Legislation Introduced Regarding IRS’s FET Interpretation For Managed Aircraft Services

March 2017

Lost amidst the hubbub in Washington, D.C. this spring, bipartisan legislation was introduced in both the House of Representatives and the Senate which attempts to resolve a contentious issue pushed by the IRS. In March of 2012, the IRS issued a Chief Counsel opinion that management services provided for privately operated aircraft are all subject to commercial airline ticket taxes, the same as a ticket on Delta Air Lines or any other scheduled service. This interpretation changed fifty years of precedent and threw the U.S. aircraft management world into turmoil.

In essence, the IRS applied a 7.5% federal excise tax on all amounts paid for management services (including crew, flight planning services, insurance, and maintenance) and did so both retroactively and proactively.  They also began aggressively auditing based on the change and began assessing massive tax liabilities and penalties. The impact from these actions rippled throughout the industry and created incredible uncertainty among aircraft owners and management companies. Aircraft owners and managers, beginning with NetJets, pushed back with litigation, audit challenges and political push-back, which eventually resulted in the IRS informally placing this new policy tax on hold until they could proceed with a rulemaking – which has not been forthcoming. Meanwhile, due to the uncertainty of the IRS’s opinion and enforcement, management companies were left to choose from two unfavorable situations: to collect the commercial airline taxes from their clients in accordance with the current on-hold opinion, or apply the aviation fuel tax instead and remain subject to hefty IRS assessments down the road should the IRS lift the hold and begin enforcing their policy.

The recent legislation, H.R. 896 and its companion bill, S. 321, were introduced by Rep. Pat Tiberi (R-12-OH) and Sen. Sherrod Brown (D-OH), respectively. If passed, they would clarify that management services provided to owners of business aircraft are non-commercial and are subject only to the aviation fuel tax instead of the airline ticket tax. While this is not the first time that this legislation has been introduced, the previously proposed bills did not make it out of committee and did not have bipartisan support. Whether or not the most recent proposals will garner enough support to make it out of committee and pass both the House and Senate remains to be seen, but supporters of the bill hope that at a minimum, it would be included in the discussions for the FAA reauthorization bill.  The current iteration of the FAA reauthorization bill expires on September 30th of this year.

This post was written by Transportation & Logistics attorney Garrett Caffee. If you have any questions or would like to learn more about this legislation, contact Garrett at 952-297-5791 or garrett.caffee@fmjlaw.com.