Depreciation deductions allow businesses to recover the cost of their investments in assets that have a limited useful life. To stimulate the economy, Congress has, from time to time, created a temporary window in which “bonus” depreciation is permitted, encouraging purchases of depreciable assets. For example, a 50% bonus was enacted for qualified property placed in service after May 5, 2003, and before January 1, 2005.
Critics may debate the effectiveness of such measures, but this one definitely stimulated Michael Brown. His career was selling “high-end” life insurance, no policies under $10 million, and he was very good at it. Brown’s business took him all over the country. Generally, he chartered airplanes, but this did not always prove satisfactory. In 2003 Brown decided that he needed a private jet to be able to meet with his prospective customers at their convenience. As he began his shopping, Brown made it clear to everyone that he needed the deal to close in 2003 so that he could secure the bonus depreciation for that tax year. Eventually, Brown found an appropriate jet that cost $22 million. However, in the course of his shopping, he had seen a jet that included a conference table and large digital display screens suitable for PowerPoint presentations.
Brown concluded the purchase agreement for his jet in December. He also made the down payment for the reconfiguration of the interior of the jet to accommodate the conference table and displays in January 2004, for an additional half-million dollars. Although Brown lived in California, he arranged to take delivery in Oregon, on December 29, 2003, to avoid paying California sales tax. Brown then had his pilot use this jet to fly him first to Seattle, then to Chicago, for business meetings that day. He believed that these trips constituted putting the jet “into service” for tax purposes, and so he claimed some $11 million in bonus depreciation for 2003.
Not so fast, said the IRS. This business jet wasn’t just for transportation; its purpose also was to create a suitable environment for making presentations to potential customers and other insurance agents. As such, the jet actually wasn’t put into service until the modifications were completed in January.
The law is surprisingly murky on this point. After a review of the case law, the Tax Court agreed with the IRS. Not just any use of an asset will satisfy the “placed in service” test; it must be available for its intended use on a regular, ongoing basis. The Court accepted Brown’s December business trips as legitimate, and it ruled that they were enough to negate the fraud penalty that the IRS had assessed. Unfortunately for Brown, a separate accuracy-related penalty was upheld.