Section 4261 excise tax, monthly management fees fractional-aircraft-ownership program

Section 4261 excise tax, monthly management fees

The U.S. Court of Appeals for the Fifth Circuit today affirmed a federal district court’s grant of summary judgment for the government in a refund case concerning federal excise tax on fees collected from participants in a fractional-aircraft-ownership program. The Fifth Circuit agreed that under the “possession, command, and control test,” the taxpayer provided a crew, insurance, and all operations and maintenance, and with this finding, the excise tax was due under section 4261 for taxable transportation.

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The case is: Bombardier Aerospace Corp. v. United States, No. 15-10468 (5th Cir. July 25, 2016). Read the Fifth Circuit’s 25-page decision [PDF 212 KB]

Background

The taxpayer operated a fractional-aircraft-ownership program that allowed participants to have on-demand access to a fleet of aircraft via a dry lease exchange pool. The taxpayer provided all management services necessary to support the program, including scheduling maintenance, securing insurance, and staffing the aircraft with qualified pilots and crew.  In exchange, the taxpayer charged three types of fees to the participants:

  • Monthly management fees (fixed charges covering aircraft costs regardless whether or not the aircraft was flown) (“Management Fees”)
  • Variable rate fees (costs associated with flight time) (“Variable Fees”)
  • Fuel component adjustment (fuel fees covering fuel costs not otherwise included in the other fees) (“Fuel Fees”)

During the period 2006 and 2007, the taxpayer collected federal excise tax under section 4261 on the Variable Fees and Fuel Fees and remitted the amounts of tax to the IRS. It did not collect and remit excise tax on the Management Fees. 

The IRS audited the taxpayer and assessed excise tax on the Management Fees. The taxpayer objected, claiming it had not been subject to this tax during the 11 years prior to the audit, that it had undergone two audits by the IRS, and that there had been no change to its business practice or the law. 

When the dispute could not be resolved, the taxpayer paid a portion of the excise tax assessed on the Management Fees and filed a refund suit in federal district court.  In its motion for summary judgment, the taxpayer also asserted it owed no excise tax under section 4261 on any of the fees it had collected and sought a refund of the excise taxes paid on those fees.  

The government filed a counterclaim for the unpaid excise taxes on the monthly management fees, and asserted that the taxpayer lacked standing to bring a refund lawsuit for the taxes paid on the other fees. The district court agreed, and held that the IRS had properly assessed tax on the fees.

Fifth Circuit

The Fifth Circuit first turned to consider the question whether the taxpayer was entitled to a refund of the excise taxes paid on the Variable Fees and Fuel Fees. The Fifth Circuit concluded that the district court had properly dismissed this portion of the refund claim because the taxpayer had not met the statutory requirements to sue—that is, the taxpayer had neither filed an administrative claim for refund nor met the conditions required by section 6415.

Next, the Fifth Circuit looked to the taxpayer’s claim that it was not liable for the excise tax imposed by section 4261 on amounts paid for taxable transportation because it was not engaged in “commercial aviation.”  Alternatively, the taxpayer argued that the Management Fees were fixed costs, unrelated to actual air transportation and, thus, were not amounts paid for taxable transportation.

With respect to taxpayer’s first argument, the district court had looked to the “possession, command, and control test” to determine whether the taxpayer was providing taxable transportation services or was merely acting as an aircraft owner’s “agent” by providing limited operational maintenance services, for which no tax would be due.  Because taxpayer acted as the “principal” by providing a crew and insurance, among other things, the district court held that taxpayer was providing taxable transportation subject to tax under section 4261. Although taxpayer argued that it was not providing commercial aviation, the Fifth Circuit disagreed that taxpayer’s arguments were applicable. Rather, the Fifth Circuit agreed that the possession, command, and control test was the proper framework to analyze an entity’s section 4261 tax liability, and looking to guidance in IRS revenue rulings, concluded that the taxpayer was in possession, command, and control of the means of transportation and was required to submit section 4261 excise tax on fees collected from the fractional-aircraft-ownership program’s participants.

Turning to address the taxpayer’s second argument—that the Management Fees cannot be categorized as amounts paid for taxable transportation—the Fifth Circuit found that the district court had not erred.  Because the Management Fees must be paid in order for the program’s participants to receive air transportation, the fees were “amounts paid for taxable transportation” and thus were subject to the excise tax.

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