A U.S. District Court has found that Executive Jet Management is not liable for $9.7 million in federal excise taxes the Internal Revenue Service assessed for aircraft management services the company provided for aircraft used in charter operations. The U.S. District Court for the Southern District of Ohio on November 12 found that “the government failed to provide EJM with precise and not speculative notice of EJM’s potential tax collection obligation.” Without adequate notice, the court added, “it would be unfair to hold EJM secondarily liable for taxes owed by its customers.” The IRS had sought the taxes for services provided between April 2005 and June 2009.
The finding followed a ruling in January in which the court invalidated federal excise tax assessments that the IRS attempted to collect from EJM parent company NetJets. The court withheld judgment on the EJM portion of the lawsuit at that time to further review whether the government provided adequate notice.
While the case is specific to EJM, it is among the lawsuits closely watched since industry has been working with the IRS on the tax treatment of management fees. The IRS released guidance in 2012 that deemed management fees commercial activities that are covered under the federal excise tax on air transportation (the so-called ticket tax). That memorandum has led to numerous audits and hefty assessments. After an outpouring of opposition, the IRS agreed to set aside enforcement of the levies while it reviews the policy. It has not yet issued new guidance, but lawmakers in both the House and Senate have recently introduced legislation to specify that the management fees are not subject to the ticket tax.