Aircraft Management Company Not Liable for Transportation Excise Tax

In its January 26, 2015 Opinion and Order [ECF No. 136],¹ the Court already addressed the cross-motions for summary judgment filed by the Government [ECF No. 103] and the other Plaintiffs in this case (i.e., NetJets Aviation, Inc., NetJets Large Aircraft, Inc., and NetJets International, Inc.) [ECF No. 61]. In that Opinion, the Court also addressed one of the arguments made in EJM's motion for summary judgment [ECF No. 62] -- whether EJM provides "taxable transportation" under 26 U.S.C. § 4261. The Court determined that a genuine issue of material fact exists as to whether EJM provides taxable transportation. (Jan. 26, 2015 Op. & Order at 33.)

Only two issues remain before the Court on summary judgment: (1) whether the Government provided adequate notice of EJM's potential obligation under 26 U.S.C. § 4261 to collect the air transportation excise tax on payments made by some of EJM's customers; and (2) whether the Government fulfilled its alleged duty to apply the § 4261 tax to EJM in a manner consistent with the Government's application of the tax to other similarly situated taxpayers. For the reasons that follow, the Court GRANTS EJM's motion for summary judgment [ECF No. 62] on the issue of adequate notice and DENIES the Government's motion for summary judgment [ECF No. 93) on that issue. Because the Court's determination of the notice issue resolves the parties' dispute, the Court does not address EJM's duty of consistency claim.

In short, EJM operates an aircraft management business in which it provides aviation services to owners of whole aircraft. (Noe Suppl. Decl. ¶¶ 2-3 [ECF No. 105-1).) Owners select the services they want from EJM on an a la carte basis in the management contracts that they enter. (Id. ¶ 5.) EJM also operates a commercial air charter business, selling charter flights to the general public. (Id. ¶ 4.) Owners choose whether or not EJM can use their aircraft as part of the company's charter service for third-party customers.

The IRS has assessed the § 4261 tax against the monthly management fees and pass-through costs paid by EJM's customers (i.e., the aircraft owners) for the tax periods April 1, 2005 through June 30, 2009.² The IRS, however, drew a distinction between owners who put their aircraft in EJM's charter business and owners who did not. EJM was liable only for its customers who entered their planes into the charter business, according to the IRS. Though EJM did not collect any § 4261 taxes from aircraft owners, it did collect and remit § 4261 taxes on all of the charter flights with third parties. Thus, the assessment at issue here relates only to payments received from owners who chose to make their aircraft available for use in EJM's charter program. The § 4261 tax for the relevant periods totals more than $9.7 million. (Garvey Decl. ¶ 15 [ECF No. 62-2].)

In evaluating a motion for summary judgment, the evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970); see Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000). However, the existence of a mere scintilla of evidence in support of the nonmoving party's position will not be sufficient; there must be evidence on which the jury reasonably could find for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986); see Copeland v. Machulis, 57 F.3d 476, 479 (6th Cir. 1995); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986) (finding reliance upon mere allegations, conjecture, or implausible inferences to be insufficient to survive summary judgment).

Here, the parties have filed cross-motions for summary judgment. Each party, as a movant for summary judgment, bears the burden of establishing that no genuine issue of material fact exists and that it is entitled to a judgment as a matter of law. The fact that one party fails to satisfy that burden on its own Rule 56 motion does not automatically indicate that the opposing party has satisfied the burden and should be granted summary judgment on the other motion. In reviewing cross-motions for summary judgment, courts should "evaluate each motion on its own merits and view all facts and inferences in the light most favorable to the non-moving party." Wiley v. United States, 20 F.3d 222, 224 (6th Cir. 1994). The standard of review for cross-motions for summary judgment does not differ from the standard applied when a motion is filed by one party to the litigation. Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991).

Here, the published guidance from the IRS regarding whole-aircraft management services failed, as a matter of law, to provide EJM with precise and not speculative guidance regarding EJM's obligation to collect the transportation excise tax under § 4261. Regardless of whether the transportation excise tax applies to the monthly management fees and pass-through costs paid by EJM's customers, EJM is not liable for the tax. Given that the Court grants summary judgment in favor of EJM on its notice claim, the Court does not address EJM's duty of consistency claim.

A. Notice of EJM's Potential Tax Collection Obligation

EJM argues that even if the air transportation excise tax applies to the whole-aircraft management services that it provides, EJM is still not liable for the excise tax. (See EJM's MSJ at 5-6 [ECF No. 62]; EJM's Suppl. Mem. at 1 [ECF No. 169].) EJM contends that "the IRS cannot hold a person secondarily liable for failure to collect a tax unless the IRS previously provided that person with 'precise and not speculative' guidance that it had an obligation to collect the tax." (EJM's Suppl. Mem. at 2 (emphasis deleted).) This obligation stems from the United State Supreme Court's decision in Central Illinois Public Service Company v. United States, 435 U.S. 21 (1978). (EJM's Suppl. Mem. at 2.) After reviewing Revenue Ruling 58-215 (purportedly the only published guidance specifically addressing EJM's situation), EJM insists that, here, the IRS failed to provide precise and not speculative guidance regarding EJM's obligation to collect the transportation excise tax. (Id.) EJM bolsters its notice argument by pointing to the IRS's inconsistent actions, shifting positions, and internal confusion regarding the application of the excise tax to whole-aircraft management services. (See id. at 7-26.) Because the IRS allegedly failed to provide precise and not speculative guidance, EJM contends that summary judgment is warranted.

Not so, claims the Government. The Government responds by challenging EJM's interpretation of Central Illinois, EJM's application of Central Illinois, and the evidence supporting EJM's motion for summary judgment. (Resp. to EJM's Suppl. Mem. at 1-2 [ECF No. 174].) According to the Government, the Supreme Court's ruling in Central Illinois "rests upon the IRS's long and consistent history in taking a contrary position to the position that it was taking in Central Illinois. . . . [W]hether it was 'reasonable' to anticipate the IRS's change in position is the touchstone of the opinion. . . ." (Id. at 7.) Thus, Central Illinois allegedly "establishes that collectors are obligated to collect those taxes that they are required to collect, but cannot be held liable where it could not be 'reasonably suspect[ed]' that there was an obligation to collect at the time of the transaction." (Id. at 8.) Applying this standard to the present case, the Government concludes that EJM had sufficient notice of its obligation to collect the transportation excise tax. (Id. at 9.)

In determining whether EJM had sufficient notice of its collection obligation, the Government insists that the Court should only consider publicly available documents and pronouncements. (Id. at 20-21.) Because internal IRS communications were not available to EJM during the tax periods in question, those communications are purportedly irrelevant to whether EJM could have reasonably suspected that its services were subject to the excise tax. (Id. at 21.) Additionally, EJM's use of internal IRS communications threatens to unfairly prejudice the Government because it "could functionally act . . . as an estoppel." (Id. at 24.) This potential prejudice substantially outweighs the probative value of the internal communications, the Government argues. (Id.)

The Government proffers two additional arguments specifically directed against EJM's use of deposition testimony collected from current and former IRS employees. First, the Government points out that the IRS deponents are not expert witnesses; as such, they are not qualified to provide opinions regarding the transportation excise tax as it applies to whole-aircraft aviation service providers. (Id. at 21.) Those would purportedly constitute expert opinions. (See id.) Second, regardless of whether the deponents provide lay or expert opinions, the deponents' testimony is still inadmissible because it is not helpful to the finder of fact. (Id. at 22.)

The Court considers each of these arguments in turn. First, the Court interprets the holding from Central Illinois to determine the proper measure of notice owed by the IRS to deputy tax collectors. The Court then applies that standard to determine whether the IRS provided EJM with adequate notice of EJM's potential collection obligation. Given that the Court finds inadequate notice based on a review of the IRS's published guidance, the Court does not delve into EJM's additional evidence or the Government's objections to that evidence.

The Court disagreed. Ruling in favor of the employer, the Court stressed the distinction between primary and secondary liability for a tax. As the Court noted, "it is one thing to say that the reimbursements constitute income to the employees for income tax purposes, and it is quite another thing to say that it follows therefrom that the [employer's] reimbursements . . . [are] subject to withholding." Id. at 29. "To require the employee to carry the risk of his own tax liability is not the same as to require the employer to carry the risk of the tax liability of its employee. Required withholding, therefore, is rightly much narrower than subjectability to income taxation." Id. The Court continued:

The tax year in issue was 1963. Id. at 22. But as of that year, "not one regulation or ruling required withholding on any travel expense reimbursement. The intimation was quite the other way." Id. at 32. Notably, the applicable treasury regulation as of 1963 excluded "amounts 'paid specifically . . . for traveling or other bona fide ordinary and necessary expenses incurred . . . in the business of the employer'" from the concepts of wages and of withholding. Id. at 30 (quoting Treas. Reg. § 31.3401(a)-1(b)(2)). Nothing in that regulation identified distinct withholding obligations based on "any overnight concept." Id. The only contradictory ruling was issued three years prior to the applicable treasury regulation. Id. at 32. And the contradictory ruling was not incorporated into the subsequent treasury regulation. See id. As the Court observed, "[n]o employer, in viewing the regulations in 1963, could reasonably suspect that a withholding obligation existed." Id.

Only in 1967 did the Supreme Court even hold that non-overnight lunch reimbursements constitute income. Id. at 25-26 (citing United States v. Correll, 389 U.S. 299 (1967) (restricting to overnight trips the travel expense deduction for meal costs under § 162(a)(2))). And even then, the Court did not consider the withholding implications of overnight stays. Id. at 30. The Government, however, claimed to have consistently "adhered to the overnight rule in determining income tax liability" since 1940. Id. Yet, as the Court explained, "[s]uch consistent adherence to the overnight rule in determining income tax liability -- together with the consistent absence of any reference to the overnight rule in the withholding regulations -- strongly indicates that it was intended that the overnight rule not apply in determining withholding tax obligations." Id. Finally, as the Court pointed out, through 1963 "[d]ecided cases have made the distinction between wages and income and have refused to equate the two in withholding or similar circumstances." Id. at 31 (citing cases).

Thus, to avoid an unfair expansion of employer withholding obligations and potential secondary liability absent adequate notice, the Supreme Court determined that the reimbursements at issue did not constitute wages. See id. at 31-33.

In the present case, the Government and EJM disagree over the proper interpretation of Central Illinois. Whereas EJM insists that the IRS must provide precise and not speculative notice to deputy tax collectors, the Government claims that the IRS provides sufficient notice if a deputy tax collector can reasonably suspect that a collection obligation exists. Although the Government's interpretation has some merit, EJM's interpretation allows for a more internally consistent and logical reading of Central Illinois. EJM's interpretation also finds more support in the case law interpreting Central Illinois.

Interpreting the Central Illinois decision as the Government argues would render superfluous the Supreme Court's directive that the obligation to withhold (or collect taxes) be precise and not speculative. See Cent. Ill., 435 U.S. at 31. An obligation is precise if it is "exactly or sharply defined or stated." Merriam-Webster, http://www.merriam-webster.com/dictionary/precise (last visited Nov. 9, 2015) (defining "precise"). By contrast, an obligation is speculative if it is "based on guesses or ideas about what might happen to be true rather than on facts." Merriam-Webster, http://www.merriam-webster.com/dictionary/speculative (last visited Nov. 9, 2015) (defining "speculative"). Accordingly, a plain reading of the Supreme Court's directive indicates that an obligation to collect taxes should be exactly or sharply defined or stated and based on facts rather than guesses or ideas about what might happen to be true. Under the Government's interpretation, an obligation to collect is sufficient if a deputy tax collector could reasonably suspect that the obligation exists. (See Resp. to EJM's Suppl. Mem. at 8.) But this standard contradicts the Supreme Court's prior directive. A deputy tax collector who suspects that a collection obligation exists would, by definition, be relying on "guesses or ideas about what might happen to be true rather than on facts." See Black's Law Dictionary 1584 (9th ed. 2009) (defining the verb "suspect" as follows: "1. To consider (something) to be probable. 2. To consider (something) possible."). Granted, a deputy tax collector would need to reasonably suspect that an obligation exists. See id. at 1379 (defining "reasonable " as "[f]air, proper, or moderate under the circumstances"). But even reasonably suspecting an obligation to exist would still require a deputy tax collector to wander into the realm of the probable or the possible rather than the world of facts and exactitudes. It seems unlikely that the Supreme Court would in one sentence mandate that a deputy tax collector's obligations be precise and not speculative and then, several sentences later, significantly curtail that mandate.

Rather than reading the Court's "reasonably suspect" comment as the applicable test for determining whether the IRS has provided sufficient notice to a deputy tax collector, the Court's comment is more logically read as an effect of the IRS's failure to provide precise and not speculative guidance. That is, as EJM has argued, "because precise and not speculative guidance did not exist, an employer in the plaintiff's position could not have 'reasonably suspected' that a collection obligation existed." (Reply in Supp. of EJM's Suppl. Mem. at 2 [ECF No. 177] (emphasis deleted).) The Court was describing a situation in which the notice provided by the IRS was much less than adequate. See Cent. Ill., 435 U.S. at 32 (observing that "not one regulation or ruling required withholding" as of 1963). Not only did the IRS fail to provide adequate notice-notice that was precise and not speculative -- but the IRS even failed to provide sufficient notice for an employer to reasonably suspect that it had a withholding obligation. See id.

The Government has, at times, also implied that the proper test for sufficient notice under Central Illinois involves a generic reasonableness analysis. (See Resp. to EJM's Suppl. Mem. at 4, 7 (stating that "whether it was 'reasonable' to anticipate the IRS's change in position is the touchstone of the opinion").) The Government, for example, suggests that the test for proper notice under Central Illinois is whether "'no reasonable' collector, analyzing the guidance that [has] been issued by the IRS, could . . . conclude[] that" a withholding obligation exists. (See id. at 4.) However, the Government has not provided any citations to Central Illinois to indicate which portion(s) of the opinion support this "no reasonable collector could conclude" interpretation. (See id.) And, in fact, nowhere in Central Illinois does the Supreme Court analyze whether a reasonable collector could conclude that a withholding obligation exists. See generally Cent. Ill., 435 U.S. 21 (The Court, by contrast, states that "[n]o employer . . . could reasonably suspect that a withholding obligation existed." (emphasis added)).³

Moreover, even if the Government's alternative interpretation could garner support from the text of the opinion, the interpretation still offers a less consistent reading of the opinion as compared to the interpretation proposed by EJM and adopted by this Court. If the Supreme Court in Central Illinois established a "no reasonable collector could conclude" test for adequate notice, the Supreme Court's statement regarding a precise and not speculative obligation to withhold would likely need to be interpreted as a clarification of the "no reasonable collector" standard to avoid rendering the precise and not speculative language superfluous. But the Supreme Court is no stranger to tests involving the ubiquitous "reasonable person." See, e.g., Howes v. Fields, 132 S. Ct. 1181, 1189 (2012) (applying the reasonable person standard in the context of custodial interrogations); Sao Paulo State of the Federative Republic of Braz. v. Am. Tobacco Co., 535 U.S. 229, 232-33 (2002) (same, judicial recusal); Oncale v. Sundowner Offshore Servs., Inc., 523 U.S. 75, 81-82 (1998) (same, a Title VII hostile work environment claim). It seems unlikely that the Court would need to define -- or, more dramatically, redefine -- such a well-worn standard. And, in any event, if the "no reasonable collector" standard were clarified such that a reasonable collector is deemed to have notice only if the collector's obligation to withhold is precise and not speculative, then the "no reasonable collector" test would be, functionally, the equivalent of the "precise and not speculative" test advanced by EJM.

Holding that a deputy tax collector must receive precise and not speculative notice of its obligation to collect taxes comports with nearly all of the subsequent cases to consider the notice issue or interpret Central Illinois. See, e.g., Univ. of Chi. v. United States, 547 F.3d 773, 784 (7th Cir. 2008) ("The University asserts the so-called 'deputy tax collector' defense, which excuses an employer from withholding employment taxes from its employees unless an obligation to withhold was 'precise and not speculative.'"); N D. State Univ. v. United States, 255 F.3d 599, 608 (8th Cir. 2001) (noting that the "'deputy tax collector' defense, . . . protects an employer from liability for failing to withhold employment taxes from its employees when the employer lacks 'precise and not speculative' notice of its duty to withhold "); HB&R, Inc. v. United States, 229 F.3d 688, 691-92 (8th Cir. 2000) (quoting Central Illinois for the proposition that "no employer . . . could reasonably suspect that a withholding obligation existed" but later explaining that the court "find[s] controlling the Supreme Court's cautious approach to withholding liability in [ Central Illinois ]:" that an employer's obligation to withhold should be precise and not speculative); Gen. Elevator Co. v. United States, 20 Cl. Ct. 345, 353 (1990) ("The 'deputy tax collector,' the employer, must have adequate notice so that it will 'know what the IRS thinks the law is and therefore what actions they have to take.' [ Cent. Ill., 435 U.S. at 31-32]; McGraw Hill, Inc. v. United States, [623 F.2d 700, 705] ([Ct. Cl.] 1980). The facts in this case do not establish a precise and clear duty to withhold."); McGraw Hill, 623 F.2d at 705 ("It has been clearly held by this court . . . that when dealing with the withholding tax liability of an employer, that those employers must have a precise idea of what they are supposed to do and why."); Bombardier Aerospace Corp. v. United States, 94 F. Supp. 3d 816, 834 (N.D. Tex. Mar. 20, 2015) ("The court holds that a reasonable trier of fact could only find from the summary judgment evidence that [the plaintiff] was given notice of a precise and clear duty to collect [federal excise taxes] . . ., that is, the notice was sufficient to apprise [the plaintiff] about what the IRS thought the law was and therefore what actions [the plaintiff] was required to take."); Sims v. United States, 756 F. Supp. 1048, 1053 (M.D. Tenn. 1991) (quoting the Supreme Court's language from Central Illinois and italicizing for emphasis the phrase "precise and not speculative"); Univ. of Chi. v. United States, No. 06 C 3452, 2007 WL 2409739, at *4 (N.D. Ill. Aug. 22, 2007) ("The statutory language is unambiguous and the University's obligation to withhold taxes was precise and not speculative."); N.D. State Univ. v. United States, 84 F. Supp. 2d 1043, 1049 (D.N.D. 1999) ("Generally, the 'deputy tax collector' defense is an equitable defense that provides it is unfair to hold an employer liable for failure to withhold taxes unless there was 'precise and not speculative' notice of the duty to withhold."); W. Reserve Acad. v. United States, 619 F. Supp. 394, 400-01 (N.D. Ohio 1985) ("The Court [in Central Illinois ] based its holding on the fact that because the employer is in a secondary position as to liability for the income tax of the employee, the employer's obligation to withhold tax should be precise and not speculative."); IBM, Corp. v. United States, No. 96-695T, 87 A.F.T.R.2d 2001-536 (Fed. Cl. Jan. 9, 2001) (same).

In only one case has a court seemingly interpreted Central Illinois as the Government does here. See Am. Airlines, Inc. v. United States, 204 F.3d 1103, 1111, 1113 (Fed. Cir. 2000). But even that case provides only marginal support for the Government's position. In American Airlines, the Court of Appeals for the Federal Circuit appears to have conflated the "precise and not speculative" standard with the "reasonably suspect" standard:

The Government offers one final argument regarding the interpretation of Central Illinois: that the Supreme Court's ruling "rests upon the IRS's long and consistent history in taking a contrary position to the position it was taking in [the litigation]." (Resp. to EJM's Suppl. Mem. at 7.) Embedded in this argument is the implication that Central Illinois' notice requirement does not apply to situations in which the IRS has simply failed to provide adequate guidance. The Government's argument is not well taken. The Supreme Court never limited its ruling to situations in which the IRS takes a position that is contrary to its own historical guidance. See generally Cent. Ill., 435 U.S. 21. And, in fact, Central Illinois involved a situation in which the IRS had failed to provide adequate guidance. See id. at 32 ("The first published pronouncement by the [IRS] with respect to withholding came only in 1969. . . . That Ruling's suggestion that withholding was a possible requirement . . . contained no reference whatsoever to wages, and thus avoided any mention of the statutory requirement that the payment must be a wage to be subject to withholding."). Subsequent courts interpreting Central Illinois have, similarly, applied the notice requirement more broadly than the Government proposes. See, e.g., Gen. Elevator Co., 20 Cl. Ct. at 353-54 (holding that the existing "rulings leave a speculative gap where plaintiff, when faced with ambiguous or inapplicable interpretations, cannot reasonably be held to have received the degree of notice the law requires"); McGraw Hill, 623 F.2d at 705 (noting that "[t]he plaintiff's vice president for taxes testified that he neither saw nor heard anything of the program. . . . [T]he promulgation of the program was clearly inadequate to provide appropriate notice").

In sum, this Court interprets Central Illinois to impose a requirement that deputy tax collectors receive precise and not speculative notice of an obligation to collect taxes. Absent this notice, the Government cannot retroactively impose secondary liability on a deputy tax collector for the deputy's failure to collect taxes.

In short, EJM did not. The published guidance during the tax years at issue failed to provide EJM with precise and not speculative notice of its collection obligation.

EJM insists that Revenue Ruling 58-215 controls the Court's analysis. Revenue Ruling 58-215, EJM argues, is "the only guidance the IRS ever published regarding application of section 4261 to whole aircraft management companies like EJM." (EJM's MSJ at 6 [ECF No. 62].) And that ruling "unequivocally held that the aircraft management services provided by [whole-aircraft management companies such as EJM] are not subject to the commercial-transportation tax in section 4261." (Id.)

In its January 26, 2015 Opinion and Order, the Court rejected EJM's contention that Revenue Ruling 58-215 represents the only relevant IRS guidance regardi ng the application of § 4261 to whole-aircraft management services. The Court noted that while Revenue Ruling 58-215 and the present case share some similarities, "there is one crucial difference: the company's use of the plane." (Jan. 26, 2015 Op. & Order at 31 [ECF No. 136].) In the Revenue Ruling, "the airline company acted solely as the corporation's agent -- and thus used the plane solely for the corporation -- as the corporation purchased the plane to 'transport[ ] its own personnel' and to use it as a 'flying-office car.'" (Id. (quoting Rev. Rul. 58-215, 1958-1 C.B. 439, 1958 WL 10832, at *1-2).) "Here, by contrast, the airline company uses clients' planes as part of its charter business." (Id.)

EJM now offers a more nuanced argument regarding the significance of Revenue Ruling 58-215. EJM contends that even if Revenue Ruling 58-215 does not explicitly foreclose the application of § 4261 to whole-aircraft management services, the Revenue Ruling is evidence of the IRS's failure to provide adequate notice under Central Illinois. (See Reply in Supp. of EJM's Suppl. Mem. at 5-6.) The Revenue Ruling provides only imprecise and speculative guidance to deputy tax collectors, like EJM, that use clients' planes as part of a charter business . (See id.) This imprecision derives from the fact that taxpayers "do not know whether the owner in Rev. Rul. 58-215 allowed its aircraft to be used for charter, because the ruling does not even address that issue." (Id.)

The Government, by contrast, insists that a series of five revenue rulings, issued over a nearly twenty-year period, provides adequate notice to deputy tax collectors in EJM's position. (Resp. to EJM's Suppl. Mem. at 11-12.) These rulings outline the applicable test that EJM purportedly should have known to utilize in determining the applicability of § 4261: the "possession, command, and control" test. (Id. at 11.) Under this test, the Government argues, the applicability of § 4261 hinges on "whether the entity providing the services has 'possession, command and control' of the means of transportation subject to the tax." (Id.) And after applying this test, EJM should have also known that the payments it collected from its customers were subject to the § 4261 tax. (Id. at 13.) The Government's argument consists of two separate assertions: (i) that EJM had precise and not speculative notice that the possession, command, and control test determines the applicability of the § 4261 tax; and (ii) that EJM had precise and not speculative notice that the payments it collected from its customers were subject to the § 4261 tax under the possession, command, and control test. (See id. at 11-13.)

The Government attempts to distinguish Revenue Ruling 58-215. The Revenue Ruling represents another instance in which the IRS has utilized the possession, command, and control test to determine the applicability of § 4261, the Government argues. (See id.) Because the customer in that Revenue Ruling "had possession, command and control of the means of transportation[ ] at all times," and the management company acted merely as the customer's agent, the amounts paid by the customer were not subject to the § 4261 tax. (See id.)

In one respect, the Government is correct: no single revenue ruling controls the Court's analysis as to whether EJM had precise and not speculative notice of its duty to collect the § 4261 tax. (See Jan. 26, 2015 Op. & Order at 33.) However, the Court disagrees with the Government regarding the clarity of the notice provided by the cited revenue rulings. None of the revenue rulings cited by the Government -- regardless of whether the Court considers them independently or collectively -- provided EJM with clear and not speculative notice. And although Revenue Ruling 58-215 does not foreclose the application of the § 4261 tax as to EJM, the Revenue Ruling, because it deals with a distinct factual situation, evidences the IRS's failure to provide precise and not speculative notice of EJM's collection obligation.

As an initial matter, two of the revenue rulings cited by the Government are obsolete -- Revenue Rulings 56-45 and 56-608. See Rev. Rul. 69-227, 1969-1 C.B. 315, 1969 WL 20086, at *1 (listing obsoleted revenue rulings). The Court need not consider these obsolete rulings because "although not specifically revoked or superseded, [they] are not considered determinative with respect to future transactions." Id.; see also Sundance Helicopters, Inc. v. United States, 104 Fed. Cl. 1, 8 n.7 (2012) (noting that a plaintiff's reliance on a revenue ruling was misplaced in part because the revenue ruling was obsolete). That is, Revenue Rulings 56-45 and 56-608 could not have provided EJM with precise and not speculative notice because the IRS does not consider them to be determinative with respect to transactions occurring after 1969. See Rev. Rul. 69-227, 1969 WL 20086, at *1.

The other revenue rulings cited by the Government, when viewed collectively, provide some notice of the test that the IRS uses to determine whether transportation services are taxable under § 4261. See generally Rev. Rul. 74-123, 1974-1 C.B. 318, 1974 WL 34732; Rev. Rul. 68-256, 1968-1 C.B. 489, 1968 WL 15396; Rev. Rul. 60-311, 1960-2 C.B. 341, 1960 WL 12965. Based on its review of these revenue rulings, the Court previously outlined the factors that the IRS would likely use to determine whether a management company provides taxable transportation services under the possession, command, and control test. (Jan. 26, 2015 Op. & Order at 33-34.) To determine taxability under the possession, command, and control test, a deputy tax collector in EJM's position would need to consider, among potentially other factors, (i) "who performs the services that allow the aircraft to be operational," (ii) "which party provides the crew to operate the aircraft," and (iii) "the nature of the transportation services" offered. (Id.)

But informing deputy tax collectors of the proper test to apply does not satisfy Central Illinois' mandate. A tax collector must have precise and not speculative notice of its collection obligation. Assuming that a tax collector could identify all of the relevant factors that the IRS considers as part of the possession, command, and control test, the tax collector would still need to apply that test to its specific circumstances. Here, the possession, command, and control test -- even if adequately described in the existing revenue rulings and accurately interpreted by a deputy tax collector -- fails to offer deputies in EJM's position precise and not speculative notice of a collection obligation.

Critically, none of the factors that the Court could glean from the cited revenue rulings are amenable to precise answers absent additional guidance from the IRS. With respect to the first factor, for example, the IRS has never explained how it handles arrangements, like EJM's, where a management company offers a variety of services that clients may choose on an a la carte basis. (See Noe Suppl. Decl. ¶¶ 5-7 [ECF No. 105-1].) In that situation, the management company might perform only some of the services that allow the aircraft to be operational. With respect to the second factor, the IRS has failed to inform taxpayers how it will treat management companies like EJM that provide crews for some clients and for some flights, but not others. (See id. ¶ 8.) And as to the third factor, the IRS has not explained what combination or threshold amount of transportation services would trigger the § 4261 tax. Further confusing the situation, the IRS has never indicated how these three factors interact. Does the IRS determine the application of the § 4261 tax based on a holistic analysis of the factors? Or does the IRS make a determination as to each factor and then find an activity taxable only if the majority of factors lean toward taxability? Deputy tax collectors in EJM's position do not know. Tax collectors also do not know if the IRS weighs each of the factors equally. Finally, if the possession, command, and control test reveals that a management company like EJM has possession, command, and control over a customer's airplane at discrete times during the management relationship but not at others, the IRS once again offers no guidance as to how it would resolve such a situation.⁴

As this discussion reveals, application of the possession, command, and control test requires an in-depth analysis of the relevant factual circumstances. But here none of the revenue rulings cited by the Government has actually applied the possession, command, and control test to a factual situation identical to, or even substantially similar to, EJM's. None of the cited revenue rulings addresses the gaps in guidance discussed above. And none of the cited revenue rulings specifically analyzes how a management company's use of its customers' aircraft in a charter business influences the applicability of the § 4261 tax to the customers' aircraft management payments and pass-through costs. See Rev. Rul. 74-123, 1974 WL 34732, at *1 (involving "[a]n aviation company operating under a contract with a Government agency to provide domestic air transportation for the agency's personnel using both government-owned 'public aircraft' and company planes"); Rev. Rul. 68-256, 1968 WL 15396, at *2 (considering the tax implications for a company that leases aircraft under both "dry leases" and "wet leases"); Rev. Rul. 60-311, 1960 WL 12965, at *1 (analyzing an agreement in which helicopter rental companies lease helicopters with pilots to an oil company for use in transporting the oil company's employees); Rev. Rul. 58-215, 1958 WL 10832, at *2 (analyzing an agreement in which a corporation "owns an aircraft and appoints an airline company as its agent to service, maintain, overhaul, and operate [the] aircraft for the [exclusive] purpose of transporting the corporation's personnel").⁵

In similar situations -- where the available guidance is imprecise or altogether fails to address the deputy tax collector's specific factual situation -- other courts have also concluded that the tax collector did not have adequate notice of its obligation as required under Central Illinois. See, e.g., Gen. Elevator Co., 20 Cl. Ct. at 353 ("A careful review of all of the revenue rulings which defendant cites as having provided adequate notice to plaintiff of its obligation to withhold . . . clearly shows that none specifically apply to the circumstances [here]."); McGraw Hill, 623 F.2d at 705 ("The way this program was promulgated, and specifically the way it was communicated to the plaintiff in this case, invited the confusion that has resulted. . . ."); Sims, 756 F. Supp. at 1053 (noting that the applicable statute was "not 'precise' in notifying numbers bankers like [the plaintiff] that they are subject to withholding obligations"); W. Reserve Acad., 619 F. Supp. at 401 (holding that the plaintiff's withholding liability as to certain payments "was speculative and imprecise" under Central Illinois where "[w]ithin weeks after issuance of . . . proposed regulations [that may have triggered a withholding obligation], the IRS withdrew the regulations ").

Accordingly, the Court finds as a matter of law that the Government failed to provide EJM with precise and not speculative notice of EJM's potential tax collection obligation under § 4261 . Without adequate notice, it would be unfair to hold EJM secondarily liable for taxes owed by its customers. Because EJM did not receive precise and not speculative notice, EJM is not liable for the § 4261 transportation excise tax even if the tax would otherwise apply to the monthly management fees and pass-through costs paid by EJM's customers.

Given that the Court has already determined -- based on a review of the pertinent revenue rulings -- that EJM received inadequate notice of its collection obligation, the Court declines to consider EJM's additional evidence. As such, the Court also declines to wade into the parties' admissibility dispute over that evidence.

B. Plaintiffs' Motion for Sanctions

Plaintiffs have also moved for sanctions regarding the Government 's alleged spoliation of evidence. (See generally Pls.' Mot. for Sanctions [ECF No. 115]; Pls.' Suppl. Mot. for Sanctions [ECF No. 119].) Plaintiffs contend that spoliated evidence supported three theories in this case: (1) that the Government must provide adequate notice as to Plaintiffs' tax collection obligations; (2) that the Government must apply the § 4261 tax consistently among taxpayers; and (3) that the IRS's retroactive assessment of the § 4261 tax to certain customer payments contradicted the representations made by the IRS in the December 1992 TAM. (See Pls.' Mot. for Sanctions at 2-3.) But Plaintiffs have now prevailed through summary judgment on the adequate notice and TAM theories. (See Jan. 26, 2015 Op. & Order at 2.) And as a result, the Court has no need to address Plaintiffs' remaining theory (the alleged duty of consistency). Plaintiffs' motion for sanctions is thus moot.

Nonetheless, because the motion implicates professional conduct, the Court does see a purpose in addressing the issue. The Court has not observed anything in the Government's behavior throughout this case to suggest that the Government or its counsel intentionally, recklessly, or even negligently spoliated evidence.

IT IS SO ORDERED.

DATE: 11-12-2015

² "Monthly management fees" cover EJM's overhead and administrative charges. (Noe Suppl. Decl. ¶ 9.) "Pass-through costs" are costs incurred in storing, maintaining, and operating the aircraft, including hanger costs, pilot salaries and benefits, and fuel. (Id.)

³ The majority opinion in Central Illinois uses the terms "reasonable" and "reasonably." Cent. Ill., 435 U.S. at 32. The majority opinion does not, however, use these terms to formulate a test for proper notice, as the Government suggests. Similarly, two of the concurrences discuss reasonableness. But neither opinion supports the Government's position. (See Resp. to EJM's Suppl. Mem. at 9 (quoting Justice Brennan's concurrence from Central Illinois).) Justice Brennan explained in his concurrence that he "share[s] the Court's conclusion that [the employer] met its obligations under Treas. Reg. § 31.3401 (a)-1(b)(2) as that regulation was most reasonably interpreted in 1963." Id. at 33 (Brennan, J., concurring). Aside from the fact that Justice Brennan's concurrence does not constitute the law on this matter, Justice Brennan's statement is not written as a test, nor is it written as an endorsement of any generic reasonableness test purportedly adopted by the majority of the Court. See id. Justice Powell opines in his concurrence that "[i]n other areas of the law, 'notice,' to be legally meaningful, must be sufficiently explicit to inform a reasonably prudent person of the legal consequences of failure to comply with a law or regulation." Id. at 38 (Powell, J., concurring). Justice Powell, unlike Justice Brennan, proposes a test for proper notice. Justice Powell' s test, however, is not the law. And to the extent that Justice Powell's proposed test mirrors a reasonableness test suggested by the Government in the present case, the fact that Justice Powell describes the test in his concurrence suggests that the test was not adopted by the majority of the Court.

⁴ Compounding the imprecision for tax collectors like EJM is the fact that EJM does not have a one-size-fits-all relationship with its customers. (See Noe Suppl. Decl. ¶¶ 5-7.) Thus, for EJM, the outcome of the possession, command, and control test -- assuming that EJM could apply it -- would likely vary from customer to customer. Given the fact intensive nature of the possession, command, and control test as outlined in the existing revenue rulings, the IRS would presumably instruct EJM to make a § 4261 taxability determination for each customer. But, once again, the IRS has not notified EJM or other deputy tax collectors of any such strategy. Instead, the IRS appears to take the position that all of EJM's charter-opting customers receive taxable transportation services. (See Government's Brief in Supp. of MSJ at 7 [ECF No. 93-1].)

⁵ The obsolete revenue rulings, 56-45 and 56-608, do not analyze the impact of a charter business on the applicability of the § 4261 tax either. See Rev. Rul. 56-608, 1956-2 C.B. 878, 1956 WL 10927, at *1 (analyzing the payments by a shipper to a contract carrier for the movement of the shipper's products [where] the transportation equipment used by the contract carrier is owned by the shipper"); Rev. Rul. 56-45, 1956-1 C.B. 521, 1956 WL 11367, at *1 (determining whether "an amount paid for the rental or lease of a bus [is taxable under § 4261] where the lessor does not furnish the driver and the bus is operated by the lessee or the employee of the lessee").