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Law Firm Loses $1 Million Tax Deduction for Standby Airplane

By William Vogeler, Esq. | Last updated on

To the lawyer who wanted a standby deduction for his aircraft, the Ninth Circuit said, "Oh no, that's not gonna fly."

At least, that's the gist of what the Ninth Circuit said about the lawyers' ill-fated attempt to deduct more than $1 million in travel expenses.

Engstrom, a plaintiff's firm in Los Angeles, tried to write off "standby" expenses for a Gulfstream IV and a Beechcraft King Air 350 turboprop between 2008 and 2010. Partner Walter Lack and attorney Thomas Girardi, a partner in his own firm, set up an aviation company to split the cost of keeping the aircraft.

A U.S. Tax Court found that Engstrom owed $1.12 million for improper travel expense deductions on more than 100 flights. The Ninth Circuit, in an unpublished opinion, said the tax court was correct.

Not Clear for Take-Off

The circuit court ruled that, despite claiming an agreement concerning a 24-hour standby airplane, "Engstrom produced no written record of such an agreement and the offered testimony did not clearly establish the alleged agreement's existence."

Under 26 U.S.C. § 274(d), to claim a travel expense as a deduction, the taxpayer must substantiate the expense with evidence showing the cost and business purpose of the claimed expense. Engstrom did not clearly show that all of the flights in question had a business purpose, the court said.

"The Tax Court could rely on evidence that weighed against Engstrom's theory, such as the fact that the planes were flown for personal use, and that Engstrom's claimed payment for standby use also included rent for a Staples Center suite that Engstrom has since conceded is not properly deductible," the panel said.

Pilot to Co-Pilot

Lack, a founding partner at Engstrom, also tried to avoid the taxes by claiming he made payments to the aviation company as a loan. The court rejected the argument because the evidence showed his payments were to satisfy his personal obligations to the company.

Girardi, a founding partner of Girardi & Keese, was not named in the case. Married to Beverly Hills realty-TV star Erika Jayne, Girardi made a name for himself for his work on the case featured in the Erin Brockovich movie and other large settlements.

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