Flying above IRS' radar?

SPRINGFIELD -- 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.

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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.

There are nearly 120 flights -- an average of two a month -- by Blagojevich and family members that appear to have no business purpose, based on his appointment calendar and public announcements. Another 150 flights by personal and political guests were reimbursed, but not at the IRS rate.

The IRS likely 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 may 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:

bull; 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.

bull; 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."