--- url: 'https://www.fmjlaw.com/watching-for-potholes-on-a-newly-paved-road-why-aircraft-management-fees-the-irs-and-fet-still-deserve-your-attention/' title: 'WATCHING FOR POTHOLES ON A NEWLY PAVED ROAD: WHY AIRCRAFT MANAGEMENT FEES, THE IRS AND FET STILL DESERVE YOUR ATTENTION' author: name: Dan Ruzicka url: 'https://www.fmjlaw.com/author/druzicka/' date: '2022-07-29T16:54:45+00:00' modified: '2025-04-16T18:53:39+00:00' type: post categories: - Thought Leadership - Uncategorized tags: - Aviation image: 'https://www.fmjlaw.com/wp-content/uploads/2022/07/AdobeStock_415698401-scaled.jpg' published: true --- # WATCHING FOR POTHOLES ON A NEWLY PAVED ROAD: WHY AIRCRAFT MANAGEMENT FEES, THE IRS AND FET STILL DESERVE YOUR ATTENTION ***Seasons don’t fear the reaper*** ***Nor do the wind, the sun, or the rain*** ***We can be like they are*** ***Come on, baby (don’t fear the reaper)*** ***Baby, take my hand (don’t fear the reaper)*** ***We’ll be able to fly (don’t fear the reaper)*** ***Baby, I’m your man*** ***“Don’t Fear the Reaper” (Blue Öyster Cult)*** In 2012, the IRS declared war on business aviation, trying to change over 50 years of precedent with respect to the applicability of passenger Federal Excise Tax (FET) to Part 91 operations and aircraft management overnight. Anyone who was providing pilot and aircraft management services at that time will remember it well, but for those not keeping score, it went like this: The IRS issued a Chief Counsel Advice Memo (CCA 2012-10026) that claimed that the interpretations of FET rules had been wrong all along. Suddenly, the IRS claimed the tax that had applied only to commercial airline flights on a Delta or American or charter flights under Part 135, also applied to: - Flights where contractors provided pilot and other management services to private aircraft owners and operators. - All amounts paid to aircraft management companies, including for pilot hiring and training. - Maybe even amounts paid to reimburse the management companies for third party costs like insurance and maintenance. What followed was a years’ long industry scramble to try to adjust to the new IRS position and to push back against it. Overnight, industry contracts were changed to refer to “services” being provided instead of “aircraft management.” Companies that had previously employed pilots and fronted costs for their customers started shifting those burdens directly to the customers to avoid reimbursements from customers which were potentially subject to FET. And, as an industry, companies that were being audited pushed back hard and appealed rulings to stonewall the IRS in its revenue grab, led by NetJets in some high visibility cases.   All of this culminated in the 2017 Tax Cuts and Jobs Act which added a provision to the Internal Revenue Code (IRC) that exempts amounts paid by an aircraft owner for aircraft management services related to the maintenance and support of the owner’s aircraft and owner flights on such aircraft. Over three years later, the IRS issued final regulations to carry out the intent of the new FET exemption. So, after nine years of industry struggle, it appears things have gone back to the way they were prior to 2012. Which now undoubtedly leads you to ask – why is FMJ writing about this now? We’re writing now for two reasons. First, because we have encountered two situations in the last month where it has become obvious that not everyone understands the new FET landscape. And, second, because we are reminded that the FET statute and the final regulations are, honestly, unnecessarily complex and filled with pitfalls that can have serious consequences. So here are a few key, non-exhaustive take-aways that aircraft owners, lessees, aircraft management companies and charter operators should be considering. ## ***1.*     *What are “Aircraft Management Services” and who are “Aircraft*** ***Management Services Providers”?*** Since the topic of this article is the FET exemption applicable to aircraft management services, it is important to understand what the IRS considers to be “aircraft management services” and who are “aircraft management service providers”. *  Aircraft Management Services* The IRC definition of “aircraft management services” is quite broad and specifically includes: **   (i) assisting an aircraft owner with administrative and support services,** **    such as scheduling, flight planning, and weather forecasting,** **    (ii) obtaining insurance,** **    (iii) maintenance, storage and fueling of aircraft,** **    (iv) hiring, training, and provision of pilots and crew,** **    (v) establishing and complying with safety standards, and** **    (vi) such other services as are necessary to support flights operated by** **an aircraft owner.** The 2021 regulations also specifically list: **Any service (including, but not limited to, purchasing fuel,** **purchasing aircraft parts, and arranging for the fueling of an aircraft** **owner’s aircraft) provided directly or indirectly to an aircraft owner** **in order to provide air transportation to the aircraft owner on the** **aircraft owner’s aircraft at a level and quality of service required under** **the agreement between the aircraft owner and the aircraft** **management services provider.** *  Aircraft Management Services Providers* With the above in mind, an “aircraft management services provider” is quite simply anyone who provides aircraft management services to an aircraft owner (or lessee). This is slightly deceptive, though, because as will be seen below, the definition may include an aircraft owner who acts as a lessor of the aircraft and provides for any of the services above. ## **   2*.*     *Who are “Aircraft Owners” and why does it matter?*** *  Aircraft Owners (and Lessees)* The new FET rules do not specifically define “aircraft owner” so it means what it says – the actual registered owner of the aircraft. However, under the IRC and final regulations, aircraft lessees can also be considered an “aircraft owner” but only if they lease an aircraft other than under a disqualified lease. A “disqualified lease” is a lease from an aircraft management services provider with respect to an aircraft it provides aircraft management services to, as long as such lease is for a term of 31 days or more. Put another way, an aircraft lessee will be considered an “aircraft owner” for purposes of the FET exemption if: - the lessor is not an aircraft management services provider to the aircraft regardless of the term of the lease; or - the lessor is an aircraft management services provider to the aircraft, but the lease term is 31 days or more. *  Why Does it Matter?* The reason why being an “aircraft owner” is important is because only payments made by aircraft owners to aircraft management services providers for aircraft management services are exempt from FET, and without carefully analyzing the aircraft owner-aircraft management services provider relationship, the parties could end up going afoul of the exemption and facing a massive tax bill. Specifically, the IRS considered – and rejected – expanding the definition of aircraft owner to include affiliates. It also rejected the idea that payments for aircraft management fees by an affiliate would be exempt. ## ***3.*     *What are the Most Likely Pitfalls Aircraft Owners (and Lessees) and*** ***Aircraft Management Services Provider May Face?*** Likely, the three most common pitfalls we believe aircraft owners, lessees considered owners, and aircraft management service providers may face include:          ***Lessor Provides Aircraft Management Services Without Even Realizing.*** Even in dry lease situations, a lessor may provide certain “aircraft management services” to its lessee, although the lessee has all operational control of each of its flights by hiring its own pilots, paying for fuel, etc. Frequently, a lessor may desire to protect its aircraft investment by providing a hangar, insurance, maintenance and the like as part of the leasing relationship and fold that into the lease rate. But these are all “aircraft management services” under the FET rules and because anyone providing such services is an “aircraft management services provider” the lease term needs to be at least 31 days or more for the lessee to be considered an “aircraft owner” and the FET exemption to apply. If the lessee was not considered an “aircraft owner”, then the FET exemption is inapplicable and all payments made to the lessor could be subject to FET – meaning, the IRS could assess a hefty FET bill against lessor which the lessor could possibly force lessee to pay.          ***Qualifying leases must have a term in excess of 31 days or the usage may be subject to FET. ***The regulation itself is less than clear whether the lease must specify a term in excess of 31 days or it may simply occur in practice. Either way is probably fine, but aircraft owners (and lessees) who want to do a one-off or other short term dry lease may find themselves at risk for FET. If possible, it is a good idea to address this expressly and plan against it.   It is worth noting that if the lessee is not receiving aircraft management services of any kind from either the lessor or an aircraft management services provider, the 31 days does not apply in theory. Depending on this situation, however, leaves you potentially vulnerable in two ways, so it is still better to document the situation carefully.         *** What if the Wrong Party Pays Aircraft Management Services Provider?*** Remember that the IRS expressly considered and insisted that the FET exemption for aircraft owners only applies when the aircraft owner (or lessee) pays for the aircraft management services provider for the aircraft management services related to the owner’s (or lessee’s) aircraft. This can be a problem, however, in situations where an ultimate parent company with numerous subsidiaries has designated an entity to hire all employees or pay all expenses for multiple companies. Imagine an organization where one subsidiary may operate an aircraft (call it “Aircraft Co.”) managed by an aircraft management services provider (call it “Provider”), and another subsidiary of the parent may serve a treasury/payment function for parent and all other subsidiaries and affiliates (call it “Payment Co.”) and yet another subsidiary of the parent (an affiliate of both Aircraft Co. and Payment Co.) may use the aircraft on occasion and reimburse Aircraft Co. for such flights (call it “Limited Use Co.”). This scenario leads to the following considerations: - If Payment Co. pays Provider for aircraft management services directly for amounts owed by Aircraft Co., the FET exemption may be blown because Payment Co. is not the aircraft owner. The FET rules do allow an agent to make a payment on behalf of an aircraft owner for aircraft management services without running afoul of the FET exemption, but the IRS would likely take the position that Payment Co. is an affiliate of Aircraft Co. (which it is) and this does not create a principal-agent relationship and therefore FET was applicable to the payment. - On the positive side, the IRS has not generally changed its “affiliate group” rules that would allow one company to operate an aircraft for certain other affiliates in a parent-subsidiary structure, even with reimbursement of expenses. As such, the FET rules do not affect the ability of Limited Use Co. to reimburse Aircraft Co. for the limited use of the aircraft but any amounts owed to Provider for such flights must be paid by Aircraft Co. in the first place or FET will be applicable. As above potential pitfalls illustrate, aircraft owners (and lessees), their affiliated companies and of course aircraft management service providers need to carefully structure and understand their relationship or face potentially significant IRS issues. This includes directing how the money flows and following a properly set-up structure in practice. At this time, we are unaware of any audits or other attempts by the IRS to pursue these particular opportunities to collect FET on aircraft management services. But one can imagine that somewhere, someone at the IRS is looking rather smugly at this result, biding their time and thinking: “give it time, this is a gold mine.” In the meantime, all the rest of us can do is try the plan scrupulously to assure that we are not the subjects of those first audits, being handed large surprises. If you have any questions related to aircraft ownership, leasing and use structures and the application of federal excise taxes to such operations, please contact Kevin Johnson at [kevin.johnson@fmjlaw.com](mailto:kevin.johnson@fmjlaw.com). 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