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Company chief executives often use security as a tax break www.privateofficer.com
New York NY April 11 2012 Most people would think that Justice Ruth Bader Ginsburg of the Supreme Court would need more security than Alan R. Mulally, the chief executive of Ford Motor Company. Ford’s directors don’t seem to agree. The board requires that Mr. Mulally — for safety reasons — fly on a private jet whether he is going to Washington for business or Hawaii for vacation. Justice Ginsburg flies commercial with all its attendant hassles. Last year, she and other passengers were forced to evacuate a United Airlines flight via an emergency slide. Mr. Mulally is not alone. Dozens of corporate boards, including those of Halliburton, Kraft, Home Depot and Waste Management, insist or recommend that their top executives fly on private jets for security reasons. In the name of security, companies also pay for home alarm systems, 24-hour monitoring and even chauffeurs. The Macy’s board provides its chief executive, Terry J. Lundgren, with a car and driver to ensure his “personal safety,” a perk that is also bestowed on the heads of Cablevision, NCR, Time Warner and Tootsie Roll Industries. Hertz even provides a driver trained in “evasive driving techniques,” whatever that means. Are corporate chieftains really in that much danger? The answer has to be no in most cases. The number of people who know the name of Tootsie Roll’s boss, Melvin J. Gordon, is likely to be smaller than the number of law students who study Justice Ginsburg’s cases. Steven P. Jobs, arguably the most famous chief executive, received no security services from Apple last year before he died. Rather, directors often dole out personal safety perks to ease a chief executive’s tax bill. By classifying the benefits as security measures, the executives typically get a better tax treatment on the services. It’s a common corporate tax trick. Each year, companies spend millions of dollars to ensure the ostensible safety of their executives, services that sometimes extend to others. Ford, for example, picks up the tab for family members who fly with Mr. Mulally. The automaker estimated that it spent $178,571 on Mr. Mulally’s and his family’s personal air travel last year. Ford declined to comment. Board members, too, can benefit. Last year, Northrop Grumman paid to put its lead independent director, Lewis W. Coleman, in a “more secure residence,” according to a regulatory filing. For those who need translation, it seems that Northrop Grumman helped Mr. Coleman buy a new house. He’s an expensive board member. Over all, Northrop Grumman spent $5,203,559 on security protection for Mr. Coleman, including about $1.5 million for personal travel for him and his family. Northrop Grumman even appears to pay to fly him in a private jet when he is traveling on business for his day job as president of DreamWorks Animation. Northrop Grumman justifies the expense because of “specific threat information” from law enforcement. I find it telling that DreamWorks doesn’t require security for him. Northrop Grumman declined to comment further. Such perks persist even against the backdrop of political or shareholder pressure. Ford shed its fleet of corporate jets in 2008, after a furor at the automakers’ use of private planes to fly their chiefs to Congressional hearings during the financial crisis. But Ford still pays a jet charter service for Mr. Mulally and his family. At General Motors, which still has to repay its taxpayer bailout, its chief executive, Daniel F. Akerson, must fly commercial, unless he gets special dispensation from the government. The corporate jet is so valued that it is often the last service to be cut. In 2011, Yum Brands, which owns Taco Bell and Kentucky Fried Chicken, ended some of its executive perks, including a car and driver, club membership and annual physical. But Yum still requires its chief executive, David C. Novak, to take a private jet for all his travel. The restaurant chain estimates that it spent $214,017 on personal air travel for Mr. Novak last year. Those personal safety perks create big tax savings. Let’s say you are a chief executive who wants to take the company’s jet. If the trip is business related, then it’s all pretty straightforward. The company pays for it and deducts the expense under a complicated formula. It’s a different case for personal travel. In those cases, chief executives are required to pay income tax on the imputed portion of the flight — that is, the amount the company paid for the flight. So a chief executive who is a frequent flier can rack up a rather large tax bill. Luckily, the tax code offers executives a break. If an outside security consultant determines that executives need a private jet and other services for their safety, the Internal Revenue Service cuts corporate chieftains a break. In such cases, the chief executive will pay a reduced tax bill or sometimes no tax at all. Even when tax is due, the company sometimes takes care of it. Northrop Grumman spent $174,953 last year to cover the tax bill for Mr. Coleman’s personal air travel. The loser is, you guessed it, the federal government, which receives less tax revenue. I typically have no problem with private jet travel for executives doing company business. Just try to travel through La Guardia Airport, and you can see what a time saver it would be to avoid the security lines. But companies cite security issues to get their executives better tax treatment for things like personal air travel. It’s also a way to justify the expense to shareholders. In this era of crimped earnings and sluggish economic growth, the benefits — and the reasons the companies give for them — ring especially hollow. While statistics are not available, some companies are reversing longstanding policies to provide jets and the like for security reasons. This year, the Williams Companies, the natural gas producer, eliminated the home security program and the air travel requirement for its chief executive. The shift comes as profits and stocks slump. Years ago, “executives were looking for methods of reducing the fringe benefit cost of using the company aircraft,” said Keith G. Swirsky, president and chairman of the aviation and tax groups of GKG Law, a firm that focuses on transportation law. Now, he added, companies are looking to eliminate the perks partly in deference to shareholders. Perhaps if the tax laws were revised, chief executives would still take the private jet while Justice Ginsburg flew commercial. But at least the taxpayers wouldn’t be subsidizing it in the name of security.