In Uncategorized on 12/03/2013 at 18:27

No, not the old Saturday Night Live crew, but rather the case of Michael D. Brown and Mary M. Brown, 2013 T. C. Memo. 275, filed 12/3/13. The problem is the bonus depreciation Mike took on his Bombardier Challenger 604 flying machine.

Mike was a flying insurance salesman, selling big-ticket multi-million-dollar policies to the very rich, to get around estate taxes. So successful was Mike that IRS generated Notice 2002-59, 2002-2 C.B. 481, just a scant three weeks after Mike trumpeted a split-dollar life insurance maneuver that, so he told the New York Times, could save $9 in tax for every $1 of premium.

Amazing how these tax maneuverers feel compelled to spill the beans at the very door of 1111 Constitution Avenue, NW. Like IRS doesn’t read the papers.

And as for the split-dollar gambit, see my blogpost “The Split”, 8/29/12, wherein it appears that Steve Neff and Brad Jensen, master builders, were blown up when IRS torpedoed Mike’s brilliant maneuver.

Back to the main story. Mike needed to jet around the country, to meet and greet his high-priced clientele. Commercial travel wasn’t convenient, and chartering meant he was at the mercy of an owner who might whisk his magic carpet away just when Mike most needed it.

So he bought his own. But he had to get it placed in service by year’s-end, and he had a very narrow timeframe to do it. Moreover, he wanted special modifications, like a $200K conference table and a couple of widescreen monitors, and extra subhydraulics (whatever those may be) and a few doodads, so the total bill was $500K, and there was no way his jet  would be completely modified before year’s-end.

Thus, he’d be back to 30% bonus depreciation and not the 50% one-time Congressional largesse special.

Mike, never taking “no” for an answer, paid for and took delivery of the plane at year’s-end, signed a post-delivery agreement with the builders to soup up the plane as Mike required. Mike testifies on the trial he absolutely has to have the conference table and the widescreens in order to wow the stratospheric highrollers he’s trying to sell (and also the CPAs and lower-echelon brokers who send him leads).

Just before the ball drops at Times Square, Mike takes the plane as unmodified, flies to Seattle and then to Chicago, and gets letters signed by a client and a fellow broker saying how they talked business.

Of course the flight logs and the fuel receipts don’t jibe. IRS busily nails Mike for tax fraud on other items, and they settle, but Mike wants to fight for the bonus depreciation. He did pay for the plane, took title and flew it.

But that intrepid unraveller of depreciation, The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Judge Mark V. Holmes, isn’t flying with Mike.

For Judge Holmes’ disquisitions on depreciation, see my blogposts” Basis For Dummies”, 11/24/11, and “The Sum of Its Parts”, 3/12/12.

Mike did use the plane, and he claims it was ready for air transport, which it was. But that’s not the point. Placing an item of property in service means not only that it works generally, but is fit for the specific use the taxpayer intended, and is ready for that specific use on a regular, ongoing basis, unless frustrated by circumstances beyond the taxpayer’s control.

Reviewing the cases, Judge Holmes concludes: “These cases teach us that not just any use of an asset will satisfy the placed-in-service standard. An asset must instead be available for its intended use on a regular, ongoing basis before we can find it ‘placed in service’ in the tax year in question.” 2013 T. C. Memo. 275, at p. 37. (Emphasis by the Court).

Any use will not suffice. The specific intended use is what controls, and as Mike testified, without the conference table and the widescreen monitors, the plane didn’t answer Mike’s specific insurance-flogging needs.

“The problem with the Challenger was that, although it would have been, as Brown said, ‘perfect for some buyers,’ it wasn’t complete for him without the ’two business requirements that [he] needed.’ And without those two …modifications, the Challenger wasn’t ‘in a state of availability for the specific intended function in Brown’s insurance business….” 2013 T. C. Memo. 275, at p. 37.

Mike does avoid the 75% fraud chop, because, though he may have filed fraudulent returns in other years, IRS couldn’t prove he committed fraud with the Challenger. But Mike does get hit with the 20% substantial understatement.

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