Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Deductions May Exceed Income to Employees for Entertainment Fringe Benefits Under Section 274: Sutherland Lumber-Southwest, Inc. v. Commissioner
In Sutherland Lumber-Southwest, Inc. v. Commissioner, a case of first impression, the Eighth Circuit held that the business expense deduction for operating a corporate jet for an employee’s vacation flight was not limited to the amount of income attributed to the employee as a fringe benefit. Rather, under section274(e)(2), so long as an employee properly reports income from the personal use of the business owned or operated jet, a business is entitled fully to deduct its operating costs. While the taxpayer could have prevailed on narrower grounds that would have made the impact of this case significant but limited, the ruling under section 274(e)(2) may have broad implications for tax planning.
Part I of this note describes the statutory and regulatory framework that gave rise to the dispute in this case. Against this backdrop, Part II outlines the statutory dispute underlying the Sutherland Lumber case, surveys the arguments on both sides, and outlines the opinion of the Tax Court and the subsequent affirmation of that opinion by the Eighth Circuit. The analysis of the case, in Part III, describes the potentially broad and significant impact that the Court’s ruling under section 274(e)(2) may have upon tax planning practice. Part IV concludes that this case, which endorses a discontinuity between corporate deduction and employee income, presents important tax planning opportunities for practitioners.