Regular readers of “T for Taxes” know that my favorite Tax Court Judge is Judge Holmes. Some inveterate readers and book lovers get excited when there is a new novel out by John Grisham, for example. I’m certainly a book lover and reader myself, and I could provide a substantial litany of writers whose books I can’t wait to read when they hit the bookstores.
But, as a tax aficionado, I get that “can’t wait to read” attitude whenever I discover a new U.S. Tax Court opinion by Judge Holmes. Let me tell you, even if you can’t tell a deduction from a credit, you should do yourself a favor and look up one of Judge Holmes’ opinions–they read like great stories of intrigue and suspense. Each and every opinion by Judge Holmes restores a tax professional pride that he has chosen the sometimes bumpy career path of federal taxation.
So, as you might have surmised, today I am going to highlight a new Tax Court opinion authored by Judge Holmes. The case in question is Brown v. Commissioner, Tax Court Memo 2013-275 (December 3, 2013).
In the first couple of pages of the Brown case, Judge Holmes quotes both F. Scott Fitzgerald and Ernest Hemingway regarding the rich. Fitzgerald said that “the very rich . . . are different from you and me.” Hemingway replied that the “very rich are different from you and me. . . They have more money.”
Judge Holmes says that the facts of this case show that both statements of Fitzgerald and Hemingway are true: “The very rich have much more money and they can use it to do things with insurance that most people can’t.”
The Brown case involves an insurance salesman to the very rich. At issue was whether an airplane he purchased was placed in service in 2003 or in 2004. The facts of the case are fascinating, but the legal issue and its resolution is ultimately more important for readers of this blog who may wish to learn a thing or two about what it means to place an asset into service for tax purposes.
Property is first placed in service when placed in a condition or state of readiness and availability for a specifically assigned function. In the Brown case, the taxpayer took delivery of the airplane on December 30, 2003, and used it in business that day. However, a few days later, the plane was returned to the manufacturer to complete a previously-planned upgrade to add a conference table and larger video screens, both of which the taxpayer had earlier indicated he needed for business purposes. That upgrade took about a month.
Although the plane was operational in 2003 and used in business in 2003, the Tax Court held that the airplane was not available for its intended use on a regular, ongoing basis in 2003, and, thus, could not be deemed “placed in service” until 2004.
What is especially interesting about this case is this–as Judge Holmes notes, it is the taxpayer who gets to determine what an asset’s “specifically assigned function” is. In this case, the Tax Court determined that the taxpayer’s specifically assigned function for the airplane required it to have a conference table and larger video screens so that the taxpayer could use those for business presentations while in flight. Another taxpayer who simply needed a more basic jet aircraft to get him from Point A to Point B could have taken delivery of the very same plane in 2003 and it would have been deemed placed in service in 2003.
The moral of the story: if it is important to make sure that you have placed a particular asset in service in a particular year, make sure that it is available to you for its intended use on a regular and ongoing basis in that year. If your intended use requires upgrades, make sure that those are completed in the year in which you wish to have the asset treated as placed in service.