Employers that own corporate jets and pay a management company to fly them were not pleased by a recent IRS memo on tax treatment of such arrangements, and two private aviation trade associations have been working with IRS on relief. Chief Counsel Advice Memorandum 20120026 , although not binding (see note at end of this article), suggested that federal excise taxes would apply to management fees employers and other jet owners pay to management companies that operate and maintain their aircraft.
Retroactive Application ‘Should Not Be Imposed’
The associations — the National Business Aviation Association and the National Air Transportation Association — met with IRS officials June 19 and “reiterated their concerns about the implications that the [March 9, 2012] Chief Counsel Advice memorandum could have on the industry, particularly with many small and mid-sized businesses that are aircraft management companies,” said NBAA spokesman Dan Hubbard. “We reiterated our opposition to the CCA memorandum” and presented the IRS with an 18-page document setting out their concerns, with top billing given to the issue of whether IRS would apply the tax retroactively. “Management companies would have to attempt to collect tax from former clients who may no longer own aircraft or even exist,” the paper argues.
The paper notes that federal excise tax under Code Section 4261(a) is imposed on the “amount paid for taxable transportation of any person.” In many cases, “passenger” or “client,” as used in the NBAA-NATA paper, could mean an employer that owns an airplane and uses it to transport executives or lets executives use the aircraft for personal reasons, as a fringe benefit.
Many employers choose to outsource operation of their aircraft to aviation management companies, which hire and train pilots, clean and service the aircraft and file flight plans. In such cases, the employer determines the destinations and general time frames for the flights, but safe operation generally is the responsibility of the management company. Whether such fees are considered “taxable transportation” turns on who has “possession, command and control” of an aircraft. The CCA memorandum describes scenarios in which a management company is considered to have possession, command and control and therefore providing taxable transportation.
Reliance on Revenue Ruling 58-215
But the general aviation industry argues that the tax not only should not be applied retroactively, it would not apply in the first place in many instances. The industry representatives say the CCA “incorrectly interprets existing IRS revenue rulings.” The paper points out that the CCA relies heavily on Rev. Rul. 58-215, which is the “first and only revenue ruling dealing with a management company arrangement. For over 50 years, the IRS has relied on Rev. Rul. 58-215 as a basis for concluding that a management company is not providing taxable transportation to the owner.”
The NBAA and NATA argue that the issue is determined on a flight-by-flight basis, citing legislative history of the Airport and Airway Revenue Act of 1970.
Hubbard wrote in a July 3 e-mail to Thompson Publishing Group, “we urged the IRS to look at [Federal Aviation Administration] rules for what constitutes commercial air transportation, and we articulated our view of what constitutes possession, command and control of an aircraft, and how that both relates to, and is different from the FAA’s operational control concept.” Hubbard said the association plans to continue its dialogue with IRS.
About CCA Memoranda
CCA memoranda are not binding on taxpayers. Nevertheless, they often provide insight into how the IRS will approach similar legal issues.