Proposed Regs Address Exemption From Air Transportation Excise Tax

Proposed Regs Address Exemption From Air Transportation Excise Tax

Internal Revenue Service

The IRS has published proposed regulations (REG-112042-19) on the air transportation excise taxes, specifically addressing the exemption for amounts paid for specified aircraft management services. Comments and public hearing requests are due by September 29. Sections 4261 and 4271 impose the excise tax on some amounts paid for transportation of persons and property, respectively, by air. The Tax Cuts and Jobs Act added section 4261(e)(5) to provide that the tax imposed by sections 4261 and 4271 does not apply to any amount paid by an aircraft owner for aircraft management services related to: (1) maintenance and support of the aircraft owner’s aircraft or (2) flights on the aircraft owner’s aircraft. The proposed regs address comments regarding the applicability of the possession, command, and control test to amounts paid for aircraft management services in light of section 4261(e)(5). The test is a facts and circumstances analytical framework that is used to determine whether a person is providing taxable transportation to another person when each of the parties contribute some but not all of the elements necessary for complete air transportation services. The proposed regs provide that because section 4261(e)(5) directly addresses a situation that if not for the new provision would be analyzed using the possession, command, and control test, the test is not relevant in situations to which the exemption applies. The proposed regs address the treatment of payments for aircraft management services made by a person who has a close relationship to the aircraft owner but is not itself the owner of the aircraft. Specifically, the proposed regs do not adopt the suggestion of commentators to treat payments made by some parties related to the aircraft owner as though made by the aircraft owner. The IRS and Treasury expressed concern that the adoption of a related-party rule would effectively expand the exemption in a manner not authorized by Congress. The proposed regs address whether an aircraft owner’s decision to operate its aircraft under parts of the regulations issued by the Federal Aviation Administration affects the application of section 4261(e)(5). It has long been the position of the IRS and Treasury that FAA rules do not control for federal excise tax purposes. Therefore, the proposed regs provide that because section 4261(e)(5) makes no reference to aviation regulations, under the plain language of the statute, its application does not depend on the flight rules under which an aircraft is operated. The proposed regs provide that whether an aircraft owner permits its aircraft to be used for charter flights does not affect the application of section 4261(e)(5) to amounts paid by the aircraft owner for aircraft management services. The proposed regs also specify that the method or manner by which an aircraft owner is billed for aircraft management services does not affect whether the section 4261(e)(5) exemption applies. Moreover, the proposed regs amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update the existing regs to incorporate statutory changes, case law, and other published guidance.

The IRS has published proposed regulations (REG-112042-19) on the air transportation excise taxes, specifically addressing the exemption for amounts paid for specified aircraft management services.

The IRS has published proposed regulations (REG-112042-19) on the air transportation excise taxes, specifically addressing the exemption for amounts paid for specified aircraft management services. Comments and public hearing requests are due by September 29. Sections 4261 and 4271 impose the excise tax on some amounts paid for transportation of persons and property, respectively, by air. The Tax Cuts and Jobs Act added section 4261(e)(5) to provide that the tax imposed by sections 4261 and 4271 does not apply to any amount paid by an aircraft owner for aircraft management services related to: (1) maintenance and support of the aircraft owner’s aircraft or (2) flights on the aircraft owner’s aircraft. The proposed regs address comments regarding the applicability of the possession, command, and control test to amounts paid for aircraft management services in light of section 4261(e)(5). The test is a facts and circumstances analytical framework that is used to determine whether a person is providing taxable transportation to another person when each of the parties contribute some but not all of the elements necessary for complete air transportation services. The proposed regs provide that because section 4261(e)(5) directly addresses a situation that if not for the new provision would be analyzed using the possession, command, and control test, the test is not relevant in situations to which the exemption applies. The proposed regs address the treatment of payments for aircraft management services made by a person who has a close relationship to the aircraft owner but is not itself the owner of the aircraft. Specifically, the proposed regs do not adopt the suggestion of commentators to treat payments made by some parties related to the aircraft owner as though made by the aircraft owner. The IRS and Treasury expressed concern that the adoption of a related-party rule would effectively expand the exemption in a manner not authorized by Congress. The proposed regs address whether an aircraft owner’s decision to operate its aircraft under parts of the regulations issued by the Federal Aviation Administration affects the application of section 4261(e)(5). It has long been the position of the IRS and Treasury that FAA rules do not control for federal excise tax purposes. Therefore, the proposed regs provide that because section 4261(e)(5) makes no reference to aviation regulations, under the plain language of the statute, its application does not depend on the flight rules under which an aircraft is operated. The proposed regs provide that whether an aircraft owner permits its aircraft to be used for charter flights does not affect the application of section 4261(e)(5) to amounts paid by the aircraft owner for aircraft management services. The proposed regs also specify that the method or manner by which an aircraft owner is billed for aircraft management services does not affect whether the section 4261(e)(5) exemption applies. Moreover, the proposed regs amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update the existing regs to incorporate statutory changes, case law, and other published guidance.

Sec. 4261 Imposition of tax

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Proposed Regs Address Exemption From Air Transportation Excise Tax