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IRS Interpretation of Section 280F Creates Trap for the Unwary
December 5, 2011
In 1984, Congress enacted Section 280F of the Internal Revenue Code (I.R.C.) to prohibit taxpayers from depreciating so-called "Listed Property" (which includes business aircraft) under the modified accelerated costs recovery system (MACRS) when such aircraft are used predominantly for personal purposes. I.R.C. § 280F(b)(1) generally requires straight line depreciation and prohibits bonus depreciation, if the aircraft's qualified business use is 25 percent or less for the year. I.R.C. § 280F(d)(6)(C); Treas. Reg. § 1.280F-6(d).
In Technical Advice Memorandum 200945037, which was released on November 6, 2009, the IRS interpreted a provision in § 280F (§ 280F(d)(6)(C)(i)) in a manner that could cause some legitimate business flights to be treated as personal flights for purposes of determining whether the aircraft is eligible to be depreciated under MACRS. For the flights in question, it is not the legitimacy of the business purposes of the flights that would determine if the flights are treated as business or personal, but instead the structure of the aircraft ownership and operations.
Under this provision in § 280F, if an aircraft is leased to a 5 percent owner or related party, the leasing activity only qualifies as qualified business use for purposes of this test, if at least 25 percent of the use of the aircraft is use by individuals who are not 5 percent-owners or related parties. Incomprehensibly, the percentage of actual business use is not relevant.
It is reasonable for § 280F and the regulations thereunder to limit the circumstances in which the activity of leasing to 5 percent owners and related parties will qualify as qualified business use. This rule understandably limits taxpayers' ability to artificially convert an aircraft that otherwise would fail the 25 percent qualified business use test into an aircraft that passes the test merely by leasing the aircraft between related parties and treating the leasing activity as a business use.
However, when the aircraft is leased to a 5 percent owner or related party, the rule limiting the lessor's ability to treat the leasing activity as qualified business use should not prevent the aircraft from nevertheless meeting the 25 percent qualified business use test based on the lessee's actual business use of the aircraft. Once § 280F precludes a taxpayer from treating the leasing activity as qualified business use, the potential "abuse" had been remedied. There is no reason to further punish taxpayers who lease aircraft to 5 percent owners or related parties by denying them the ability to meet the 25 percent qualified business use test based on the lessee's actual business use of the aircraft.
In TAM 200945037, the IRS appears to be ignoring the purpose and context of § 280F, and is instead interpreting § 280F, as well as the Treasury Regulations, to treat all flights under a lease between related parties as personal flights for purposes of the qualified business use test, if an individual who is a 5 percent owner or a related person is on board the aircraft irrespective of whether such individual was in fact traveling for business purposes. The result of this nonsensical guidance is that two similar business aircraft, both of which are used primarily, or even exclusively, for business purposes could be treated substantially differently for tax purposes based on how the ownership of the aircraft is structured. Accordingly, NBAA is requesting that the IRS issue guidance to reverse this holding from TAM 200945037.