In 1984 Stanley Kurzet sold his business and invested the proceeds in a Lear jet and a timber farm in Oregon. He also owned other business and investment properties and a residence in California. On their joint return, the Kurzets deducted expenses for business travel from California to Oregon, including the costs of operating the jet.
The IRS challenged the deductions, especially the depreciation of the jet, which more than doubled the Kurzets’ deduction. According to the service, these deductions were not ordinary and necessary business expenses under IRC section 162.
The Tax Court agreed with the government and said, “Large transportation expenses (including significant noncash expenses such as depreciation) associated with the Lear jet appear to be out of the ordinary and unnecessary in light of the fact that [Kurzet’s] timber farm was not producing any current income (due to [his] decision to defer cutting any of the timber).”
The Tenth Circuit Court of Appeals held that the Tax Court had erred by including depreciation in the costs of operating the jet. Relying on Noyce v. Commissioner, 97 TC 670 (1991), the Tenth Circuit stated that depreciation should not be considered in assessing whether business expenses are reasonable under IRC section 162. By ignoring depreciation, the court cut the travel expense deductions in half and allowed the entire deduction.
Observation. The Kurzets also argued that the time saved by traveling in their own jet, as opposed to commercial air travel, should be considered in determining whether an expense was reasonable. The Tenth Circuit agreed.
Stanley M. Kurzet v. Commissioner (CA 10, 8-16-2000), 86 AFTR2d, 2000–5166.
—Michael Lynch, Esq., professor of tax accounting
at Bryant College, Smithfield, Rhode Island.