that one of Fitzgerald’s jobs is to write letters on behalf of Brown’s business associates “to get the substantiation for deductions when the IRS requests them.” (Emphasis added.) We therefore find that Fitzgerald didn’t write this letter until at least 2006 when the IRS began auditing Brown’s return for the 2003 tax year. We do not take it seriously as proof of anything but a reason to question Brown’s credibility.
And that leaves us with only Brown’s uncorroborated testimony about his lunch in Seattle. Brown didn’t produce a lunch bill, and neither Mastro nor the unknown couple testified on his behalf. We also find noteworthy that Schneider–who was on board the Challenger from Portland to Seattle (but not on any of the other flights discussed below)–worked at a law firm just outside of Seattle. We therefore find it more likely than not that there was no business lunch in Seattle.
In considering the issue, the court rejected the IRS’s argument that the airplane was in construction as the modifications were not complete, such that it was not fit for commercial flight.
The court concluded that the airplane was not ready and available for its specifically assigned functions for Mr. Brown, as Mr. Brown had testified that they were required for his business.
The court also noted that: “Just because a taxpayer uses an asset in his business sometime during the course of a year doesn’t necessarily mean that he placed it in service that year. Consumers Power tells us instead that the asset needs to be available on a regular basis for its specifically assigned function.”
Because the airplane did not meet this standard, the court concluded that the airplane was not placed in service in 2003 and it denied Mr. Brown’s bonus depreciation deduction.