The Advisors' Blog

I blogged a few weeks ago that personal travel is the perk that is most likely to catch the attention of the SEC. The Commission isn’t the only agency that is scrutinizing the use of corporate jets, though. This NYT article says that the IRS is rolling out an “aircraft audit” initiative to evaluate whether companies have improperly deducted expenses for airplanes that were sometimes being used for personal travel, and whether individuals have properly recognized income relating to personal travel benefits. They’re starting with about four dozen audits and will go from there. Here’s more detail:

The scrutiny of corporate jet use will involve new data analytics tools, which the I.R.S. has been developing with the $80 billion in funds it was granted through the Inflation Reduction Act of 2022, to determine when executives or other company officials might be using corporate planes for vacations and private trips. The agency plans to begin dozens of new audits that will focus on large companies, partnerships and wealthy taxpayers.

The deductions can be worth tens of millions of dollars. And according to this WSJ article, more companies have been jumping on the bandwagon:

Overall, the number of big companies providing the perk rose about 14% since 2019, to 216 in 2022, figures from executive-data firm Equilar show. The number of executives receiving free flights grew nearly 25%, to 427.

The article says that this worked out to an aggregate spend of $65 million on executives’ personal jet travel in 2022. Keep in mind that the SEC has made a big deal of using data analytics in its enforcement initiatives and loves a good headline. If the IRS is leveraging these tools to identify perks, the SEC – which as I mentioned, is already focused on personal travel – may not be far behind with its own type of sweep. It is a good time to pay extra attention to your perks analyses & disclosures! This blog from Gunster’s Bob Lamm recaps what goes into the perquisite analysis for the purpose of proxy statement disclosure:

– A benefit (such as aircraft usage) is “not a… personal benefit if it is integrally and directly related to the performance of the executive’s duties”.

– “[A]n item is a… personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

– The “concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one” and would not be satisfied by a determination that the benefit would qualify as an “ordinary” or “necessary” expense for tax or other purposes or that the perquisite provides some benefit or convenience to the company, as well as to the executive.

– “If an item is not integrally and directly related to the performance of the executive’s duties, the second step of the analysis comes into play. Does the item confer a direct or indirect benefit that has a personal aspect (without regard to whether it may be provided for some business reason or for the convenience of the company)? If so, is it generally available on a non-discriminatory basis to all employees? For example, a company’s provision of helicopter service for an executive to commute to work from home is not integrally and directly related to job performance (although it would benefit the company by getting the executive to work faster), clearly bestows a benefit that has a personal aspect, and is not generally available to all employees on a non-discriminatory basis” (emphasis added).

If, as seems apparent, the SEC doesn’t view the helicopter example as being a close call, what do you think it would say about an executive claiming that her husband’s travel on the company jet to a conference she is attending in Costa Rica is “integrally and directly related” to the company’s business? And many other examples would reach similar conclusions.

For a great primer on corporate aircraft use, check out this 22-minute podcast that I taped a couple years ago with Cooley’s Brad Goldberg and Jet Counsel’s Stewart Lapayowker.

– Liz Dunshee