Applicability Of Tax Depends In Part On Who Employs The Pilot

In an internal IRS memo acquired by ANN, the agency sets tax policy which could have serious tax consequences for business jet management companies. And one key factor is who employs the pilots.

In the memo, the IRS concludes that "(c)ontrol of an aircraft’s pilots is a factor for determining the person that has possession, command, and control of an aircraft," and that "(t)he monthly management fees, as well as the separately reimbursed amounts, paid to Management in each of the three scenarios described below are “amounts paid for taxable air transportation of persons, and thus are taxable."

According to the IRS, if an airplane owner hires a management company to maintain its aircraft, and the management company is required to provide qualified pilots and crew, as well as make arrangements for maintenance and insurance, the company is providing taxable transportation services. The IRS concluded that "control of an aircraft's pilots is a factor for determining who has possession, command, and control of an aircraft. Also, when determining who has control over the pilots, the ability to direct the pilots as to destination and time of flights should not be considered determinative."

Even when the aircraft management company provides all of the "essential elements" necessary for the flights, the IRS says the owner of the aircraft relinquishes possession, command, and control of the aircraft to the management company, and is providing taxable transportation to the airplane's owner.

Taxes also apply when the agreement between the management company and the aircraft owner allows the manager to lease the aircraft to third parties. In that situation, the IRS says that "all amounts paid to an air transportation services provider that is necessary to receive air transportation services are generally part of the tax base."  In addition, monthly management fees collected by the aircraft manager are taxable because the fees paid by the owner are necessary to the operation of the aircraft, and not incidental costs like meals and entertainment. Without the services paid for by those fees, such as maintenance, scheduling, record keeping, and weather services, the manager "could not provide air transportation services to Owner." The memo goes on to say that "(p)ayment of monthly management fees" as well as other separately reimbursed amounts "is a precondition of receiving air transportation services from Management, and thus are amounts paid for taxable transportation."

FMI: www.irs.gov