A minor technicality, I believe:
They are allowed to write it off at the highest value for said seat (which even a paying passenger does not pay due to the way airlines 'discount' all fares offered). The way this break works out, the airline is actually making more for that seat than if it were provided to a paying customer, since they are getting the full fare value (not the discounted price the airline actually charges), tax-free.
If corporate taxes work the way personal taxes work, your statement is accurate only if the cost of the seat is a tax credit: $1.00 of write-off=$1.00 of reduction in tax liability. But, if they must write off the cost as a business expense -- reduce the net profit by the cost of the seat -- the airlines only get back a piece of the dollar (like itemizing your deductions). Also, reduced profit (or a larger loss) will have a negative effect on stock prices and the investment rating. It looks good on paper, but I can't imagine that the airlines are making money giving up first class seats to FAMs. Providing upgrades is an investment, even though airlines don't appear to make money on those seats, either. But, their business strategy is to build customer loyality, and providing upgrades is one way to do it.
My background is one of almost 30 years in the USAF and civil service, so I know of whence I speak. I need to calibrate one more thing:
Do you honestly believe that any Federal Agency (in all their bureaucratic glory) is going to pay the full ticket price of a First Class seat simply for the comfort of their employee? I can tell you for a fact that they don't.
Yes, they do. The DOD Joint Travel Regulation permits purchase of "premium class" tickets (mostly business class, but could be first class) for these circumstances that come to mind:
1. Continuous travel in excess of 14 hours; (ex: US-Sydney or Hong Kong)
2. To accommodate a handicapped employee who needs a larger seat, more legroom, etc;
3. More situations that I can't remember without spending the time to look it up.
Authorization for premium class travel is delegated to a reasonably low management level, so it's actually used. (I have authorized it fairly frequently.) I assume the parent organization of the FAMs has a similar regulation. Some agencies have found out that it's cheaper to make people travel over two days in coach and pay the extra day's hotel and per diem than it is to pay for a premium class ticket. A three-class aircraft is preferred, but the individual can ride in first class if only a two-class aircraft is available.
Concerning FF miles, are you prohibited from accepting them or has the airline refused to enroll FAMs in their programs? (or both???) When you're flying non-mission status, I also assume you have to book using the approved GSA city pairs, correct?
No hidden agenda -- just curious...