Aircraft Management Fees Susceptibility to Federal Excise Tax to be Decided by Congress or Courts BY ANTHONY GASAWAY F or at least four years, the aviation industry has anxiously awaited promised regulations or other guidance from the IRS concern- ing the taxability of aircraft manage- ment fees, and specifically whether those fees are subject to the 7.5% Federal Excise Tax (FET) imposed on the transportation of persons. The new Administration, with all the personnel and policy changes that accompany it, means that further IRS regulations or guidance will not be forthcoming quickly and either a legislative solution must be enacted or the courts will decide the issue. Because aircraft are complex and operations require specialized skill and knowledge, owners and lessees of private aircraft often retain the services of experts to manage all or a part of their aircraft and attendant operations. Regulatory compliance, aircraft maintenance, and the mul- titude of tasks required in manag- ing aircraft, such as flight planning; interviewing, hiring, and supervising pilots and crew, are quite challeng- ing even for the most sophisticated individual or corporate owner, many of whom lack even a modicum of Aviation Business Journal | 2nd Quarter 2017 aircraft expertise. As a result, compa- nies and individuals that own aircraft routinely hire aircraft management companies to operate, maintain, and otherwise care for their aircraft. Until Recently, the IRS Did NOT Attempt to Apply FET to Management Fees FET of 7.5% (plus a small, per- head fee) applies to amounts paid for “transportation by air” if the trip begins and ends within the United States, or in Canada or Mexico within 225 miles of the U.S. border. It is called the “ticket tax” because Congress intended it to apply to passengers who purchase a ticket (or the equivalent of a ticket) for transportation on a commercial or charter aircraft that is owned by others. Under those circumstances, the passenger is paying for “transpor- tation,” because the passenger has no possessory rights in the aircraft on which he is traveling; rather, his ticket simply provides him a temporary right to enter upon the aircraft for the limited purpose of being flown between fixed locations. The legislative history to the FET suggests that the FET was intended to only tax commercial transporta- tion. Unlike a commercial or charter passenger, an owner has a possessory interest in the aircraft in which he is flying (either through ownership or leasehold interest), and thus an owner transports himself when he flies on his own aircraft, even if he pays others to assist him in main- taining and operating the aircraft. Since 1958, published guidance and audit practice suggested that the IRS deemed management fees paid by owners to aircraft manage- ment companies as not subject to FET. In the early 1990’s, despite arguing that Executive Jet Aviation was engaged in commercial avia- tion and was thus subject to FET, the IRS nonetheless stipulated in Executive Jet Aviation v. United States, 125 F.3d 1463 (Fed. Cir. 1997) (“EJA”) that management fees were exempt from the FET. However, 20 years later, in Chief Counsel Advice Memorandum 201210026, dated March 9, 2012, and in concurrent audits, the IRS seemingly changed its institutional position concerning Continued on page 13 11
