New York Times
September 12, 2002, Thursday

BUSINESS/FINANCIAL DESK

Cheap Seats In Private Jets For Executives On Vacation

By DAVID CAY JOHNSTON and GERALDINE FABRIKANT

Flying from New York to Paris for a vacation? A first-class seat will set you back almost $6,000 each way, and coach will cost $1,100-plus if you buy at the last minute.

But if you are a top executive at General Electric or many other large companies you can go on the company's jet -- a Boeing 737 in G.E.'s case. While it would cost G.E. about $14,700, by conservative estimates, to fly the plane one way, the cost to the executive would be only $486. And that is only what he or she would owe in additional income tax on the reported value of the flight; the company would receive nothing to cover its costs.

The cost to executives who use corporate jets for personal travel is low because of a 1985 tax law that allows corporate executives and directors to fly on personal trips in company planes at rates far below what business travelers pay to sit in a middle seat in coach. It is another example of how federal tax laws grant favors to the very wealthiest people in America.

''It's a great deal,'' said Mary B. Hevener, a partner at the law firm of Baker & McKenzie who represents a third of the Fortune 500 companies on tax issues connected with their corporate jets.

A different view was voiced back in 1985 by Senator Howard Metzenbaum, an Ohio Democrat who objected to the tax legislation when it came to the Senate floor. Mr. Metzenbaum, who has since retired from the Senate, said at the time that requiring executives who use corporate jets for personal travel to value the trips at first-class air fares for tax purposes was woefully inadequate given the nature of corporate jet travel.

''Have we lost our heads?'' he said during the debate, noting that the Reagan administration also thought that first-class plane fare was too low to cover the true value of private jet travel.

''This is as wrong as wrong can be,'' Mr. Metzenbaum said. ''This is just a matter of playing to corporate executives.''

The giveaway, as Mr. Metzenbaum labeled it, turned out to be a lot bigger than even he had suspected.

The formula for valuing the personal use of corporate aircraft by executives allows the executives to pay far less than first-class air fare, and often less than coach.

The basic rates at which the Internal Revenue Service and the Transportation Department value the personal use of corporate jets are currently 20.80 cents a mile for the first 500 miles, 15.86 cents for the next 1,000 miles and 15.24 cents for miles beyond 1,500 -- less than the allowance for using a car.

Then, the value of the travel -- which the 1985 law generally defines as four times that basic rate, plus a flat $38.02 for the value of using an airplane terminal -- is reported as additional wages to the I.R.S. The executive just pays the federal income and Medicare taxes -- which for most executives is at a 40.05 percent rate -- on the reported value of the flight,

There is one significant exception to the general rule that values a flight at four times the basic mileage rate. If outside consultants conclude that corporate-owned jet travel is needed for security on personal trips, the mileage rates are only doubled.

Ms. Hevener said that such security studies were common before the Sept. 11 attacks and have become much more widespread since then.

Thus, an executive who flies 500 miles in a corporate jet to play a round of golf would be liable -- if his company has done a security study -- for only $246.02 in additional wages each way, on which he would owe federal income taxes of $98.53.

The taxes are the only cost that executives actually pay. Some companies reimburse executives for those taxes -- as well as the taxes on the reimbursement -- so that their out-of-pocket cost is zero. Companies that reimburse top executives, however, must disclose this in proxy statements to shareholders.

The companies, meanwhile, get to deduct the full value of operating these aircraft. For a Boeing 737 business jet, which can cost $40 million to buy and an equal sum to fly 800 hours a year for two decades, the operating cost works out to about $4 million a year, or $5,000 for each hour flown.

Excluding the purchase price and other fixed costs, the direct cost of operating the plane is $2,000 to $2,500 an hour, according to estimates provided by Boeing, General Electric and two aviation experts. Direct cost, these sources said, is the best measure of the cost of personal use of planes by executives because it approximates the additional use of these planes for personal travel.

At $2,000 an hour, it would cost $14,660 to make the flight of 7 hours and 20 minutes from New York to Paris. Chartering a Boeing 737 business jet for that run would cost more than $100,000, said Randy Brandoff, an executive at Marquis Jet Partners in Manhattan, and a smaller Gulfstream IV-SP, which seats 12, would cost $87,300.

It is not clear from G.E.'s proxy statement that John F. Welch Jr., the company's former chief executive, used the company's aircraft for private travel. However, in divorce papers filed by his wife, Jane, in Superior Court in Bridgeport, Conn., she estimated the value of the couple's use of a G.E. 737 at $291,667 a month.

Publicly traded companies are required to disclose the salary, bonuses, incentives and ''other compensation'' of the top five company executives in annual proxy statements to shareholders. If any single component, like air travel, accounts for more than 25 percent of this other compensation, it must be specified.

Mr. Welsh's other compensation last year was $171,772, 83 percent of which was for financial planning, the company said. The rest is not broken down, but could include some air travel.

G.E.'s current chief executive, Jeffrey R. Immelt, reported that 60.5 percent of his $137,954 in ''other annual compensation'' was for personal use of company aircraft by his family traveling without him. Other top G.E. officers also cited personal use of the company's aircraft.

If a company's security study concludes that all of an executive's travel must be on corporate aircraft, as G.E. requires Mr. Welch to do even after retiring as chief executive, then there may not be any disclosure to shareholders. The reason is that the S.E.C. requires disclosure of ''incremental expenditures'' and such personal travel on corporate planes is not, under these rules, considered to be an additional cost.

The practice of using company planes for personal travel is widespread. At Pfizer, for example, the former chief executive, William Steere, has lifetime access to the company's facilities and services, which would include its aircraft, company documents say. At Wachovia, Edward Crutchfield, a former chief executive, negotiated 120 hours of use of the corporate plane each year for 10 years, and less use after that.

Among those companies that require that their top executives use corporate jets for security reasons, the rules vary subtly.

For years, the Coca-Cola Company has required that its chief executive -- including its current chairman and chief executive, Douglas Daft -- fly on one of the company's four planes for business or personal reasons.

''We feel that this is the best way for us to insure the proper security for Mr. Daft, '' said Sonia Soutus, director of Coca-Cola's media relations. ''It includes his wife when she travels with him.''

According to the company proxy, Mr. Daft received $118,764 in ''other compensation'' last year, with $103,898 of that for his personal use of Coca-Cola's air fleet.

Gillette also has a rule that requires its chairman and chief executive, James M. Kilts, to use the company's aircraft ''for security reasons.'' A Gillette spokesman said that the requirement was for business purposes only.

Mr. Kilts does not use the company plane for anything except business, he said.

''That was part of his employment contract,'' the spokesman said. ''If he goes away for the weekend, he arranges his own transportation.''

Copyright 2002 The New York Times Company
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