Is an aircraft transaction a lease when the owner insists on supplying a pilot who keeps control during the flight?

Plain-English summary

Legal Division reviewed a 1957 annotation that treated aircraft arrangements as leases based partly on whether the owner was licensed and regulated as a carrier. The memorandum said that analysis was wrong and should be deleted.

Carrier certification can matter to the aircraft exemptions, but it does not decide whether the transaction is a lease. The lease-versus-charter question depends on who receives possession and control.

If the owner insists that the owner's pilot fly and retain control of the aircraft, the customer does not receive possession and control. The owner is providing charter transportation, not leasing the aircraft. Because no lease or rental payment exists, the owner also cannot elect to pay tax on fair rental value as a lessor.

Citations and references

• California Revenue and Taxation Code sections 6366 and 6366.1 (as cited)
• Entremont v. Whitsell (1939) 13 Cal.2d 290
• Former Annotation 105.0040 (May 1, 1957) (described as incorrect and recommended for deletion)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/105-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/105-0040.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

105.0040

Memorandum
To

:

Mr. Gary J. Jugum

From :

David H. Levine

Subject:

Annotation 105.0040 (5/1/57)

Date:

June 29, 1992

The above annotation is wrong, and I believe it must be deleted. It addresses the question of whether a charter can be regarded as a lease. The rule stated by the annotation is that if the customer is entitled to exclusive use or possession of the plane for a flight, then the aircraft is regarded as leased. The exception to this rule stated in the annotation is that it does not apply if the owner's charter flight operations are such that he is subject to licensing and regulation as a carrier. Under such circumstances, the flight is not regarded as a lease. This is incorrect analysis, and is not the analysis we have been applying. Whether the owner is certificated and regulated as a carrier is relevant to whether the owner is entitled to an exemption under section 6366 or 6366.1, but it has absolutely no relevance to the question of whether the transaction is a lease. If the owner will not "lease" the aircraft without providing a pilot who will maintain control of the aircraft during flight, then the flight is a charter and not a lease. That the owner doing charters may or may not be in violation of regulatory requirements has no relevance to the question of whether a charter is involved. The answer to that question depends solely on the degree of control retained by the owner. The applicable rule is set forth in Entremont v. Whitsell (1939) 13 Cal.2d 290. If possession and control of the property in question are not transferred to the purported lessee, then the transaction is not a lease. Rather, the purported lessor is actually using the property. We regularly apply this rule. For example, if a photographer "leases" his camera but insists upon taking the pictures himself, refusing to transfer possession and control of the camera to the "lessee," then the "lessor" is not regarded as leasing the camera, and would not be entitled to purchase that camera for resale. Here, if the aircraft owner will not let the purported lessee gain possession and control of the aircraft, that is, if the owner insists that the his pilot will fly the aircraft, then the owner is providing charter transportation service and is not leasing the aircraft. Such an owner may not elect to pay tax on fair rental value because there is no lease and no rentals are paid. The annotation should be deleted.