Source: http://www.sj-r.com/News/stories/22004.asp

Flight check: Blagojevich could owe
Analysis finds that taxes may be due for governor’s personal plane use

By JOHN O’CONNOR
THE ASSOCIATED PRESS
December 17, 2007

On Memorial Day, Gov. Rod Blagojevich huddled with legislative leaders in his Capitol office in what turned out to be another futile attempt to negotiate a state budget deal.

Then Blagojevich did what millions of people do after work: He went home. The difference is that the governor flew 150 miles to Chicago on a state plane, then used it to return to Springfield the next day.

That trip and dozens of other flights over the past five years could create tax headaches for Blagojevich and wind up costing Illinois taxpayers tens of thousands of dollars, according to an Associated Press analysis and interviews with tax experts.

The problem? The Internal Revenue Service might consider Blagojevich’s flights to be personal trips and a taxable fringe benefit.

The AP analysis covers nearly 1,000 flights on state aircraft by Blagojevich, his family and guests. It found personal travel that could be considered extra income to the governor of at least $225,000, based on the cost of hiring private planes in Illinois.

The additional income could mean a $60,000 tax bill for Blagojevich, according to the analysis. And unless he amends his past tax returns and pays the sum, the state could be penalized for not reporting the travel, according to tax law. The penalty could exceed $40,000, the AP review shows.

Blagojevich has an office in Chicago and may travel there for business without repercussion. Otherwise, the travel is taxable, said Marianna Dyson, an employment and fringe-benefits lawyer with Miller & Chevalier in Washington, D.C.

“The capital is in Springfield, and he has made a personal decision to keep his family in Chicago,” said Dyson, a former IRS special assistant for fringe benefits. “He has to live with that consequence.”

A Blagojevich spokeswoman, Abby Ottenhoff, said the AP has it backward: The governor’s headquarters is in the Windy City, not the state capital, so he may fly tax-free to Springfield and back when business calls him there.

“We define the principal place of business as Chicago, and all the flights are billed accordingly,” Ottenhoff said.

The governor’s last two tax returns give no indication he has paid any taxes for flights. An IRS spokeswoman in Chicago declined comment.

The AP analysis covers 58 months, from Blagojevich’s inauguration in January 2003 through October.

Nearly 120 flights — an average of two a month — by Blagojevich and family members appear to have had no business purpose, based on the governor’s appointment calendar and public announcements. Another 150 flights by personal and political guests were reimbursed, but not at the IRS rate.

The IRS probably would scrutinize the travel if it conducted an audit, Dyson said. If it found Blagojevich had taken unreported personal trips, it could use the charter airplane rate to determine their value instead of a discount usually allowed for personal travel by executives on company aircraft.

Flight value in the AP review was based on the average cost of chartering similar aircraft in Illinois, with a basic rate of nearly $1,500 an hour.

The analysis doesn’t include dozens of business trips Blagojevich took to other cities when, instead of taking a shorter return trip to Springfield, he flew to Chicago despite having no appointments there. Portions of those trips could be considered personal and taxable, experts said.

The review also excluded most of first lady Patricia Blagojevich’s flights, along with dozens of trips by daughters Amy and Annie, even though the IRS allows tax-free family travel only when it has more than a minor business purpose.

Travel has meant trouble for Blagojevich from the start. He was criticized for not moving into the Executive Mansion, and questions arose about his frequent Chicago travel as early as fall 2003.

In June, the AP reported he was making nearly daily roundtrip flights between home and capital while legislators were deadlocked on a budget. Last month, lawmakers hammered him for a flight to a Chicago Blackhawks hockey game during crucial legislative action.

In all, Blagojevich has flown on state aircraft more than 500 times. When he goes to Chicago for a job-related event, he can fly at taxpayers’ expense, said Thomas Cryan, an employment lawyer for the Washington firm of Baker & McKenzie.

But absent business there — and work at his residence doesn’t count — his travel to work and home is no different from anyone battling rush hour. Commutes can be painful but are not tax-deductible.

“The capital would be his main place of business. So getting to there, regardless of how he gets there, would be commuting,” said Cindy Hockenberry, a Wisconsin-based tax information specialist for the National Association of Tax Professionals.

Two examples show the difference:


On Friday, July 20, Blagojevich flew to Chicago. His calendar shows no weekend events. But the IRS might consider it a business trip because on the next workday he went to a Chicago hospital to sign legislation banning smoking in public places.

On Saturday, July 28, however, the governor and his family flew to Chicago even though he had no scheduled events. He flew to his next appointment, on Monday, south of Springfield. The Chicago trip could be called personal.
Tax rules could help. The IRS has a “special valuation” formula for executives’ personal flights that can drastically lower the amount taxed. The amount potentially owed in the AP analysis is based on the IRS allowing Blagojevich to use the discount for travel in 2007.

Another rule precludes taxing personal trips when at least half a flight’s passengers are business travelers.

On about 45 percent of Blagojevich’s personal trips, the plane was half-full of passengers declaring business, the AP analysis found. But they were governor’s staff members. More than two dozen Blagojevich employees were on the personal flights a combined 250 times, not counting state troopers who provide security.

Blagojevich may not claim those flights were free for him if he told the other passengers to board, said Bob Kamman, a Phoenix tax attorney whose past work for the IRS included preparing tax returns for U.S. senators.

“If he doesn’t have a business reason to travel,” Kamman said, “then they don’t have a business reason to travel either.”

Who is on board state-funded flights?

Family flights

Illinois Gov. Rod Blagojevich’s wife, Patricia, and the couple’s two children have flown on state aircraft nearly 300 times since 2003. An Associated Press analysis found dozens of those trips could be personal and potentially amount to taxable income.

The AP analysis counted most of Patricia Blagojevich’s flights as business-related, reasoning that taxpayers expect to see the first lady at official events. But the IRS is strict about spouses’ travel and rarely allows free flights for children. Combined, Amy and Annie Blagojevich took 190 flights listed as business-related — many of which they wouldn’t have been on if they lived in Springfield and not in Chicago.

The analysis of personal flights did not count dozens of flights the children took to their father’s inaugurals, state fairs, Springfield Easter egg hunts, Halloween parties, Christmas-tree lightings or Thanksgiving dinner at the usually empty Executive Mansion.

Personal guests

Blagojevich and his campaign fund have accounts to reimburse the state for personal guests or passengers on political missions for him. But the reimbursements for more than 60 guests flying on nearly 150 flights aren’t as much as the cost of chartering a plane, so the IRS could tax the difference, experts said.

The IRS apportions the charter cost among passengers. The amount underpaid for Blagojevich’s guests was $24,000, according to the AP analysis.

For example, on Aug. 31, 2004, Blagojevich flew with two top staffers and a bodyguard on a business trip to Granite City to announce a workforce training grant. Also on the plane were guests John Wyma, a former Blagojevich aide, and fundraiser Christopher Kelly, who was indicted on federal fraud charges last week.

The estimated charter value of that flight and the return to Chicago on Sept. 1 was $4,641, which would amount to $1,548 for the guests’ portion. But state records show Blagojevich’s personal and political funds reimbursed the state just $688 for Wyma and Kelly, leaving potential taxable income to Blagojevich of $860.

One guest, a friend of Blagojevich’s older daughter Amy, took 18 flights that were underpaid by $1,603.