Supreme Court: NBAA challenges incorrect IRS application of federal excise tax

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The National Business Aviation Association this week filed an amicus brief urging the U.S. Supreme Court to review a Fifth Circuit decision on the IRS’s incorrect assessment of federal excise tax (FET) on management fees paid to fractional aircraft providers.

In the 2016 decision, the Fifth Circuit upheld a ruling that monthly management fees charged by FlexJet, once owned by Bombardier Aerospace, were subject to FET.

When Bombardier last year appealed the Fifth Circuit’s decision, asking the full court of appeals to reconsider siding with the IRS, NBAA filed an amicus brief supporting the company. The Fifth Circuit denied that request, and Bombardier is asking the Supreme Court to hear the case.

NBAA’s amicus brief now, as then, argues the IRS never provided precise guidance to fractional programs on the application of FET to aircraft management fees.

“Like sales tax, FET is a tax vendors collect from their customers and remit to the IRS. Vendors, including fractional providers, need clear guidance on whether they owe the tax or not,” said Scott O’Brien, NBAA senior manager of finance and tax policy. “When it comes to FET and aircraft management fees, the record shows IRS has not been clear or consistent.”

The original tax assessment against Bombardier/FlexJet in 2004 contradicted the IRS’s earlier technical advice to FlexJet’s competitor, NetJets. In a 1992 memo to NetJets, the IRS had stated that FET was not due on monthly management fees. More recently, in a 2015 case involving NetJets, a U.S. District Court found “a mountain of undisputed evidence” supporting the conclusion reached in the 1992 memo that management fees are not subject to FET.

NBAA’s amicus brief to the Supreme Court argues that “the Fifth Circuit’s holding in this case will disrupt the aviation industry. It leads to significant business challenges and disparate treatment among direct competitors in the industry.” Now that Bombardier has asked the Supreme Court to hear the case, the government has the opportunity to submit a brief of its own. The Supreme Court’s term usually concludes by July of each year.

“This case pertains to management fees for fractional programs, where FET is being assessed retroactively,” said O’Brien. “It’s distinct from, but related to, the equally improper application of FET to whole aircraft management companies.”

Earlier this year, NBAA welcomed bipartisan legislation in the House and Senate that finally makes clear aircraft management services are not commercial aviation. Learn more about that legislation.

“NBAA is continuing to work with Congress, the IRS and the Treasury Department to resolve the confusion surrounding the applicability of FET for aircraft management companies,” said O’Brien, “and we are supporting this bill that finally does that.”

BlueSky Business Aviation News | 23rd March 2017 | Issue #409