Biden Highlights IRS Plans to Audit Corporate/Partnership Jet Use in State of the Union Address

March 08, 2024

In his State of the Union address, President Joseph Biden targeted tax breaks for corporations and wealthy individuals who use private jets as part of a broader goal to make big corporations and the wealthy pay “their fair share.” Following the address to Congress, the White House highlighted a recently announced audit initiative by the IRS to “crack down on high-end tax evasion like deducting personal use of corporate jets as a business expense.”


The Internal Revenue Service (IRS) announced on February 21 (in IR-2024-46) that its Large Business and International Division intends to open in spring 2024 approximately four dozen audits relating to the use of personal jets that are owned or leased by multinational and domestic corporations and “complex partnerships” operating in several industries. These audits may be prompted by the significant increase in private air travel during the COVID-19 pandemic, and we expect tax years 2020–2022 to be the periods the IRS is analyzing for examination. The entities selected for audits will be identified through “advanced analytics” applied to a database of corporate jet activity that the IRS is developing. It is possible that these audits may in turn lead to audits of high-income taxpayers using these jets.

IRS Commissioner Werfel explained during a press call about these imminent audits that the IRS is concerned that deductions were overstated, and that passengers’ personal travel has not been correctly reported as taxable income. (Such reporting would require wage withholding, in the case of any employees’ travel, which we assume will also be a focus of these IRS aircraft use audits.)

Werfel stated that “Personal use of corporate jets and other aircraft by executives and others have personal and business tax implications and it’s a complex area where IRS work had been stretched thin.” He also commented that “On a given taxpayer’s tax return, the amount of the deduction for aircraft travel can be in the tens of millions of dollars. That’s why it’s so important that we get this right, because the amount of the deduction given the value of the asset is so material.”

This area is undoubtedly complex, but prior to these forthcoming audits, the IRS has never issued clear guidance explaining how Congress’ changes to the deductibility of “entertainment expenses” in 2017 would affect the deductibility of travel on company-provided aircraft (which has been governed by detailed regulations, issued in 2007, which were not amended by the IRS regulations implementing these 2017 statutory changes).

Indeed, the IRS has never issued any update to its pre-1979 regulation generally defining an airplane as a “transportation facility” (not an “entertainment facility”), although we expect that the IRS National Office may issue informal guidance in connection with these forthcoming audits that tries to address many unanswered questions (and may lead ultimately to more litigation as follow-ons to the aircraft and entertainment expense deduction cases discussed below).


Exemptions from Disallowance Under Code Section 274(e)(2)

Many IRS auditors assigned to this project may not be aware how the IRS rules have evolved to create many important exceptions to the deduction disallowance rules applicable to corporate aircraft. In Sutherland Lumber-Southwest Inc. v. Commissioner, the Court allowed a full tax deduction for all airplane costs, even for “entertainment flights,” provided that the IRS’s special valuation rules applicable to passengers’ personal flights had been correctly applied.

In 2004, Congress enacted certain statutory limitations on aircraft deductions in order to overturn parts of Sutherland Lumber and the underlying regulations. Under the statutory override, in any case where a top executive or their guest flies for personal entertainment, the aircraft deductions attributable to that flight are limited to the amount of income imputed for the flight. However, the regulations explaining these rules created several important exceptions, outlined below:

  • Exclusion of “business entertainment air travel,” that is directly related either to the active conduct of the taxpayer’s trade or business or to entertainment that directly preceding or following a substantial and bona fide business discussion. (See Treas. Reg. § 1.274-10(b)(3).)
  • Exclusion of any flights that are “not for entertainment purposes,” such as flights to attend family members’ funerals, flights for medical purposes, or flights for commuting between home and work.
  • Exclusion of flights where the passengers are guests of a person who is not a “specified individual” (a term defined to include any officers, directors, or over 10% owner of the entity providing the aircraft who is either “subject to section 16(a) of the Securities Act of 1934 in relation to the taxpayer, or an individual who would be subject to section 16(a) if the taxpayer were an issuer of equity securities referred to in that section).”

Thus, despite these disallowance rules enacted in 2004, many flights to business entertainment events (even by spouses), commuting flights, and flights by non-executives and their guests have remained deductible. Even after the 2017 changes to Code Section 274(a) enacted by the Tax Cuts & Jobs Act (TCJA), the incremental costs (if any) of passengers’ flights to business entertainment events may be disallowed as “entertainment expenses,” but the IRS has never amended these above-outlined rules to mandate disallowance of even the “variable costs” of airplane operation as a result of any entertainment flights, or to specify how to calculate any disallowance where passengers may have various different reasons for taking a flight, as between business, business entertainment, personal (but not entertainment), or business entertainment.

Further, it is even unclear whether transportation to an entertainment event is necessarily part of the “entertainment” itself. Notably, in enacting the 50% (initially 20%) disallowance rule under Code Section 274(n) applicable to both entertainment and food and beverage expenses from 2007 through 2017 (which, like Section 274(a) as amended by the TCJA, did not contain any exception for “business entertainment”), Congress specifically exempted from the disallowance any “transportation to restaurants” from the definition of “entertainment,” and the IRS’s guidance under this provision never countermanded that exemption.

Similarly, even when issuing its regulations implementing the “Sutherland Lumber override,” the IRS never specified that airplanes were classified as “entertainment facilities.” Instead, Treas. Reg. §1.274-10 simply provides special disallowance rules for airplanes. Accordingly, since neither the TCJA legislative history nor any previous or subsequent IRS guidance has indicated that an airplane is an “entertainment facility,” it is difficult to see how the IRS could disallow the fixed costs of aircraft operation simply because some passengers may be on business entertainment flights.

Additionally, given the 1986 Act legislative history, and lack of any formal IRS guidance characterizing all “transportation” (in a car or a plane) as “entertainment,” it is questionable whether, in these forthcoming audits, the IRS could successfully disallow even the operating costs of a “flight to a business entertainment event.”

Limitation of ‘Spousal Travel’ and ‘Gift’ Deduction Disallowance to Incremental Expenses

Moreover, although there are other deduction disallowance rules applicable to “spousal travel” (even when it is for business purposes), and to “gifts” (which can be made to directors and other independent contractors), these rules do not require the expenses subject to this disallowance to be determined on the basis of any pro-rata allocation of expenses across all passengers, or flight miles, or flight hours. Instead, in the case of travel on a company plane, it is possible that there are only negligible incremental costs associated with an additional passenger’s flight.

Inapplicability of Code Section 162(m)

In addition, in the case of publicly held corporations and publicly traded partnerships whose top executives’ compensation in excess of $1 million per year is subject to the deduction disallowance rules under Code Section 162(m), there are two applicable exemptions from these disallowance rules. First, the rules do not apply to any passenger’s travel for bona fide business reasons. Second, and even more importantly, even in the case of personal travel by an executive and/or the executive’s guests, these Section 162(m) disallowance rules apply only to compensation deductions.

Importantly, Treas. Reg. § 1.162-25T specifically provides that “if an employer includes the value of any non-cash fringe benefit in an employee’s income, the employer may not deduct this amount (i.e., the imputed income) as compensation for services, but rather may deduct only the costs incurred by the employer in providing the benefit to the employee [including] a cost recovery deduction under section 168 or a deduction under section 179.”

Therefore, although this regulation disallows a “compensation” deduction for any amounts of income calculated under the special valuation rules for plane travel, it instead allows a deduction for depreciation and cost recovery deductions (which are deemed by this longstanding regulation not to be “compensation expenses”). Thus, although deduction disallowances could apply if and to the extent a flight is an “entertainment flight” subject to Treas. Reg. § 1.274-9 and -10, there should be no additional deduction disallowance applied under Code Section 162(m).


Overview of Section 280F

One focus of this new round of IRS aircraft audits will also be on potential violations of Code Section 280F, the provision limiting claims for accelerated depreciation under Code Section 168 for airplanes (as well as other specified “listed property”) when there is excessive personal use of the aircraft by business owners and their employees. Under Section 280F(b)(1), if any listed property is not at least 50% used in a “qualified business use” for any tax year, the depreciation deduction allowed for that property is limited to straight-line depreciation.

Code Section 280F(d)(6)(B) defines “qualified business use” as any use in the trade or business of the taxpayer except for the uses listed in Section 280F(d)(6)(C), which were designed to prevent taxpayers from disguising the excessive personal use of business owners by structuring the use as either a compensation arrangement or a lease. Section 280F(d)(6)(C)(i) provides that qualified business use does not include

  1. leasing property to any five% owner or related person,
  2. providing use of the property as compensation for the performance of services by a 5% owner or related person (irrespective of whether that personal use is taxed), or
  3. use of property provided as compensation for the performance of services by any person who is not a 5% owner or related person, unless the value of such use is treated as taxable income and, where required, subjected to federal income tax withholding.

Exception Where 5% Owner Leases and Personal Use Exceed 75% of Use

For aircraft, Code Section 280F(d)(6)(C)(ii) provides that this 5% owner rule does not apply if at least 25% of the total use of the aircraft during the tax year consists of qualified business use that is not excluded under Section 280F(d)(6)(C)(i). However, in TAM 200945037 (7/29/2009), the IRS concluded (without statutory support) that even business flights provided to a 5% owner or related person on board are excluded from qualified business use, and further concluded that the taxpayers addressed in the TAM were not regularly engaged in the business of leasing aircraft and thus were subject to the 50% qualified business use test.

Thus, under this controversial TAM, even if the owner’s use is for business purposes of the owner, that use still counts as owner use (which, if it exceeds 75%, results in denial of accelerated depreciation). For this reason, companies with 5% owners are usually very careful to ensure that at least 25% of the aircraft’s use during each year is business use, excluding all use by the 5% owner (and that owner’s invitees). However, the IRS will no doubt be looking for instances where this 25% test is not met.


SIFL Rate Valuations

The safe harbor valuation rules applicable to personal flights on “employer-provided aircraft,” applicable since 1985, are based upon Standard Industry Fare Level (SIFL) statistics published by the Office of International Aviation (Pricing & Multilateral Affairs) of the Department of Transportation (DOT). The values determined using the SIFL valuation rules must be imputed for any personal trips by employees, independent contractors, and their guests, and are also the maximum deductible amount for any “entertainment flights”. When the US Department of the Treasury initially designed the SIFL valuation method, the basic rate applicable to a flight by a top executive or guest was believed to approximate two times first class fares.

However, these SIFL valuations have declined over the years, and the highest valuation currently approximates first class commercial fares. (Thus, IRS agents will likely be checking these valuations, for purposes of both payroll tax and deduction audits.)

These regulations value each seat on any particular flight by multiplying the SIFL cents per mile charge by a number called the “Aircraft Multiple” and then adding the SIFL terminal charge. There are substantially different values applied for top executives (called “control employees”) and their guests, as opposed to flights by any “noncontrol” employees, as shown below:

SIFL Cents-Per-Mile Aircraft Multiples

Maximum Certified Takeoff
Weight of Plane or Helicopter

Aircraft Multiple
for Control Employee

Aircraft Multiple for Non-Control Employee

          Over 25,000 lbs.



          10,001-25,000 lbs.



          6,001-10,000 lbs.



          6,000 lbs. and less



In using the SIFL formulas, the value of each flight is determined on a passenger-by-passenger basis; deadhead flights are not counted; and round trips are counted as at least two flights (or more than two if there are deplaning stopovers requested by employees). Refueling, servicing, weather conditions, or emergency stops are not counted. Intermediate stops also are not counted if they are for business reasons of the employer unrelated to the particular flight of the employee. Flights by passengers under two years old are also not counted. Complex valuation and potential deduction disallowance rules also apply to foreign travel.

Finally, if the personal travel by the executive is covered by the “security exclusion” (as a result of some specific threat to the executive, and as supported by an independent security study), then any travel by the executive, spouse, and dependent children accompanying the executives can be valued at a rate equal to “200% of SIFL,” which is slightly more than half the regular SIFL rates.

Half-Capacity Rule

Another special aircraft travel valuation rule applies if at least half the “regular seating capacity” of the aircraft is filled with business travelers at the time the individual whose flight is being valued both boards and deplanes the aircraft.

For this purpose, the “regular seating capacity” means the maximum number of seats that have at any time been on the aircraft while owned or leased by the employer, excluding seats which are occupied by bona fide flight crew, and excluding seats that cannot at any time be legally used during takeoff (unless such seats, in contravention of the law, have in fact been so used).

“Business travelers” for this purpose means only persons performing services for the company who are traveling primarily on company business (excluding bona fide flight crew members), and who therefore may exclude their flights as a working condition fringe.

If this “half-capacity” rule test is met, current and retired employees, partners of the employer, and their spouses and dependent children may fly in the remaining seats for free. Guests of employees as well as independent contractors and directors of the employer may fly in the remaining seats at the non-control employee rate (explained above).

Reversion to ‘Charter Rates’ Applicable Only Where Valuation Rules Are Disregarded

If any company has misapplied or disregarded the SIFL rules explained above, such as by misidentifying “control employees,” or using an incorrect aircraft weight classification, or erroneously claiming that a flight is a “business flight,” then the SIFL values might still be applied on an “amended return.” However, if the IRS corrects the valuation in an audit after the statute of limitations has expired on correcting information returns, the IRS can apply “charter values” to value flights by passengers (by allocating the charter value among all the passengers), and then propose to collect payroll tax withholding from this substantially increased value.

We have seen this regulation applied only once in an IRS audit, because, in our experience, nearly all companies are careful to apply correctly the complicated SIFL rules described above. Further, in the event that “charter values” were used by the company or by the IRS on audit to value any flight, then the deduction applied by the entity to any “entertainment flight” might also be increased.

Predicted Results of IRS Audits

Certainly, the above-described deduction disallowance rules and valuation (and withholding) rules applicable to travel on company aircraft are extremely complicated. However, in our experience, companies are extremely careful to identify any personal trips that are taxable to company employees and contractors, to value those trips correctly, and, finally, to apply deduction disallowance rules where applicable.

The identity of the “four dozen” entities that the IRS intends to target in these audits is currently unclear, but we hope that any audited company has properly applied the rules and pays careful attention to the special exceptions and valuation rules discussed herein. In preparation for any potential IRS audit, companies certainly should be sure to retain their flight logs (including for foreign travel), passenger manifests, notes on any business reasons for the flights by employees, directors and guests, valuation calculations for flights where income was imputed, and deduction disallowance calculations for any “entertainment flights” by top executives and their families and guests.


Morgan Lewis partners have prepared opinion letters and explanatory memoranda for more than 250 major corporations on valuation and deduction issues relating to company aircraft, presented to the IRS on proposed regulations, and litigated and won a key test case on the deduction of company plane costs. Together with the aviation team, we advise on all aspects of the purchase, sale, lease, operation, and tax of aircraft. Please contact Handy Hevener for a version of this LawFlash with detailed footnotes.


If you have any questions about aircraft valuation or deduction-disallowance rules, whether or not in the context of any company aircraft audit, please do not hesitate to contact any of the below:

Mary B. Hevener (New York / Washington, DC)
Steven P. Johnson (Washington, DC)
Gregory L. Needles (Washington, DC)
Lisa Valentovish (New York / Hartford)
Jonathan Zimmerman (Washington, DC)
Anna M. Pomykala (New York)