CCA 1233015: IRS distinguishes taxable Alaska bush flights from exempt sightseeing and rural-airport segments

Plain-English summary

Chief Counsel advised on the federal excise-tax treatment of six types of Alaska air services using small float planes. It concluded that flightseeing tours and two bear-viewing tours were not subject to the § 4261 tax because they were sightseeing flights, and that private charter service was exempt because it was not operated on an established line. Fly-fishing tours and lodge service were taxable under § 4261(a) because they transported passengers between locations on regularly offered routes, but their segments qualified for the § 4261(e)(1) rural-airport exemption. The advice applied the small-aircraft rules in § 4281 and treated remote bodies of water as rural airports when the statutory passenger and road-access conditions were met.

Ruling snapshot

• Question: Which Alaska air-tour and charter services were subject to the § 4261 taxes, and which qualified for the rural-airport exemption?
• Outcome: Advice given.
• Key authorities: IRC §§ 4261, 4262, 4281, and 4291; Treas. Reg. § 49.4263-5(c); FAR 14 CFR § 1.1.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201233015
       Release Date: 8/17/2012
       CC:PSI:B07:MHBeker                       Third Party Communication: None
       POSTN-128397-12                          Date of Communication: Not Applicable

UILC: 4261.00-00, 4281.00-00

date: July 25, 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: Alaska Bush Flights

       This Chief Counsel Advice responds to your request for assistance dated July 2, 2012.
       This advice may not be used or cited as precedent.

       ISSUES

          1. Whether amounts paid for the six flight services described in the facts below are
             subject to the taxes imposed by § 4261 of the Internal Revenue Code (Code).

          2. If amounts paid for a flight service described in the facts below are subject to the
             taxes imposed by § 4261, are amounts paid for the flight segments for that
             particular service exempt from the tax imposed by § 4261(b) (domestic segment
             tax) by reason of § 4261(e)(1) (rural airport exemption).

       CONCLUSIONS

          1. Amounts paid for “Flightseeing tours”, “bear viewing platform day tours”, “bear
             viewing boat tours”, and “charter service” described in the facts below are not
             subject to the taxes imposed by § 4261. Amounts paid for “fly-fishing day tours”
             and “lodge service” are subject to the taxes imposed by § 4261(a).

          2. Amounts paid for “fly-fishing day tours” and “lodge service” are exempt from the
             domestic segment tax under the rural airport exemption.

POSTN-128397-12 2

FACTS

These facts describe events that occurred after September 30, 2005.

Six unrelated air tour and aircraft charter companies, Operator 1, Operator 2, Operator
3, Operator 4, Operator 5, and Operator 6 (collectively “operators”) offer various air
transportation services in Alaska. All of the aircraft in the operators’ fleets are piston-
driven float planes with a maximum certified takeoff weight of 6,000 pounds or less. All
of the operators’ tour flights originate from an airport (home bases) that receives
financial assistance from the Airport and Airways Trust Fund. This airport is not a “rural
airport” as that term is defined in § 4261(e)(1)(B) of the Code. All of the sites (other
than their home bases) to which the operators fly had fewer than 100,000 commercial
passengers departing by air during the second preceding calendar year before any of
the flights described herein occurred. In addition, none of the sites (other than their
home bases) to which the operators fly are connected by paved roads to another
airport.

The operators offer the following services:

 Flightseeing tour. A customer that purchases a flightseeing tour boards an
aircraft at Operator 1’s home base, flies to a remote region of Alaska to view
mountains, glaciers, and other natural features from the aircraft, and returns to
Operator 1’s home base. The flight lasts from half an hour to three hours,
depending on the tour selected by the customer. The aircraft does not land at
any of the natural features during the flightseeing tour; the aircraft takes off from
and lands at the same point.

 Bear viewing platform day tour. A customer that purchases a bear viewing
platform day tour boards an aircraft at Operator 2’s home base and flies to a
National Park or other scenic location where the aircraft lands on a body of
water. After landing, the customer deplanes and walks a short distance to a
platform where the customer views wild bears. While on the ground, the
customer may have a box lunch, but does not engage in any other activities
(such as fishing or kayaking). After a few hours, the customer re-boards the
aircraft (which may or may not wait on site) and returns to Operator 2’s home
base. The bear viewing platform day tour begins and ends on the same calendar
day.

 Bear viewing boat tour. A customer that purchases a bear viewing boat tour
chooses a destination from a list of options provided by Operator 3, boards an
aircraft at Operator 3’s home base, and flies to a National Park or other scenic
location where the aircraft lands on a body of water. After landing, the aircraft
docks and the customer deplanes and boards a boat at the same or nearby dock.

POSTN-128397-12 3

   The boat then cruises around the body of water while the passengers and a
   guide look for wild bears. The customer remains on the boat with a guide the
   entire time the group is bear watching. The boat then returns to the dock from
   which the boat departed and the customer may have lunch. Lunch is served at a
   lodge that is walking distance from the dock. After lunch, the customer re-boards
   the aircraft (which may or may not wait on site) and returns to Operator 3’s home
   base. The bear viewing boat tour begins and ends on the same calendar day.

 Fly-fishing day tour. A customer that purchases a fly-fishing day tour chooses a
fishing location from a list of options provided by Operator 4, boards an aircraft at
Operator 4’s home base, and flies to a remote area of Alaska where the aircraft
lands on a body of water at the selected location. All of the fly-fishing locations
are accessible only by aircraft or boat. After landing, the customer deplanes and
is accompanied by a guide for a day of fly-fishing. At the end of the day, the
customer re-boards the aircraft (which may or may not wait on site) and returns
to Operator 4’s home base. Also included in this category of flight services are
tours that involve activities such as kayaking, where the customer spends the
day kayaking rather than fly-fishing. Most days during the summer season,
Operator 4 offers daily or near-daily departures for these tours and the aircraft
used is determined by Operator 4 based on the total number of passengers that
signed up for the tour.

 Lodge service. Operator 5 partners with several lodges located in the Alaska
wilderness that are accessible only by aircraft or boat. A customer that
purchases lodge service is flown from Operator 5’s home base to one of the
lodges. After several days Operator 5 returns to the lodge and flies the customer
back to Operator 5’s home base. Most days during the summer season,
Operator 5 offers daily or near-daily departures to the lodges and the aircraft
used is determined by Operator 5 based on the total number of passengers flying
to or from the lodges.

 Charter service. Operator 6 offers private charter service to fly customers to
locations it otherwise does not service. A customer that purchases charter
service arranges with Operator 6 the departure time, departure location,
destination, and either specifies the type of aircraft for the flight or works with
Operator 6 to choose the appropriate aircraft to fit the customer’s needs.

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.

POSTN-128397-12 4

Section 4261(b) (domestic segment tax) imposes a tax on amounts paid for each
domestic segment of taxable transportation. A “domestic segment” is defined in
§ 4261(b)(2) as any segment consisting of one takeoff and one landing and which is
taxable transportation.

Section 4261(e)(1)(A) exempts from the domestic segment tax amounts paid for
segments beginning or ending at rural airports. Section 4261(e)(1)(B) defines the term
“rural airport” as any airport if:

    (i) there were fewer than 100,000 commercial passengers departing by air (in the
    case of any airport not connected by paved roads to another airport, on flight
    segments of at least 100 miles) during the second preceding calendar year from
    such airport; and

    (ii) such airport: (I) is not located within 75 miles of another airport which is not
    described in § 4261(e)(1)(B)(i), (II) is receiving essential air service subsidies as
    of the date of the enactment of § 4261(e)(1), or (III) is not connected by paved
    roads to another airport.

Section 4261(i) exempts from the taxes imposed by § 4261 amounts paid for any air
transportation by a seaplane with respect to any segment consisting of a takeoff from,
and a landing on, water, but only if the places at which such takeoff and landing occur
have not received and are not receiving financial assistance from the Airport and
Airways Trust Fund.

Section 4281 provides that the taxes imposed by § 4261 do not apply to transportation
by an aircraft having a maximum certificated takeoff weight of 6,000 pounds or less,
except when the aircraft is operated on an established line or when such aircraft is a jet
aircraft.1 For purposes of the preceding sentence, the term “maximum certificated
takeoff weight” means the maximum such weight contained in the type certificate or
airworthiness certificate. For purposes of § 4281, an aircraft is not considered as
operated on an established line at any time during which such aircraft is being operated
on a flight the sole purpose of which is sightseeing.

Section 49.4263-5(c) of the Facilities and Services Excise Taxes Regulations
(regulations) defines the term “operated on an established line” to mean operated with
some degree of regularity between definite points. It does not necessarily mean that
strict regularity of schedule is maintained; that the full run is always made; that a
particular route is followed; or that intermediate stops are restricted. The term implies
that the person rendering the service maintains and exercises control over the direction,

1
The requirement that amounts paid must be for transportation provided on non-jet powered aircraft was
added to § 4281 by section 1107 of the FAA Modernization and Reform Act of 2012 (Pub. L. 112-95).
The requirement applies to taxable transportation provided after March 31, 2012. This change to the law
does not affect this case because none of the transportation at issue here was provided on jet powered
aircraft.

POSTN-128397-12 5

route, time, number of passengers carried, etc.

The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users
(SAFETEA-LU), Pub. L. 109-59 (August 10, 2005), added the last sentence to § 4281
(providing that sightseeing flights are not operated on established lines). The Code
does not define the term “sightseeing” for purposes of § 4281, and the IRS has not
issued guidance defining the term. However, the Senate Finance Committee
(Committee) Report (Report) to SAFETEA-LU, S. Rep. 109-82, 16, explains that
“sightseeing” flights--

   include flights of short duration that overlook a glacier, volcano, the Grand
   Canyon, or other similar attraction and for which the air tour begins and ends at
   the same point. By short duration, the Committee intends that the tour occur
   within a calendar day, irrespective of intermittent stops to view the attraction. In
   addition, all passengers from the initial point of departure must return with the
   aircraft at the conclusion of the tour.

The Report also explains the policy behind the provision – that such flights are primarily
for entertainment rather than for transportation from one place to another and so should
be treated as noncommercial aviation.

You asked whether the taxes imposed by § 4261 apply to amounts paid for the flight
services described in the facts above. The six flight services described above involve
air transportation that begins and ends in the United States. Thus, the operators are
providing taxable transportation, and the taxes imposed by § 4261 apply to the amounts
paid for these flights unless the Code otherwise exempts the amounts paid for the flight
services from the taxes. The taxability of air transportation services is determined on a
flight-by-flight basis.

Exemption for seaplanes

All of the flight services offered by the operators are provided on float planes and all of
the flights originate from, or return to, the operators’ home bases, which receives
financial assistance from the Airport and Airways Trust Fund. Because all of the
operators’ flights either take off from, or land at, a seabase that receives financial
assistance from the Airport and Airways Trust Fund, § 4261(i) does not exempt from tax
amounts paid for these flights.

Exemption for small aircraft on a nonestablished line

The § 4281 exemption applies to air transportation if the aircraft--
(1) Has a maximum certificated takeoff weight of 6,000 pounds or less; and
(2)(a) Is not operated on an established line; or
(b) Is on a flight the sole purpose of which is sightseeing.

POSTN-128397-12 6

The operators use piston-driven aircraft with maximum certified takeoff weight of 6,000
pounds or less. Therefore, the aircraft used for all of the flight services satisfy Item (1).

Item (2) is satisfied if the aircraft is either (a) not operated on an established line or (b)
solely for the purpose of sightseeing. If the flight meets neither of these tests, then the
flight does not qualify for the § 4281 exemption.

   Flightseeing tours

Flightseeing tours involve over-flights of scenic areas that depart from, and return to,
Operator 1’s home base. Flightseeing tours are short duration flights that overlook a
glacier or other similar attraction, and which begin and end at the same point on the
same day. In addition, all passengers from the initial point of departure return with the
aircraft at the conclusion of the tour. Therefore, these flights are solely for the purpose
of sightseeing and Item (2)(b) is satisfied.

   Bear viewing platform day tour

Bear viewing platform day tours involve flights to wild bear habitats, a stop of several
hours at the habitat to view bears, and a return flight to Operator 2’s home base. These
tours are short in duration, occurring within a calendar day, and involve flights with an
intermittent stop to view wild bears in their natural habitat. While on the ground, the
passengers leave the aircraft and walk a short distance but only for the purpose of
viewing the bears; the passengers do not participate in any other activities. In addition,
all passengers from the initial point of departure return with the aircraft at the conclusion
of the tour. Therefore, these flights are solely for the purpose of sightseeing and Item
2(b) is satisfied.

   Bear viewing boat tour

Bear viewing boat tours involve flights to wild bear habitats, a stop of several hours
during which the customer cruises around a body of water to view wild bears from a
boat, and a return flight to Operator 3’s home base. These tours are short in duration,
occurring within a calendar day, and involve flights with an intermittent stop to view wild
bears in their natural habitat. While on the ground, the passengers leave the aircraft
and board a boat, but only for the purpose of viewing the bears; the passengers do not
participate in any other activities while on the boat (such as fishing or waterskiing). The
sole purpose of the boat is to provide a mobile viewing platform to watch wild bears;
customers begin and end the trip from a single point and do not dock at any other
location during the tour; the boat is not used to transport customers in the same sense
that a ferryboat transports passengers from one point to a different point across a body
of water; and all passengers from the initial point of departure return with the aircraft at
the conclusion of the tour. Therefore, these flights are solely for the purpose of
sightseeing and Item 2(b) is satisfied.

POSTN-128397-12 7

   Fly-fishing day tour

Sightseeing. Fly-fishing day tours involve flights to remote sections of river, a stop of
several hours to fly-fish, and a return flight to Operator 4’s home base. The purpose of
these flights is not to overlook a glacier, volcano, or other similar attraction, but rather to
transport the passenger from one location to another location to engage in an activity
that is not sightseeing. These flights are essentially no different than purchasing a ticket
on a commercial airline to fly from one’s home city to another city to engage in an
activity there. Therefore, fly-fishing day tours are not sightseeing flights as that term is
used in § 4281.

Established line. An aircraft is operated on an established line if (1) the aircraft is
operated with some degree of regularity between definite points (even though strict
regularity of schedule is not maintained) and (2) the operator of the aircraft maintains
and exercises control over the direction, route, time, and number of passengers carried.

The crux of “regularity” is that the public can rely on the transportation; a fixed schedule
is not required. Papillon Airways, Inc. v. U.S., No. 09–297T, 2012 WL 2126815, at *6
(Fed.Cl. June 5, 2012). However, some form of scheduled air service, whether
advertised or merely existing in fact, is necessary. Service on demand is not by itself
sufficient, even where such service is characterized by a substantial number of flights.

The fly-fishing day tours are operated with some degree of regularity because the tours
are offered daily, even though some flights may be cancelled because of bad weather
or lack of customers. Because the customer chooses a destination from a list of options
offered by Operator 4, these flights are operated between definite points even though
the exact landing spot on a river or lake may vary with the weather and fishing
conditions of each day. For example in Temsco Helicopters, Inc. v. U.S., 409 Fed.
Appx. 64, 67 (9th Cir. 2010), the “definite points” requirement was satisfied even though
the exact landing points on a glacier varied with the conditions of the day. Also,
Operator 4 maintains the requisite control over the flights because Operator 4 decides
what tours to offer, which aircraft to fly, when to schedule flights, the route to take, and
where to land. It also decides the maximum number of passengers allowed and
whether to cancel a flight for insufficient sales. When purchasing a fly-fishing day tour,
a customer cannot simply call Operator 4 and inform them of their departure time.

Thus, the fly-fishing day tours are operated on an established line and are subject to the
tax imposed by § 4261(a).

   Lodge service

Sightseeing. Lodge service is similar to the fly-fishing tours as the purpose of these
flights is to transport the passenger from one location to another location to visit a lodge
and engage in activities organized by the lodge. Like the fly-fishing day tours, these
flights are essentially no different than purchasing a ticket on a commercial airline to fly

POSTN-128397-12 8

from one’s home city to another city to engage in an activity there. Therefore, lodge
service is not sightseeing flights as that term is used in § 4281.

Established line. Lodge service is similar to fly-fishing tours as the flights are operated
with some degree of regularity between Operator 5’s home base and the Operator 5’s
partner lodges. Operator 5 maintains the requisite control over the flights because
Operator 5 maintains control over time of departure, route, number of passengers to
take, and whether to cancel a flight for insufficient sales.

Thus, the lodge service is operated on an established line and are subject to the tax
imposed by § 4261(a).

    Charter service

Sightseeing. Charter service is similar to the fly-fishing tours and lodge service as the
purpose of these flights is to transport the passenger from one location to another
location to engage in activities at the destination. Like the fly-fishing day tours and
lodge service, these flights are essentially no different than purchasing a ticket on a
commercial airline to fly from one’s home city to another city to engage in an activity
there. Therefore, charter service is not sightseeing flights as that term is used in
§ 4281.

Established line. Unlike fly-fishing tours and lodge service, charter services are not
operated with some degree of regularity between Operator 6’s home base and the
charter flight destinations. Operator 6 does not maintain control over time of departure,
route, number of passengers to take, and whether to cancel a flight for insufficient sales
like it does for its other services.

Thus, the charter service is not operated on an established line and is not subject to the
tax imposed by § 4261(a).2

Exemption for Rural Airports

You also asked whether those flight services that are not exempted from § 4261 taxes
by operation of § 4281 (fly-fishing day tours and lodge service) are nevertheless
exempted from the domestic segment tax by § 4261(e)(1) (the rural airport exemption)..

An amount paid for a flight segment is exempt from the domestic segment tax if the
segment begins or ends at a rural airport. The facts state that the operators’ home
bases are not rural airports. However, amounts paid for flight segments that begin or

2
If a customer charters an aircraft having a maximum certificated takeoff weight of 6,000 pounds or more,
§ 4281 would not exempt amounts paid for the flight from the taxes imposed by § 4261. In that case, the
amount paid for the charter is subject to the tax imposed by § 4261(a). However, applying the analysis
discussed below, amounts paid for the charter flights would be exempt from the domestic segment tax.

POSTN-128397-12 9

end at the operators’ home bases are exempt from the domestic segment tax if the
destination or origin of the flight is a rural airport.

Rev. Proc. 2005-45, 2005-2 C.B. 141, allows taxpayers to rely on a list of rural airports
published by the U.S. Department of Transportation, Office of the Secretary of
Transportation (USDOT list), to determine whether an airport is a “rural airport”.
However, any airport not on the USDOT list qualifies as a rural airport if it meets the
requirements of § 4261(e)(1)(B). None of the destinations to which the operators fly is
on the USDOT list. Therefore, we must first determine whether the landing site is an
“airport,” and if we determine that it is, we must then determine whether the airport is
“rural” by applying § 4261(e)(1)(B).

Neither the Code, IRS published guidance, nor the legislative history define the word
“airport” for purposes of the rural airport exemption. Although Rev. Rul. 78-75, 1978-1
C.B. 340, holds that regulations issued by the Federal Aviation Administration (FAA) are
not determinative for air transportation excise tax purposes, the Service sometimes
considers external sources (including dictionaries) as an aid in construction when those
sources do not conflict with the Code or IRS published guidance or such guidance is
silent.

In this case, the FAA’s definition of “airport” in the Federal Aviation Regulations (FAR),
which is consistent with dictionary definitions of the term, is informative. FAR 14 CFR
1.1 defines “airport” as “an area of land or water that is used or intended to be used for
the landing and takeoff of aircraft, and includes its buildings and facilities, if any.”

The remote bodies of water on which the operators land and takeoff are among the
types of areas that Congress intended to include when it created the rural airport
exemption. A narrow reading of the word “airport” to only mean a transportation facility
with a terminal building and control tower would undermine the purpose of the
exemption by excluding from it some rural air facilities. The broader reading of the word
“airport” is further supported by the definition of “airport” in FAR 14 CFR 1.1.
Accordingly, these areas of water are “airports” for purposes of the rural airport
exemption.

We must next determine whether these airports are “rural” as defined in
§ 4261(e)(1)(B). Applying § 4261(e)(1)(B)(i), we first look at the number of commercial
passengers that depart by air from the airports. Fewer than 100,000 commercial
passengers depart from the bodies of water to which the operators fly. Therefore,
clause (i) of § 4261(d)(1)(B) is satisfied.

Clause (ii) of §4261(e)(1)(B) looks at the connectivity of the airport at issue with other
airports. To satisfy this test, the airport must satisfy one of three conditions.
The airport:

POSTN-128397-12 10

   (I) is not located within 75 miles of another airport that has a minimum of 100,000
   commercial passengers departing by air during the second preceding calendar
   year from such airport;
   (II) is receiving essential air service subsidies as of August 5, 1997; or
   (III) is not connected by paved roads to another airport.

Clause (ii) of §4261(e)(1)(B) is also satisfied because all of the airports to which the
operators fly are accessible only by air or boat; none of the airports are connected to
other airports by paved roads.

Because § 4261(e)(1)(B)(i) and (ii) are satisfied, the sites to which the operators fly are
“rural” airports. Accordingly, we conclude that amounts paid for the fly-fishing day tours
and lodge service are exempt from the domestic segment tax.3

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

3
Because the rural airport exemption to the domestic segment tax does not depend on the weight of the
aircraft, we would reach the same conclusion if the aircraft used for these flights have a maximum
certificated takeoff weight of 6,000 pounds or more.