IRS excise tax written determination and excise tax case

Aircraft Club / Issue 38 /April 2015
Applicability of excise tax to prepaid jet cards p1 / Excise tax case p2
IRS excise tax written
determination and excise tax
case
This month's issue of the Aircraft Club newsletter discusses a recent IRS Chief Counsel Advice on
application of excise taxes to prepaid jet cards; and summary of a recent excise tax case, both of which
are noteworthy aircraft issues.
IRS rules on section 4261(a)
taxation of prepaid air travel
cards
Cruising altitude
A recent IRS Chief Counsel Advice (CCA)
addressed whether the price paid for prepaid air
travel cards is an amount paid for taxable
transportation subject to the section 4261(a)
excise tax on air transportation.
Stuck on the runway
The CCA addressed whether the 7.5% excise tax
applies to amounts paid for prepaid flying
programs, using ‘jet cards’ as a means to
purchase air transportation. In general, these
programs provide for the sale of fixed hours for a
set price for the purpose of charter air
transportation on aircraft owned and operated
by third parties. In the CCA, the jet card is valid
for a 12-month period and covered, on average, a
period of 25 hours of flying time, and all flights
originated and ended within the United States.
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Section 4261(a) imposes an excise tax of 7.5% on the amount paid for taxable
transportation. Taxable transportation for these purposes is defined as transportation by
air which begins in the United States or in the 225-mile zone (i.e., portions of Canada and
Mexico within 225 miles of the continental United States) and ends in the United States
or in the 225-mile zone.
The CCA references examples in the regulations as well as revenue rulings providing that
amounts paid as a condition to receiving air transportation are subject to the 7.5% excise
tax. Thus, amounts that must be paid to get on the aircraft are subject to the excise tax.
Jet cards entitle the purchasers to actually get on a flight, and according to the IRS, are
virtually ticket substitutes. Consequently, the CCA determined that the section 4261(a)
excise tax would apply to the amount paid to purchase the jet card, and the seller must
collect the tax at the time of the sale.
The CCA also reviewed the applicability of the excise tax to amounts paid for a prepaid
gift card from a commercial air carrier. As the gift card does not permit the bearer to
board an airplane, the gift card is viewed as a cash equivalent. Thus, the excise tax does
not apply when commercial airline gift cards are purchased, but rather when it is used to
purchase a ticket from the commercial air carrier.
Excise tax case
Cruising altitude
A recent federal district court case looked into the issue, among other issues, of what fees
charged in connection with fractional and managed aircraft constitute an amount paid for
taxable transportation for purposes of the section 4261(a) excise tax discussed above.
Stuck on the runway
In Bombardier Aerospace Corporation v. United States, the U.S. District Court for the
Northern District of Texas held, through summary judgment, that Bombardier, a thirdparty management company, lacked standing to challenge the IRS’ collection of excise
taxes on monthly management fees Bombardier charged its clients.
Bombardier, through its Flexjet program, provides management services to aircraft
owners and leaseholders of fractional interests in aircraft. In such a program, Bombardier
collects three types of fees: monthly management fees, variable rate fees, and fuel
surcharge fees. It had collected the 7.5% excise tax on just the variable rate fees and the
fuel surcharge fees, and not the monthly management fees.
Despite IRS concessions on audit of prior tax years, the IRS assessed the excise tax on
monthly management fees for the years at issue in the case. When Bombardier and the
IRS were unable to resolve the issue, Bombardier paid a portion of the excise tax on the
monthly management fees for the years at issue. Subsequently, Bombardier initiated this
action to seek recovery of the excise tax paid (and to abate the assessment of the excise
tax on monthly management fees). The refund action also included a claim to recover
excise taxes assessed and paid for variable rate fees and fuel surcharge fees, alleging it
overpaid the excise tax on those amounts for the years at issue.
With regard to the variable rate and fuel surcharge fees, the District Court concluded that
Bombardier lacked standing and thus dismissed Bombardier’s claim. With regard to the
monthly management fees, the court concluded that the government was entitled to
summary judgment and denied Bombardier’s claim for refund and abatement of federal
excise tax. Among other factors affecting its conclusion, the court concluded that
Bombardier had possession, command and control of the program aircraft, and therefore
properly owed federal excise tax on the monthly management fees.
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It should be noted that this case involved tax years prior to Congress’ enactment of
section 4043 in 2012, which increased the fuel tax rate for fractional aircraft in lieu of the
7.5% excise tax on amounts paid for taxable air transportation under section 4261(a).
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Rick Farley, New York
+1 (646) 471-4084
[email protected]
© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers (a
Delaware limited liability partnership), which is a member firm of PricewaterhouseCoopers International Limited, each member
firm of which is a separate legal entity.
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This content is for general information purposes only, and should not be used as a substitute for consultation with professional
advisors.
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