Change in IRS Position Creates Additional Tax Exposure for Aircraft Management Companies and Aircraft Owners
Earlier this year, the Internal Revenue Service issued a Chief Counsel Advice (CCA 2012-10026) that addresses the taxability of aircraft management fees as amounts “paid for the taxable transportation of persons” that are subject to the 7.5% Federal Transportation Excise Tax imposed by §4261 of the Internal Revenue Code (the “FET”). The CCA’s analysis suggests that the IRS will insist that aircraft management companies collect FET on management fees and other amounts paid by owners under most garden-variety aircraft management arrangements. This is an unwelcome surprise, not only for management companies (which had assumed -- for decades -- that no such obligation existed), but also for their aircraft owner clients. In light of the CCA, management companies and owners may want to consider reviewing and re-casting their aircraft management arrangements – before the issue comes up on audit.
The CCA focusses on what were hitherto considered very customary arrangements between aircraft owners and aircraft management companies. In the scenarios addressed in the CCA, an aircraft owner hires a management company to manage aircraft operations, perform maintenance, and ensure regulatory compliance. The management company also provides qualified pilots, who are employees of the management company. The owner pays a monthly management fee and an hourly fee for each hour of flight time. In addition, the aircraft owner reimburses the management company for the costs of employing the pilots and any crew and for pilot training. In one of the scenarios, the management company is allowed to charter the aircraft to third parties under Part 135 of the Federal Aviation Regulations when the owner is not using it, and the management company and owner share the charter revenue.
The CCA concludes that the amounts paid by the aircraft owner to the management company under the described scenarios, including management fees and a variety of costs separately reimbursed by the aircraft owner, are subject to the FET. Because such payments are subject to the FET, the management company has the obligation to collect the FET from the aircraft owner and remit the collected tax to the IRS. Should the management company fail to do so, the FET can be collected from the management company directly by the IRS.Continue Reading...