The IRS Steps Back on FET for Managed Aircraft Services

August 2017

Two developments are signaling a shift in the position of the Internal Revenue Service (IRS) on subjecting managed aircraft services to federal excise taxes.  As Special Agent Dale Cooper of Twin Peaks fame would say, “When two things happen simultaneously pertaining to the same object of inquiry we must pay special attention.”

First, in a mostly unreported move, the IRS recently stipulated to a final judgment in the longstanding case of Netjets Large Aircraft, Inc. et al, v. United States of America in the Federal District Court in the Southern District of Ohio.[1]  The stipulation mostly sustained the findings in favor of NetJets from 2015, resulting in an entry of an Amended Final Judgment.  The IRS then voluntarily dismissed the case, cutting off any further appeals.

Second, as frequent readers here will know, the IRS had also pursued many other aircraft management companies FET audits nationwide in the last few years (click here to read that post).  Law firms and accounting firms involved in such audits may have noticed the same activity that our firm witnessed recently as pending audits were suddenly dismissed with no additional assessments.  As much as we would like to take credit for holding the IRS at bay, National Air Transportation Association (NATA) President Martin H. Hiller recently reported that the IRS has decided to close existing FET audits and forego additional audits “while it developed guidance on the tax treatment of aircraft management issues.”[2]  The IRS cited that it was taking these actions in the interest of what the NATA has described as, “sound tax administration.”

At this moment, it is impossible to know how the issue will be resolved going forward.  As we have reported before, bipartisan legislation was introduced into both the House of Representatives and the Senate which, if passed, would have overturned the IRS’s FET interpretation for managed aircraft services. That legislation has gone nowhere.  We expected the issue to raise its head in the Federal Aviation Administration Reauthorization Act of 2017, but the issue was not found in the Act.  And it is yet to be seen if the IRS is undertaking a rulemaking of its own accord, as has been previously speculated. For the future, we can only wait and see.

The thing we can note is that the business aviation community can take a great deal of pride in how it dealt with the issue to date.  In a group effort, audit by audit and through lobbying and litigation, this community managed to fend off the IRS from summarily changing fifty years of interpretation of its rules without following due process.  And for that, kudos are in order.  Well done.

If you need further information on these or related matters, contact Kevin Johnson at 952-995-9576 or kevin.johnson@fmjlaw.com or Garrett Caffee at 952-995-9500or garrett.caffee@fmjlaw.com. Click here to learn more about our Transportations and Logistics practice group.

[1] Southern District of Ohio, Eastern District, Case. No. 2:11-cv-1023.

[2] http://www.ainonline.com/aviation-news/business-aviation/2017-07-17/irs-shelve-pending-audits-aircraft-management-fees