April 30, 2012
Earlier this month, NBAA President and CEO Ed Bolen and members of NBAA’s Tax Committee met with IRS Chief Counsel William J. Wilkins, and urged him to reconsider his office’s recent guidance on aircraft management fees – guidance that could upend the industry.
In March, the Chief Counsel’s office released a memo (Chief Counsel Advice [CCA] 2012-10026) that breaks with years of precedent in tax audits by concluding that monthly management fees and reimbursements paid to aircraft management companies were subject to Federal Transportation Excise Tax (FET).
As it’s written, the conclusion that aircraft management companies provide commercial air transportation would apply retroactively, and any management company audited by the IRS could owe 7.5 percent of its aircraft management revenues for years of operations in taxes. “Those companies would quickly go out of business,” said Mike Nichols, NBAA vice president of operations, education and economics. “Because of the 7.5 percent rise in cost, owners would stop doing business with any management company audited in future years, forcing others out of business. It would be chaos.”
A Long History of Working With the IRS
While NBAA was dismayed with the Chief Counsel’s office’s conclusions, Association staff and Tax Committee members had been expecting the CCA for some time. In fact, NBAA has been working with the IRS to clarify the applicability of FET to management company fees for almost four years, since the publication of an audit technique guide (ATG) on air transportation taxes, which NBAA believed to be flawed.
“In 2008, in response to some questions from NBAA about the ATG, the IRS proposed a meeting to get a better understanding of the aircraft management industry and establish clearer guidelines for auditors,” said Joanne Barbera, founding partner of Barbera & Watkins and a member of NBAA’s Tax Committee. “The NBAA and the National Air Transportation Association met the IRS several times over the last four years, working together on an industry directive that would establish guidelines on when FET does or does not apply.”
Last summer, the IRS notified NBAA it would wait for the CCA to be issued before further engaging in the industry directive process.
At Issue: Possession, Command and Control
In the April 19 meeting with Mr. Wilkins, NBAA underscored that in a contract between a Part 91 aircraft owner and a management company, the legal concept of “possession, command and control” remains with the owner – and therefore the management company is not providing commercial air transportation service.
“The management company, which serves at the pleasure of the owner, is hired to perform day-to-day services,” explained John Hoover, senior counsel at Dow Lohnes and a member of the NBAA Tax Committee. “The owner has the ultimate say over when and where the aircraft flies, which is absolutely relevant because that’s what the aircraft is for: travel.”
Hoover, Barbera and Nichols made these points in the April 19 meeting with Wilkins and his staff, which lasted more than an hour and a half. To drive this point home, NBAA President and CEO Ed Bolen offered a simple illustration:
“If an aircraft owner were to show up at the management company’s hangar with pilots and fly the airplane somewhere unannounced, it might upset the management company, but it’s within the owner’s rights,” said Bolen. “However, if the management company were to take the airplane and fly it somewhere without the owner’s permission, that would be theft.”
NBAA Asks IRS Not to Assess the Tax Retroactively
While NBAA explained these issues of possession, command and control to oppose the new policy guidance set forth in the CCA, the Association’s first request in the meeting with the IRS was to make the CCA prospective instead of retroactive. To be clear, NBAA believes FET should not apply to Part 91 aircraft management – retroactively or prospectively – however, if the IRS were to follow the CCA, applying the guidance retroactively would be harmful and inequitable.
“There’s a higher burden on the law to be clear when it comes to a collected tax,” said Hoover, referring to taxes like FET and sales tax that are collected by intermediaries and remitted to the government. “Imposed retroactively, the whole burden of a collected tax would fall on management companies that are audited. That would not be a fair and equitable tax.”
As the Tax Committee reported, the Chief Counsel’s office was receptive to their arguments. The IRS has already responded, requesting data from NBAA on the size and scope of the aircraft management industry, and estimates on the impact of the new FET guidance. For more information, review NBAA’s resources on FET and management companies.