CCA 1226024: Advice addresses fuel and air transportation taxes for fractional aircraft flights

Plain-English summary

Chief Counsel advice considers whether flights in a fractional aircraft ownership arrangement are subject to fuel tax under IRC § 4043 or air transportation tax under § 4261. It concludes that the two fractional aircraft are part of the same program, and fuel for a flight taken by an owner in one program aircraft is taxed under § 4043 even though the owner has an interest in another program aircraft. Fuel for an owner's flight on a separately owned charter aircraft and for public charter flights on program aircraft is not subject to § 4043, but amounts paid for those flights are subject to § 4261. The memorandum also states that the program manager is liable for § 4043 tax under Notice 2012-27.

Ruling snapshot

• Question: Which flights in a fractional aircraft arrangement are subject to the fuel tax under IRC § 4043, and when does the air transportation tax under § 4261 apply?
• Outcome: Advice
• Key authorities: IRC §§ 4043, 4261, and 4291; Notice 2012-27

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201226024
       Release Date: 6/29/2012
       CC:PSI:B07:MHBeker                      Third Party Communication: None
       POSTN-108034-12                         Date of Communication: Not Applicable

UILC: 4043.00-00

date: April 9, 2012

 to:   Holly L. McCann
       Chief, Excise Tax Program

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

subject: Application of Section 4043 Tax on Fuel Used in Fractional Ownership Aircraft
Programs

       This Chief Counsel Advice responds to your request for assistance dated February 13,
       2012. This advice may not be used or cited as precedent.


       ISSUES

          1. Under the facts described below, whether Aircraft ABCD and Aircraft EFGH are
             part of the same fractional ownership aircraft program for purposes of § 4043 (tax
             on fuel used in fractional ownership aircraft programs) of the Internal Revenue
             Code (Code).

          2. Under the facts described below, whether fuel used in Aircraft EFGH for a flight
             taken by Owner A is taxed by § 4043.

          3. Under the facts described below, whether fuel used in non-program Aircraft NP
             for a flight taken by Owner A is taxed by § 4043.

          4. Under the facts described below, whether fuel used in Aircraft ABCD or Aircraft
             EFGH for a flight chartered by a non-fractional aircraft owner (a member of the
             general public) is taxed by § 4043.

POSTN-108034-12 2

5. If we conclude that that the fuel used in the aircraft in Issues 2, 3, or 4 is not
   taxed under § 4043, whether the amount paid for the flight is taxed by § 4261
   (excise tax on transportation of persons by air).

CONCLUSIONS

1. Under the facts described below, Aircraft ABCD and Aircraft EFGH are part of
   the same fractional ownership aircraft program for purposes of § 4043.

2. Under the facts described below, fuel used in Aircraft EFGH for a flight taken by
   Owner A is taxed by § 4043 (tax on fuel used in fractional ownership aircraft
   programs).

3. Under the facts described below, fuel used in non-program Aircraft NP for a flight
   taken by Owner A is not taxed by § 4043.

4. Under the facts described below, fuel used in Aircraft ABCD or Aircraft EFGH for
   a flight chartered by a member of the general public is not taxed by § 4043.

5. Amounts paid for the flights described in Issue 3 and Issue 4 are taxed by
   § 4261.

FACTS

    A fractional ownership program manager (Program Manager) manages a fleet of

two aircraft, Aircraft ABCD and Aircraft EFGH (Program Aircraft). The Program Aircraft
are in the same fractional ownership dry-lease aircraft exchange arrangement
(Arrangement).

    The Program Aircraft are subsonic, fixed wing aircraft registered in the United

States and are listed as fractional program aircraft in the management specifications
issued to Program Manager by the Federal Aviation Administration (FAA) under subpart
K of 14 CFR part 91. Aircraft Owners A, B, C, and D each own a 1/4 fractional interest
in Aircraft ABCD. Aircraft Owners E, F, G, and H each own a 1/4 fractional interest in
Aircraft EFGH (Aircraft Owners A, B, C, D, E, F, G, and H referred to individually as an
‘aircraft owner’ and collectively as ‘aircraft owners’). When the aircraft in which an
aircraft owner has an interest is not available for the aircraft owner’s use, Program
Manager provides a different aircraft from the Program Manager’s pool of Program
Aircraft and non-program aircraft, including Aircraft NP, described below. Each aircraft
owner entered into the following agreements:

 Aircraft Purchase Agreement with aircraft interest seller – this agreement
conveys title for a fractional interest in a specific aircraft to an aircraft owner. A
person typically, but not necessarily, purchases its interest in a fractional
program aircraft from Program Manager or an entity related to Program Manager.
POSTN-108034-12 3

 Management Agreement with Program Manager – in this multi-year agreement,
Program Manager assumes full responsibility for the maintenance and operation
of aircraft ABCD and EFGH.

 Joint Ownership Agreement with other owners of aircraft owner’s aircraft – this
multi-year agreement facilitates sharing of a particular aircraft between the
owners of that aircraft. For example, Aircraft Owners A, B, C, and D enter into a
Joint Ownership Agreement with respect to Aircraft ABCD. Aircraft Owners E, F,
G, and H enter into a Joint Ownership Agreement with respect to Aircraft EFGH.

 Dry-lease aircraft exchange agreement with all other aircraft owners in the
Arrangement – this multi-year agreement facilitates sharing of the Program
Aircraft with other aircraft owners who participate in Program Manager’s
fractional ownership program.

    Program Manager also owns and operates Aircraft NP. Aircraft NP is not a part

of the fractional ownership program and Program Manager charters the aircraft to third
parties. Aircraft NP is registered with the FAA under 14 CFR part 135 as a charter
aircraft.

LAW AND ANALYSIS

  Section 4043 was added to the Code by section 1103 of the FAA Modernization

and Reform Act of 2012 (Act) (Pub. L. 112-95) and applies to fuel used after March 31,
2012.

   Section 4043(a) imposes a tax on any liquid used in a fractional program aircraft

as fuel (1) for the transportation of a qualified fractional owner with respect to the
fractional ownership aircraft program of which such aircraft is a part, or (2) with respect
to the use of such aircraft on account of such a qualified fractional owner, including use
in deadhead service.

   Section 4043(c)(1) defines ‘fractional program aircraft’ with respect to any

fractional ownership aircraft program, as any aircraft that (A) is listed as a fractional
program aircraft in the management specifications issued to the manager of such
program by the FAA under subpart K of 14 CFR part 91, and (B) is registered in the
United States.

  Section 4043(c)(2) defines ‘fractional ownership aircraft program’ as a program

under which:

   (A) A single fractional ownership program manager provides fractional ownership
   program management services on behalf of the fractional owners;

POSTN-108034-12 4

   (B) There are one or more fractional owners per fractional program aircraft, with
   at least one fractional program aircraft having more than one owner;

   (C) With respect to at least two fractional program aircraft, none of the ownership
   interests in such aircraft are (i) less than the minimum fractional ownership
   interest, or (ii) held by the program manager;

   (D) There exists a dry-lease aircraft exchange arrangement among all of the
   fractional owners; and

   (E) There are multi-year program agreements covering the fractional ownership,
   fractional ownership program management services, and dry-lease aircraft
   exchange aspects of the program.

    Section 4043(c)(3)(A) defines ‘qualified fractional owner’ as any fractional owner

that has a minimum fractional ownership interest in at least one fractional program
aircraft. Section 4043(c)(3)(B) defines ‘minimum fractional ownership interest’ as
including a fractional ownership interest equal to or greater than 1/16 of at least one
subsonic, fixed wing, or powered lift aircraft.

   Section 4043(c)(3)(A) defines ‘fractional ownership interest’ as (i) the ownership

of an interest in a fractional program aircraft, (ii) the holding of a multi-year leasehold
interest in a fractional program aircraft, or (iii) the holding of a multi-year leasehold
interest which is convertible into an ownership interest in a fractional program aircraft.
Section 4043(c)(3)(D) defines ‘fractional owner’ as any person owning any interest
(including the entire interest) in a fractional program aircraft.

    Section 4043(c)(4) defines ‘dry-lease aircraft exchange’ as an agreement,

documented by the written program agreements, under which the fractional program
aircraft are available, on an as needed basis without crew, to each fractional owner.

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

of any person. “Taxable transportation” includes 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.

 Notice 2012-27, IRB 2012-17, provides that the fractional ownership program

manager, rather than fractional owners, is liable for the tax imposed by § 4043.

    You asked whether fuel used in certain flights by certain individuals is taxed by

§ 4043(a). To determine whether fuel used in a flight is taxed by § 4043(a), we must
first determine whether the Arrangement is a fractional ownership aircraft program
under § 4043(c)(2). If we determine that the Arrangement is a fractional ownership
aircraft program, we must then determine whether the aircraft used for a particular flight
POSTN-108034-12 5

is a fractional program aircraft under § 4043(c)(1). Finally, if we determine that the
aircraft used for a particular flight is a fractional program aircraft, we must determine
whether the person transported on the flight is a qualified fractional owner under
§ 4043(c)(3)(A) or whether the flight was made on account of a qualified fractional
owner.

   Issue 1

   An arrangement must satisfy each factor of the five-factor definition provided in

§ 4043(c)(2) to be a fractional ownership aircraft program for purposes of the tax
imposed by § 4043(a). The Arrangement involves a single fractional ownership
program manger that provides fractional ownership program management services on
behalf of aircraft owners. Thus, the Arrangement satisfies § 4043(c)(2)(A). The
Arrangement also involves two aircraft, each with more than one owner. Thus, the
Arrangement satisfies § 4043(c)(2)(B).

   Each aircraft owner owns 1/4 of its respective aircraft, which is greater than the

1/16 interest required to satisfy the minimum fractional ownership interest requirement.
Further, Program Manager does not own an interest in the Program Aircraft. Thus, the
Arrangement satisfies § 4043(c)(2)(C).

    The Arrangement also includes a dry-lease aircraft exchange arrangement

among all aircraft owners, and there are multi-year program agreements covering the
fractional ownership, fractional ownership program management services, and dry-
lease aircraft exchange aspects of the program. Thus, the Arrangement satisfies
§ 4043(c)(2)(D) and (E). The Arrangement satisfies each factor of the five-factor
definition provided in § 4043(c)(2). Accordingly, we conclude that the Arrangement
described in the facts is a fractional ownership aircraft program for purposes of the tax
imposed by § 4043(a).

   Issue 2

   We determined that the Arrangement is a fractional ownership aircraft program.

We must next determine whether the aircraft used for a particular flight is a fractional
program aircraft under § 4043(c)(1). In Issue 2, you describe a flight taken by Owner A
on Aircraft EFGH, an aircraft in which Owner A does not have an ownership interest.
The Program Aircraft are listed as a fractional program aircraft in the management
specifications issued to Program Manger by the FAA under subpart K of 14 CFR part

91. The Program Aircraft are also registered in the United States. Because the
    Program Aircraft satisfy the requirements of § 4043(c)(1)(A) and (B), the Program
    Aircraft are fractional program aircraft with respect to the fractional ownership aircraft
    program that includes the Program Aircraft.

    We must next determine whether the person transported on the flight is a
    

    qualified fractional owner under § 4043(c)(3)(A) or whether the flight was made on
    POSTN-108034-12 6

account of a qualified fractional owner. Because Owner A owns a 1/4 interest in Aircraft
ABCD, Owner A satisfies the minimum fractional ownership interest in at least one
fractional program aircraft with respect to the fractional ownership aircraft program that
includes the Program Aircraft. Accordingly, A is a qualified fractional owner.

    Issue 2 involves a fractional Program Aircraft (Aircraft EFGH) that transports a

qualified fractional owner (Owner A). Therefore, the requirements of § 4043(a) are
satisfied and the fuel used in this flight is taxed by § 4043(a). Pursuant to Notice 2012-
27, Program Manager is liable for the taxed imposed by § 4043(a).

   Issue 3

   In Issue 3, you describe a flight taken by Owner A on Aircraft NP. Aircraft NP is

owned entirely by Program Manager and is not part of the fractional ownership aircraft
program that includes the Program Aircraft. Also, Owner A is not a qualified fractional
owner with respect to Aircraft NP. Therefore, Issue 3 does not involve a fractional
program aircraft that transports a qualified fractional owner. Accordingly, the
requirements of § 4043(a) are not satisfied and the fuel used in this flight is not taxed by
§ 4043(a).

   Issue 4

     In Issue 4, you describe a flight chartered by a member of the general public on

the Program Aircraft. A member of the general public who does not own an interest in
the Program Aircraft is not a qualified fractional owner. Therefore, Issue 4 does not
involve a fractional program aircraft that transports a qualified fractional owner.
Accordingly, the requirements of § 4043(a) are not satisfied and the fuel used in this
flight is not taxed by § 4043(a).

   Issue 5

    You asked that if we conclude that that the fuel used by the aircraft in Issues 2, 3,

or 4 is not taxed under § 4043, whether the amount paid for the flight is taxed under
§ 4261. We concluded that the fuel used in the flights described in Issues 3 and 4 are
not taxed under § 4043(a).

     If fuel used in a flight is not taxed by § 4043(a) and an amount is paid for that

flight, then the amount paid is taxed by § 4261(a) unless exempt from tax by the Code
or under IRS published guidance. The flights described in Issues 3 and 4 are not taxed
under § 4043(a), and are not covered by an exemption in the Code or IRS published
guidance. Accordingly, we conclude that amounts paid for these flights are taxed under
§ 4261(a).

   Please call (202) 622-3130 if you have any further questions.