CCA 1141018: Aircraft fractional-ownership management fees are taxable transportation charges

Plain-English summary

This Chief Counsel Advice concludes that monthly management fees paid by an aircraft fractional owner are amounts paid for taxable transportation under IRC section 4261(a). The advice reasons that the management company provides taxable transportation because it controls and operates the aircraft, and that the monthly fees are required to access the aircraft and cover necessary services such as pilots, insurance, maintenance, and flight planning. The conclusion applies even if a participant pays the fee but does not use all allocated flight hours. The advice separately notes that occupied hourly fees were not at issue in the request but are also treated as taxable transportation under prior case law.

Ruling snapshot

• Question: Are monthly management fees in an aircraft fractional-ownership program amounts paid for taxable transportation?
• Outcome: Advice given
• Key authorities: IRC §§ 4261, 4262, 4291; Treas. Reg. §§ 49.4261-2, 49.4261-7, 49.4261-8; Rev. Ruls. 60-311, 73-508, 80-31, 2006-52; Executive Jet Aviation, Inc. v. United States, 125 F.3d 1463 (Fed. Cir. 1997)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201141018
       Release Date: 10/14/2011
       CC:PSI:B03:MHBeker                               Third Party Communication: None
       POSTN-127586-11                                  Date of Communication: Not Applicable

UILC: 4261.00-00

date: September 15, 2011

 to:   Lori J. Leonard
       Air Transportation Technical Advisor
       Large Business and International Division

from: Frank Boland
Chief, Branch 7
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

subject: Section 4261 - Aircraft Fractional Ownership Management Fees

            This Chief Counsel Advice responds to your request for assistance. This advice
       may not be used or cited as precedent.

       ISSUE

              Whether monthly management fees paid by an aircraft fractional owner
       (Participant) to a management company that operates an aircraft fractional ownership
       program, as described in the facts below, are amounts paid for taxable transportation
       under § 4261(a) of the Internal Revenue Code (Code) 1.

       CONCLUSION

             Monthly management fees paid by a Participant to a management company that
       operates an aircraft fractional ownership program are amounts paid for taxable
       transportation under § 4261(a).



       1
        You did not ask us to address the taxability of occupied hourly fees under § 4261(a). However, it is well
       established that occupied hourly fees paid to an aircraft fractional ownership program management
       company are amounts paid for taxable transportation and, therefore, are taxable under § 4261(a). Exec.
       Jet Aviation, Inc. v. U.S., 125 F.3d 1463 (Fed. Cir. 1997).

POSTN-127586-11 2

FACTS

  You provided us with the following description of a typical aircraft fractional

ownership program.

   Fractional Ownership Program Manager (Program Manager) manages an aircraft

fractional ownership program (Program) for Participants. Through the Program, each
Participant is guaranteed a set number of flight hours in a certain aircraft class
(measured by the aircraft’s passenger capacity and speed). The number of flight hours
allocated to each Participant is based on the size of the participant’s ownership interest
and type of aircraft in which that interest is held.

    To become a Participant, a person purchases an undivided interest in an aircraft

from the Program Manager (or an entity related to Program Manager) and enters into
the following interlocking agreements (collectively, Operative Agreements):

 Purchase Agreement;
 Management Agreement;
 Joint Ownership Agreement; and
 Master Interchange Agreement (also called an Interchange Agreement,
Exchange Agreement, or Dry Lease).

Of these agreements, the terms of the management agreement are most relevant to the
issue presented here.

   Management Agreement

    The management agreement outlines the flight services that each Participant is

entitled to as a Program participant. The management agreement (in conjunction with
the master interchange agreement) generally provides each Participant with the use of
the same class of aircraft (but not the exact aircraft in which it owns an interest)
(Program Aircraft) for a set number of hours per year. The number of hours allocated to
a Participant is proportional to the Participant’s ownership interest, with additional flight
time available for additional fees. Participants are generally permitted to use their flight
hours simultaneously, thereby using two or more Program Aircraft at the same time.
The management agreement gives Program Manager the right to use Participants’
aircraft for flight training, demonstration, and other specified purposes. The
management agreement does not limit Program Manager’s use of the aircraft to a set
number of hours and provides that it is entitled to keep for itself any reimbursement that
it receives for those uses.

   Under the management agreement, Program Manager assumes full

responsibility for maintenance and operation of the aircraft. For a monthly management
fee, Program Manager provides at its own cost the following services:
POSTN-127586-11 3

 Arrange for the aircraft to be inspected, serviced, repaired, overhauled, and
tested in order to maintain the aircraft’s airworthiness certification from the
Federal Aviation Administration (“FAA”).
 Keep the interior and exterior of the aircraft in good cosmetic appearance.
 Maintain all records, logs, and other materials required by the FAA with respect
to the aircraft.
 Provide professionally trained and qualified pilots.
 Maintain hangar space, tie-down as required, weather and flight planning,
catering, fueling and administrative communications and aeronautical radio
services.
 Make all necessary takeoff, flight, and landing arrangements.
 Obtain and maintain aircraft hull and liability insurance.

   In addition to the monthly management fee, each Participant pays Program

Manager an hourly fee for each flight hour (including taxiing) that the Participant actually
uses the aircraft (occupied hourly fee). The occupied hourly fee is designed to
compensate Program Manager for the direct, variable costs of operating the aircraft.
These costs include, but are not limited to, fuel charges, standard catering,
maintenance, airport landing fees, and average fleet repositioning expenses.

LAW AND ANALYSIS

   Section 4261(a) of the Code imposes a tax on the amount paid for the taxable

transportation of any person. “Taxable transportation” is defined in § 4262(a)(1) to
generally include transportation by air that begins and ends in the United States.
Section 4261(d) provides that the tax is paid by the person making the payment subject
to tax and § 4291 provides that the tax is collected by the person receiving the payment.

   You asked whether monthly management fees paid by Participants to Program

Manager are subject to the taxes imposed by § 4261. To determine whether these fees
are taxable requires that we must first determine whether Program Manager provides
taxable transportation to Participants. If we determine that Program Manager provides
taxable transportation to Participants, we must then determine whether the monthly
management fee is an “amount paid” for that taxable transportation.

   Taxable Transportation

   The longstanding position of the Internal Revenue Service (IRS) is that a person

provides taxable transportation if that person has possession, command, and control of
the means of conveyance, rather than mere legal title to the means of conveyance.
Rev. Rul. 60-311, 1960-2 C.B. 341. In Exec. Jet Aviation, the Federal Circuit agreed
with the IRS, finding that the aircraft fractional ownership program management
POSTN-127586-11 4

company in that case provided taxable transportation to their program participants.2
125 F.3d 1463, at 1469. As a result, the court found that the occupied hourly fees
(which were the only fees at issue in that case) paid by the participants in Executive
Jet’s program to Executive Jet were taxable under § 4261. The Program is substantially
similar to the aircraft fractional ownership program at issue in Exec. Jet Aviation.
Accordingly, and without further analysis because you did not ask us to analyze in detail
whether Program Manager provides taxable transportation, we conclude that Program
Manager provides taxable transportation to Participants through the Program.

    Amount Paid

   We must next determine whether the monthly management fees are amounts

paid for taxable transportation. The concept of an "amount paid" for taxable
transportation is addressed in guidance published by the IRS. Rev. Rul. 2006-52, 2006-
2 C.B. 761, for example, states that an airline's costs associated with selling tickets are
generally necessary to the air transportation the airline provides. Therefore, all amounts
paid to an air transportation services provider that is necessary to receive air
transportation services are generally part of the tax base. The regulations and other
IRS published guidance, however, specifically exclude (or include) amounts paid for
certain types of services.

   Section 49.4261-8 of the Facilities and Services Excise Taxes Regulations

(regulations) provides examples of payments for services that are not subject to the
§ 4261(a) tax. Section 49.4261-8(f)(1) provides that the § 4261(a) tax does not apply to
charges for transportation of baggage, including incidental charges such as excess
value, storage, transfer, parcel checking, special delivery, etc.

   Section 49.4261-8(f)(4) provides that the tax does not apply to charges for

admissions, guides, meals, hotel accommodations, and other nontransportation
services, for example, where such items are included in a lump sum payment for an all-
expense tour. However, if a payment covers charges for both transportation and
nontransportation services, § 49.4261-2(c) provides that the nontransportation charges
must be separable and shown in the exact amounts thereof in the records pertaining to
the transportation charge, or the tax is computed upon the full amount of the payment.

   Although the regulations do not define nontransportation services, the examples

in § 49.4261-8(f)(4) generally relate to meals, entertainment and hotel accommodations.
Therefore, an amount paid for any service that falls into one of these categories is not
included in the tax base, provided it meets the recordkeeping requirements of
§ 49.4261-2(c).

2
The court analyzed the issue of whether Executive Jet provided taxable transportation through the
§ 4041 aviation fuel excise tax rules that were in effect during the tax quarters at issue in that case. At
that time, aviation fuel taxes only applied to noncommercial aviation and the § 4261 taxes only applied to
commercial aviation. The court found that Executive Jet was in the business of providing commercial
aviation, and thus the amounts it received from program participants was for taxable transportation.
POSTN-127586-11 5

   Section 49.4261-7, on the other hand, provides examples of payments for

services that are subject to the § 4261(a) tax. Section 49.4261-7(c) provides that
amounts paid as additional charges for changing the class of accommodations,
destination, or route, extending the time limit of a ticket, as "extra fare," or for exclusive
occupancy of a section, etc., are subject to tax. Thus, any service that meets this
provision is included in the tax base.

   For services that are not addressed by the regulations, IRS published guidance

generally limits the tax base to amounts paid for mandatory charges; in essence,
amounts that must be paid to get on the aircraft for a certain type or level of service.
Rev. Rul. 73-508, 1973-2 C.B. 366, for example, holds that a security charge is part of
the amount paid for taxable transportation because it is required to be paid as a
condition to receiving air transportation.

    Rev. Rul. 80-31, 1980-1 C.B. 251, provides further guidance on whether an

amount is paid for taxable transportation. The ruling considers the application of § 4261
to a service charge added by an airline to the price of a ticket for the administrative
costs involved in the use of that ticket by another person in another city. The ticket in
question could have been purchased without the service charge in the other city. The
ruling concludes that the service charge is not an amount paid for taxable transportation
because the service is optional, not reasonably necessary to the air transportation itself,
and bears a reasonable relation to the cost of providing the service.

  Therefore, all amounts paid as a condition to receiving air transportation are

subject to tax unless the service is also optional and not reasonably necessary to the air
transportation itself.

    Participants are required to pay Program Manager the monthly management fee

in order to access Program Aircraft for air transportation services. The monthly
management fees stand in contrast to the nontransportation services described in IRS
published guidance because the fees are paid to cover expenses related to air
transportation services (such as pilot salaries and training, insurance, and hangering
fees) rather than mere incidental costs such as meals or entertainment. Costs covered
by the monthly management fees are reasonably necessary to the air transportation
itself because without licensed pilots, insurance, and administrative services like
weather information and flight planning, Program Manager could not provide air
transportation services to Participants.

   Further, it is not relevant to this analysis that the monthly management fees

cover indirect (or overhead) costs of Program Manager rather than direct costs of flight
operations. For example, imbedded in the purchase price of a passenger ticket on a
commercial air carrier or chartered flight are essentially similar indirect costs that make
up the monthly management fees. Amounts paid for air transportation do not escape
taxation merely because they are split from direct costs of the transportation and paid
separately by the person purchasing the services.
POSTN-127586-11 6

    Also, it is not relevant to this analysis that a participant may pay the monthly

management fee but not use any of its allocated number of flight hours. The tax is
imposed on amounts paid for taxable transportation and is not dependant on whether
travel actually occurs. Thus, for example, a person must pay the § 4261(a) tax when
the person purchases a commercial airline ticket, regardless of whether the person
actually takes the flight. Payment of monthly management fees is a precondition to
receiving air transportation services from Program Manager and thus, is an amount paid
for taxable transportation.

  Accordingly, we conclude that monthly management fees paid by a Participant to

a management company that operates an aircraft fractional ownership program are
amounts paid for taxable transportation and are therefore subject to the taxes imposed
by § 4261.

 Please call         if you have any further questions.