FIFTH CIRCUIT UPHOLDS EXCISE TAX ON FRACTIONAL AIRCRAFT PROGRAMS
September 12, 2016
On July 25, 2016, the U.S. Court of Appeals of the Fifth Circuit unanimously upheld a district court ruling that Bombardier Aerospace Corp. was liable for $32 million in aviation excises taxes. The Internal Revenue Service ruled in March 2015 that Bombardier’s fractional aircraft ownership program, Flexjet, was required to remit federal excise taxes on fees collected from participants. Bombardier challenged the finding and a Texas district court ruled in favor of the government on cross-motions for summary judgment. The Fifth Circuit decision upholds the district court’s ruling.
Bombardier charges three types of fees to Flexjet participants: a monthly management fee, a variable rate fee, and a fuel component adjustment fee. The IRS held that any “amount paid for taxable transportation” is subject to federal excise tax. Bombardier argued that it was not engaged in “commercial aviation” and that the monthly management fee was not taxable under the statute.
The district court and Fifth Circuit agreed with the IRS’s position that the “possession, command, and control” test warranted the fees at issue being taxable because Bombardier was in possession, command, and control of the aircraft involved in the transportation. Bombardier sought to rely on a 1992 IRS memo to a competitor regarding the taxes at issue. The Fifth Circuit dismissed this argument because the 1992 memo was not complete, was not specific about which fees were taxable, and was not directed to Bombardier but rather to a competitor. The Fifth Circuit found a more recent 2004 to be sufficient enough to inform Bombardier of its tax obligations.
If you have any questions, please contact Evelyn Sahr (esahr@eckertseamans.com, 202-659-6622) or Drew Derco (dderco@eckertseamans.com, 202-659-6665).
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