Aircraft Management Fees Susceptibility to Federal Excise Tax to be Decided by Congress or Courts Continued from page 13 matters with a tax revenue impact. In 2016, the Joint Committee informed the tax-writing commit- tees the legislation’s impact on future federal revenues is insignificant, an important step in the journey of any tax-related legislation. As a result, last July the House Committee on Ways and Means approved the legislation. Though it did not make it all the way through the legislative process before Congress adjourned, its approval was an important milestone. Earlier this year, Representative Tiberi and Senators Brown and Portman reintroduced the legislation (H.R. 896/S.321) and given the increased focus on tax reform, prospects for its successful enactment are bright. Courts Will Be Asked to Decide Whether the Duty of Clarity Applies The quagmire of IRS rulings and the current state of the tax also impli- cates rather unique tax principles. One principle, commonly referred to as the IRS’s Duty of Clarity, requires that the IRS provide clear guidance to taxpayers who collect taxes, such as the FET, that are primarily owed by their customers. Aircraft man- agement companies are considered “deputy collectors of tax” because they collect tax from their customers and remit those excise taxes to the IRS. Their customers are the aircraft owners and lessees who operate the aircraft. Similar to a sales tax, the aircraft owners and lessees are primarily liable for those taxes, which are merely collected by the deputy collector. The deputy collector may be held secondarily liable for FET for failing to collect. Due to this rather 14 unique relationship, to ensure a level playing field, and to avoid unfair competitive disadvantage, the U.S. Supreme Court has ruled that the IRS has a Duty of Clarity to deputy col- lectors of excise tax to provide clear and precise guidance of what is part of the FET tax base. Without clear and precise guidance, the deputy tax collector cannot be held secondarily liable for failing to collect the FET. However, the IRS did not provide relevant guidance to the aircraft man- agement industry between conflicting announcements in 1958 and 2012. In fact, in a 1992 private ruling and again in its litigating position in EJA, both the Office of Chief Counsel and the Department of Justice, Tax Division, stipulated that the FET was inapplicable to management fees of a fractional aircraft management company, despite the audit finding that the fractional program manager was engaged in commercial aviation. For the next decade, presumably as a result of the litigating position in EJA, fractional program managers and aircraft management companies, generally, did not collect FET on management fees, and the IRS did not challenge either the industry’s report- ing of management fees or provide written guidance different from its 1990’s litigation position. However, despite providing no corrective guid- ance, beginning in the mid-2000’s the IRS initiated multiple audits, beginning with providers of fractional management services. These audits eventually were expanded in the late- 2000’s to include providers of aircraft management services under FAA Part 91. The IRS’s audit positions con- flict directly with both its litigation position in EJA and FAA guidance concerning what activities constitute commercial aviation, leaving difficult decisions for industry participants who must comply with both IRS and FAA guidelines. For example, while the Internal Revenue Code taxes “tax- able transportation,” the IRS has not issued regulations defining that term. Meanwhile, the Court of Appeals in EJA opined that “taxable transporta- tion” is limited by statutory analysis to “commercial aviation.” However, the IRS maintained, in a 1974 rev- enue ruling, that the term “commer- cial aviation” when used in the FAA regulations has a different meaning as when that term is used in the Internal Revenue Code. Furthermore, the IRS disagrees that the “commercial avia- tion” standard used by the Court of Appeals in EJA is the applicable test and, instead, pushes for adoption of its administratively-created “posses- sion, command and control” test. All of these patent inconsistencies sup- port the argument that aircraft man- agement companies were not given clear and precise guidance by the IRS. At least one court has agreed that the IRS is estopped from hold- ing aircraft management companies secondarily liable under the Duty of Clarity. In NetJets Large Aircraft, Inc. v. United States, No. 2:11-cv- 1023, 2015 WL 7784925 [116 AFTR 2d 2015-6776] (S.D. Oh. Nov. 12, 2015), appeal docketed, No. 17-3540 (6th Cir. May 18, 2017), the court concluded that Plaintiff Executive Jet Management (“EJM”) does not owe FET on management fees because the government failed to provide ade- quate notice pursuant to the duty of clarity doctrine: “Absent this notice, Aviation Business Journal | 2nd Quarter 2017
