Sept. 23, 2016

NBAA recently filed an amicus brief in the Fifth Circuit Court of Appeals supporting Bombardier Aerospace, the prior owner of fractional provider FlexJet, in its effort to challenge significant retroactive tax assessments.

The NBAA filing said that clear guidance has not been provided to fractional program managers on the application of federal excise tax (FET) to management fees and that similarly situated fractional program managers must be treated consistently by the IRS.

“NBAA got involved in this case because it is an example of the challenges businesses face when the IRS attempts to collect millions of dollars in retroactive taxes without clearly stating how the tax should apply,” said Scott O’Brien, NBAA senior manager of tax and finance policy. “We also continue to work directly with Congress, IRS and the Treasury Department on common sense guidance as to how FET applies to various business aviation operations.”

NBAA’s brief makes two key arguments:

  • First, the tax assessment against Bombardier/FlexJet goes against the IRS’s duty of consistency, because the IRS had held in an earlier technical advice memorandum, issued to Executive Jet Aviation (NetJets), that FET was not due on monthly management fees.
  • Second, the IRS violated its duty of clarity, regarding whether monthly management fees are included in the tax base, and whether they are considered payments for commercial transportation.


In a case in the federal district court for the Southern District of Ohio, the court found a “mountain of evidence” that the IRS’s 1992 TAM issued to NetJets’ predecessor applied FET to the occupied hourly fee and not the monthly management fee. Therefore, it is inconsistent for the IRS to hold Flexjet responsible for FET on monthly management fees.

“FET is like sales tax,” explained NBAA Tax Committee member John Hoover, who co-wrote the amicus brief. “The service provider is supposed to collect it and remit it to the government. Bombardier never collected FET from fractional owners on monthly management fees, because there was no clear guidance requiring them to do so.”

Even the IRS Audit Technique Guide on air transportation stated that no published guidance addressed the application of FET to management fees.

“When the guidance isn’t clear, the taxpayer cannot simply err on one side or the other,” said Hoover, special counsel at Cooley LLP. “If they don’t collect enough, they’re stuck paying a large tax bill out of their own pocket. If they over-collect FET on their fees, they’re liable to their customers for the excess collected.” For this reason, the Supreme Court has announced that companies like fractional program managers that are required to collect tax must have clear guidance from the IRS on what taxes must be collected.

Like NBAA’s advocacy work with federal regulators, this case is about the need for clear guidance, and for consistent treatment of member companies by the IRS. “We want to be on the record that holding fractional providers and aircraft management companies liable for these retroactive taxes is not fair and will have a devastating impact on business aviation,” said O’Brien.

NBAA filed the amicus brief in support of Bombardier’s motion for a rehearing by all of the judges on the Fifth Circuit. Motions for rehearing are only rarely granted, but in view of the compelling arguments asserted in this case NBAA is optimistic about the prospects for the request for a rehearing to be granted.

Review the amicus brief and related documents filed by NBAA. (PDF)

View the Fifth Circuit decision. (PDF)