The Internal Revenue Service allows for reasonable business expenses, but some of the hundreds of thousands of dollars in expenses charged by Blue Grass Airport directors might not have been reasonable, a Lexington tax lawyer says.
"It's going to be extremely hard to say that the acquisition of Wii games is a necessary business expense," said Bill Rigsby, of The Rigsby Group.
If the expenses aren't reasonable, they should count as income for the employees, Rigsby said.
The IRS allows for ordinary and necessary business expenses. Companies run into trouble when they pay too much for something — especially if it was provided by a family member — or if they buy something that isn't necessary to run the business.
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During tax audits, the IRS routinely questions expenses, Rigsby said. And companies often run into trouble with travel and entertainment expenses in particular.
At the airport, questions have been raised about expenses for Executive Director Mike Gobb, who resigned earlier this month after the Herald-Leader reported that he spent more than $200,000 on travel and other expenses in 2½ years.
Three of the airport's four remaining directors resigned Tuesday amid questions about their expenses.
Director of Operations John Coon, Finance and Administration Director John Rhodes and Director of Development and Planning John Slone resigned at the airport board meeting.
Those three directors, as well as Marketing and Communications Director Brian Ellestad, charged at least $332,000 on their airport credit cards in three years, according to a Herald-Leader review.
The expenses included tickets to a Hannah Montana concert, a strip club visit, DVDs, Wii games and presents for other employees. In 2004, Gobb, Slone and Coon spent more than $5,000 at a Dallas strip club.
Strip clubs, in particular, would be hard to argue as a reasonable expense, even if clients participated in the events, Rigsby said. It is not clear that clients were involved in the airport directors' strip club visits.
A quiet dinner meeting at an expensive restaurant is easier to justify, Rigsby said. But at a strip club, there's music and other distractions.
"That would be looked at with extreme suspicion from the IRS," Rigsby said.
Because the airport is a quasi-governmental agency, the airport would most likely be asked to amend the directors' compensation to include the expenses. The directors would then be responsible for back taxes and interest on the additional income, Rigsby said.
A private business that had similar problems could face penalties for not accurately reporting its income, Rigsby said. A not-for-profit could face losing its tax-exempt status, Rigsby said.
A spokeswoman for the IRS declined to comment for this story.