Aircraft Management Fees Susceptibility to Federal Excise Tax to be Decided by Congress or Courts Continued from page 11 the taxability of management fees. Applying a “possession, command and control” agency rule as opposed to the statutory “commercial aviation” test, the IRS asserted inconsistent audit positions often asserting that the FET broadly applies to manage- ment company arrangements even in circumstances where aircraft are operated purely under FAA Part 91 for the use of an aircraft operator. However, facing an industry backlash from its change-in-position, includ- ing administrative lobbying efforts by NATA, the IRS Small Business/ Self-Employed Division announced a suspension of further assessments of FET on services provided by aircraft management companies on May 16, 2013 in order to give the IRS time to draft regulations clarifying the issue. Since May 16, 2013, dozens of aircraft management companies have been mired in stagnant IRS audits of the issue, while hundreds more have anxiously watched from the sidelines wondering whether their business practices are the next to be challenged and audited by the IRS. In addition, even aircraft management companies that collect the FET on aircraft management fees are left with a quagmire of whether they have a fiduciary duty to file protective refund claims on behalf of their customers. The IRS’ Promise to Revisit the Issue Has Stalled New Administrations mean new people and governing philosophies, which makes immediate relief out of the Executive Branch unlikely in the near term. On January 20, 2017, the Trump Administration issued a mem- orandum to the heads of executive Aviation Business Journal | 2nd Quarter 2017 departments and agencies instructing them to, among other things, stop submitting regulations for publication in the Federal Register until those regulations have been approved by a Trump-appointed principal, withdraw regulations that have been submit- ted to the Federal Register but not yet published, and, where possible, postpone the effective date of pub- lished but not yet effective regula- tions. The memorandum also freezes executive-agency rulemaking and the issuance of any guidance documents by an executive agency. Although this memorandum by the Trump Administration is clearly intended to curtail over-regulation and other gov- ernmental barriers to business, it may also prevent the IRS from retracting Chief Counsel Advice Memorandum 201210026 for the time being. While the IRS conveyed to NATA and the rest of the aircraft industry in the waning days of the Obama Administration that the IRS was dili- gently pursuing FET regulations and related guidance, nothing had been issued beyond its listing in the agen- cy’s 2016-17 Priority Guidance Plan. Despite the suspension of further assessments of FET and no writ- ten or verbal indication by the IRS that it intends to lift the suspension, the author of this article represents an aircraft management company that is currently litigating the FET issue in a case involving services to owners who operated purely under FAA Part 91. We hope that this is an isolated incident and not a walk back by the IRS of the suspension. Legislative Solution For Future Tax Periods Is On Promising Course Since it now appears that regu- latory relief and clarity is not on a fast track, a legislative alternative now appears the most promising course. Beginning in April 2012, the Internal Revenue Code was amended to exempt fractional aircraft owner- ship program operations (under FAA Part 91, Subpart K) from FET on air transportation of persons and property, when the “fractional fuel tax” applies. This exemption expires after September 30, 2017, unless renewed by Congress. However, this legislative exemption is specific to fractional aircraft ownership pro- grams under FAA Part 91, Subpart K, and, by its terms, does not specifically exempt other aircraft management companies who provide services for aircraft owners and lessees who oper- ate their aircraft under FAA Part 91. For that reason, NATA has been instrumental in working with Congress to explain the issue to policymakers with the goal of leg- islative language clarifying even further the intent of Congress: that the application of the commercial ticket tax does not apply to aircraft management services. As a result, bipartisan, bicameral legislation has been introduced the last two sessions of Congress by Representative Pat Tiberi (R-OH) and Senators Sherrod Brown (D-OH) and Rob Portman (R-OH). The legislation was redrafted in the last session of Congress to include input from the powerful Joint Committee on Taxation—the authority in Congress on all policy Continued on page 14 13
