Flight Options Finally Wins IRS Management Fee Tax Case

The case of Flight Options versus the U.S. has finally been resolved, according to a May 27 filing from the United States Court of Appeals, Sixth Circuit.

Flight Options was a fractional-share flight operation founded by Kenn Ricci that later merged with Raytheon Travel Air, and was eventually acquired by Ricci's Directional Aviation Capital. In 2007, Flight Options was subject to a federal excise tax audit by the Internal Revenue Service (IRS), which claimed that the excise taxes that apply to commercial (including Part 135) flights—the so-called 7.5% “ticket tax”—should be assessed for other costs such as management fees. The IRS’ move to tax ancillary fees also ensnared NetJets and Bombardier, which then had its own fractional-share operation.

In an amendment to the tax code in 2012, instigated by Congress, fractional-share owners were exempted from such taxes. But the Flight Options litigation continued as it applied to pre-2012 flights, and the government wanted to impose a $39 million judgment on Flight Options ($24 million in uncollected taxes on fixed fees, plus interest and penalties).

The court concluded that “Flight Options’ fixed fees do not constitute payments for ‘transportation by air.’ The monthly and membership fees provide neither a ‘fare’ nor a ‘ticket,’ nor ‘the right to transportation.’ They instead provide the option to purchase flight hours—an option that fractional owners and jet members may exercise only after paying the hourly usage fee.

“Because the ticket tax applies only to usage charges for each flight and not fixed charges for overhead and management costs, we reverse [the previous decision against Flight Options],” the court concluded.

Flexjet responded to AIN's query about the case and said it had nothing further to offer besides what was outlined in the court’s opinion.