FETs: With Congressional Relief Comes More Questions

The business aviation community finds itself once again awaiting guidance from the IRS on how to approach taxes on aircraft management fees, despite a recently passed congressional measure intended to provide clarity on the issue.

The business aviation community for years has sought guidance on the issue with seemingly conflicting interpretations and rulings coming out of the IRS. The issue came to a head in 2012 when the IRS released a controversial memorandum suggesting that aircraft management activity constituted commercial activity and associated fees were subject to the same federal excise taxes (FETs) assessed on airline tickets. The 2012 memorandum spurred numerous audits and hefty tax bills in the management community. This generated an outcry from industry groups, and in response, the IRS agreed to suspend the assessment of the taxes until it came up with more definitive guidance.

The audits continued, but the assessments remained pending. After several years and no guidance forthcoming, Congress became involved, offering various measures to exempt management fees from commercial air transportation FETs.

Ultimately, last summer, the IRS began to close the audits that had been hanging fire—some for many years. Conklin & de Decker vice president Nel Stubbs told a session during this year’s National Air Transportation Association Annual Meeting & Aviation Business Conference that by last summer she still had five clients with outstanding audits—one that came with a $2 million tax liability—and all were closed.

Industry groups were unclear what led to the closing of the audits but believe the increasing congressional involvement and the length of time that the audits had been pending may have played a role in this decision. “It was almost as if it were a tacit admission that [they] hadn’t been clear or concise…but they also saw the writing on the wall,” Jacque Rosser, senior advisor, regulatory affairs for NATA, said, also during the association’s Aviation Business Conference session on the aircraft management tax status.

New Guidance Means More Questions

Congress in late 2017 took concrete steps to finally resolve the aircraft-management taxation matter, passing a measure as part of the Tax Cuts and Jobs Act that essentially exempts management fees from commercial air transportation FETs.

The measure was broadly welcomed from a business aviation community heavily reliant upon aircraft management. But the IRS’s early interpretation of that congressional measure is raising another round of questions, and again no definitive guidance has been forthcoming. “Often when you get the answer to one question, it leads to several more,” Rosser said.

Of concern to the industry, NATA and NBAA said, were references to the aircraft-management tax measures in an initial policy document (Publication 510) that were “not consistent with the statute of congressional intent.”

NATA and NBAA met with the IRS this spring on those issues and followed up with a letter that spelled out a number of their questions and concerns and asked for formal guidance. The groups are asking that the agency add the issue to its Priority Guidance Plan for 2018-2019. But it remains unclear when such guidance might be released.

With the voluminous tax bill passed last year, the IRS has numerous high-priority tax issues. Competing for attention on aircraft-management taxation could be difficult, said Jorge Castro, founder and principal of Castro Strategies. “Our goal is to get this issue back in the priority guidance and to get certainty for the industry,” Castro said.

The “knowns” at this point are the two opposite ends of the spectrum, said David Norton, partner with Shackelford, Bowen, McKinley, & Norton. On the one hand, the FETs clearly do not apply for management services provided for an aircraft that is owned and solely operated by that company and registered in that company’s name. On the other hand, the commercial FETs do apply for charter services. But it gets murkier for everything in between.

This initial IRS publication indicates that when an aircraft is available for third-party charter or involved in a fractional ownership program, “payments for management services are not covered by the exemption in the new provision,” NBAA and NATA note to the IRS in their letter, and said, “We believe this to be incorrect, as the use of an owner’s aircraft for third-party charters, or as part of a fractional ownership program, should have no impact on applicability of the new provision.”

The legislation specifies the exception is for “certain payments related to the management of private aircraft from the excise taxes imposed on taxable transportation by air. Exempt payments are those amounts paid by an aircraft owner for management services related to maintenance and support of the owner’s aircraft or flights on the owner’s aircraft.”

This makes it clear, the association said, that to be exempt, payments must be amounts paid by an aircraft owner, and the payments must be for aviation-management services or flights.

The definition of an owner creates confusion, particularly in cases involving certain lease agreements, aircraft ownership trusts, or other legal and/or financial structures. In their letter to the IRS, the associations expressed a belief that parties related to the owner should be considered an extension of the owner and treated as such, whether a subsidiary, LLC, or other related parties.

Another gray area is when the aircraft is operated under Part 135 for the owner. “If an aircraft owner elects to conduct flights on its own aircraft under Part 135, payments made by the owner for those flights should qualify for the exemption under the [congressional] provision in the same manner as a flight conducted under Part 91,” the groups told the IRS.

Further, the groups acknowledge that the FET applies in cases where the aircraft is operated for third-party charter, but “amounts paid by the owner for management services in support of the owner’s aircraft are not payments for transportation and thus covered by the exemption.”

The means of assessing the charges for services should not affect the status of management services, NBAA and NATA further told the IRS. For instance, if a management firm charges an hourly rate for aircraft-management services, it should still be exempt.

Another area of concern that the associations addressed in their letter to the IRS, as well as discussed by the panelists at the NATA Aviation Business Conference, is what services are exempt from the commercial FET. The congressional legislation specified a number of these services: administrative and support services, such as scheduling, flight planning, and weather forecasting; securing insurance coverage; overseeing maintenance, storage, and aircraft fueling; hiring, training, and providing pilots and crew; and complying with safety standards.

The legislation further added a more catchall category: “such other services as are necessary to support flights operated by an aircraft owner.”

The groups appealed to the IRS to include in that category activities such as purchasing parts, fuel, or other items on behalf of the aircraft owner.

“Clearly, the purposes of the…provision would be frustrated if the taxpayers were put in the position of having to argue the PCC [possession, command, and control] issue with respect to such unlisted items.”

Since FET determinations are made on a flight-by-flight basis, the groups add, once covered by the provisions, costs such as the purchase of aircraft services should not constitute commercial transportation.

As for the open audits, the organization appealed to the IRS to make sure they are all settled, noting they were aware of a few still not closed. The groups urged the IRS to include assurances in its guidance that it will not pursue FETs in the open tax years leading up to the passage of the congressional measure.

NATA’s Rosser stressed that despite the open questions and lack of a timeline for guidance, the good news is “we’re still able to meet with [the IRS] and we’re still talking with them.” She also stressed that even if some of the determinations might not be acceptable to all, “It’s better to have an answer than to find ourselves back where we were.”