AIRLINE'S SALE OF FARE COUPONS IS HELD TAXABLE.

Index Nos.: 4261.00-00

November 14, 1980

Refer Reply to: T:I:WEA:1:2

M is an airline company engaged in the business of providing transportation of persons by air between points within the United States. M plans to contract with independent travel agents ("Contractors") for the sale of X coupons to them for resale to the general public. The coupons would be honored by M on any flight that has a tariff rate at the time the coupon was sold equal to the fare set forth on the face of the coupon, even if there has been a subsequent fare increase. The sale of the coupons under this program will not guarantee a passenger a seat as the passenger would still be required to make reservations. The coupon merely indicates that M has received a payment for the flight.

Full payment by the contrctor would be required at the time of the sale. The Contractor would then be able to resell these coupons at whatever price he wishes or he could use it himself. M would receive no additional compensation if its Contractors sold the coupon for more than they paid for it nor would M be required to refund any amount to the Contractors if they sold the coupon for less.

M proposes that the Contractors would purchase X coupons at a discount of 10 percent from the individual tariff fare, plus excise tax, computed on the individual tariff fare. M has presented the following example based on the 8 percent rate that was in effect prior to October 1, 1980: If a $24.00 coupon represents a published fare of $22.22 (plus 8% tax of $1.78) M would charge the Contractor $20.00 ($22.22 less 10%) but collect an excise tax of $1.78 (8% of $22.22).

Section 4261(a) of the Code imposes a tax on amounts paid for taxable transportation of persons by air. Section 4262 defines "taxable transportation" as including transportation by air that begins and ends in the United States.

Section 4261(d) of the Code provides that the tax imposed by this section shall be paid by the person making the payment subject to the tax.

Section 4291 of the Code provides that every person receiving any payment for facilities and services on which a tax is imposed upon the payor thereof under section 4261 shall collect the amount of tax from the person making such payment.

Section 49.4261 -- 7(f) of the Facilities and Services Excise Tax Regulations provides that the tax applies to prepaid orders, exchange orders, or similar orders for transportation, and to additional amounts paid in procuring transportation in connection with the use of such orders.

Rev. Rul. 70-381, 1970 -- 2 C.B. 270, holds that nominal fees paid by airline employees for space available seating on company flights are subject to the tax imposed by section 4261.

Because the X coupons are redeemable by M for air transportation after their sale to the Contractor, the sale to the Contractor is a sale of taxable transportation of persons by air on which the section 4261(a) tax is imposed.

As indicated by Rev. Rul. 70-381, the amount paid on which the tax is imposed is the actual amount paid, not the value received by the payor. Thus, in the example presented by M above (and using the S percent rate for purposes of illustration and consistency), where the Contractor pays $20.00 (tax excluded) for a coupon which has a face value of $22.22 (tax excluded) the Contractor would only have to pay M a tax of $1.60 (8% of the amount paid).

Accordingly, M is required to collect, report, and pay over to the government an air transportation tax under section 4261(a) of the Code that is based on only the amount it actually receives from its Contractors for the X coupons. M has no further obligation to collect and report tax, if any, on the subsequent sale of the X coupons by the Contractor.

We cannot rule to M on the consequences of its Contractor's sale of the X coupons as M would neither be the person making the payment subject to the possible tax, nor would it be the person receiving such a payment. See section 4.03 -- .04 of Rev. Proc. 80-20, 1980 -- 26 I.R.B. 7 (copy enclosed).

Very truly yours,