When did student flight instruction include a lease of the aircraft rather than only an instructional service?

Plain-English summary

Retired Deputy Director Robert Nunes reportedly flagged a staff-counsel letter as correct but potentially inconsistent with existing annotations and Regulation 1660(a)(1). His transmittal note, Elizabeth Abreu's letter and every attachment are absent.

Supervising Staff Counsel David Levine agreed with Abreu's rule: a purported lease supplied only with a mandatory operator generally was not a lease because true possession and control did not pass. Regulation 1660(a)(1), which includes property operated under the customer's direction and control, was consistent with that result. When the operator was optional, counsel understood constructive possession and control to pass to the customer.

For student flight instruction, counsel drew a practical line. If a qualified pilot could rent the aircraft at the same aircraft fee charged to a student and instruction was separately priced, the transaction should be treated as an aircraft lease plus instruction.

If the aircraft was never leased to a qualified pilot and was used only for instruction, the student's in-flight control was insufficient: true possession and control had not transferred, so the transaction was an instructional service rather than a lease.

Levine called the question close and asked that Annotation 330.1860 be clarified on this analysis or deleted. He also asked that Annotation 330.3480, which he said had “no redeeming qualities,” be removed and recounted correction/deletion work on Annotations 105.0040 and 330.3160. None of the underlying annotation history is supplied.

An added April 6, 2004 note says this memorandum supersedes and replaces the original material behind the December 8, 1965 Annotation 330.1860. The live annotation now states only the two conditional student-flight outcomes and omits the broader operator rule and revision history.

Common questions

Did a student touching the controls automatically create a lease?

No. True possession and control still had to transfer.

When did counsel treat student aircraft use as a lease?

When a qualified pilot could lease the aircraft, the student paid the same aircraft fee as another lessee, and instruction was charged separately.

When was it only an instructional service?

When the aircraft was never leased to qualified pilots and was used only for instruction.

Why did separate pricing matter?

It helped show that aircraft rental existed independently from the instructional service.

Did Regulation 1660(a)(1) make every operated-property arrangement a lease?

No. Counsel read its direction-and-control language together with possession: an optional operator could support constructive transfer, while a mandatory operator generally did not.

Did the memo decide an actual taxpayer's tax?

No. It supplies no transaction, audit, assessment or adjudicated result; it recommends how annotations should state the rule.

What happened to the older annotations?

The memo says 105.0040 was corrected and 330.3160 apparently deleted, requests deletion of 330.3480, and asks that 330.1860 be clarified or deleted. The complete revision record is absent.

Is the original 1965 basis available here?

No. A 2004 note says the 1994 memo supersedes it, but the December 8, 1965 material is not reproduced.

Citations and references

• Regulation 1660(a)(1) — quoted in part on temporary use operated by or under customer direction and control
• Elizabeth Abreu staff-counsel letter — mandatory-operator rule described, letter absent
• January 13, 1993 and June 29, 1992 Levine memoranda — identified as attachments, not reproduced
• Senior Staff Counsel Ronald Dick correspondence — mentioned without date or text
• Annotations 105.0040, 330.1860, 330.3160 and 330.3480 — correction/deletion history discussed incompletely
• April 6, 2004 SPJarvis note — says this memo supersedes the December 8, 1965 original material
• Official Annotation 330.1860 — publishes the two student-flight conditions but not the operator/provenance discussion

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.1860
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-1860.pdf

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
330.1860
To:

Mr. Robert Nunes
Deputy Director (Ret.)
Annotation Project

From:

David H. Levine
Supervising Staff Counsel

Subject:

Lease Annotations

Date:

May 13, 1994

"The information contained in this memo supercedes and
replaces the original material that became annotation 330.1860 dated 12/8/65." SPJarvis 4/6/04.

You added a note on an annotation transmittal control sheet regarding an annotation of a letter written by staff counsel Elizabeth Abreu. The letter essentially stated that a person who purportedly leases tangible personal property but does so with a mandatory operator is not regarded as leasing the property for purposes of sales and use tax. Your note indicates that you agree with the opinion but that it appears to conflict with annotations 330.1860 (12/8/65) and 330.3480. You also cite Regulation 1660(a)(1). [Date added for clarity.] The rule stated in Ms. Abreu’s letter is the correct rule, and the one we have been applying for some time. I explain it in more detail in a memorandum dated january 13, 1993, a copy of which is attached. I assume that my January 13, 1993 memorandum will be annotated. If there is any doubt about it, I specifically request that it be annotated. I think annotating Ms. Abreu’s would also be worthwhile. Rather than being inconsistent with Ms. Abreu’s letter, I believe that subdivision (a)(1) of Regulation 1660 is consistent with it. The provision you mention states that a lease “includes a contract under which a person secures for a consideration the temporary use of tangible personal property which, although not on his premises, is operated by, or under the direction and control of, the person or his employees.” I understand your point to be that the definition includes property that is merely under the direction and control of the lessee and, implicitly, operated by the lessor. We have interpreted this to mean that, if there is an optional operator, the lessee has direction and control because possession and control has been constructively transferred to the lessee. (This is discussed in my January 13, 1993 letter.) I note that I have previously requested that annotations that are inconsistent with this rule be removed. For example, attached is a memorandum dated June 29, 1992 requesting that annotation 105.0040 be deleted because it implied that an airplane provided with a mandatory pilot could be a lease. (A copy is attached.) Rather than being deleted, the annotation was corrected to state the correct rule, as stated in Ms. Abreu’s letter. In my January 13, 1993 memorandum, I suggested that it would be appropriate for someone to cull through the annotations to select for deletion or correction inaccurate or

Mr. Robert Nunes

misleading annotations on this subject.
apparently been deleted.

-2-

May 13, 1994
330.1860

One I cited was annotation 330.3160, which has

Annotation 330.1860 is a close question. It states that student flight instruction is ordinarily considered to be a use of the aircraft by the owner, but it indicates that the owner could elect to consider the use of the aircraft to be a lease. During the flight, the student does, in effect, have control over the aircraft. On the other hand, it could also be argued that true possession and control has not transferred to the student. My view is that, if a qualified pilot could lease the aircraft and the student is charged a rental fee in the same amount as that charged to any other lessee, with a separate charge for instruction, we should regard the transaction as a lease of the aircraft plus instruction. If, however, the aircraft is never leased to a qualified pilot, and is used only for instructional purposes, we should regard the student as obtaining the service of in-air instruction and not regard the transaction as a lease. I believe that the annotation should be clarified based on this analysis, or deleted. Annotation 330.3480 has no redeeming qualities. It is one of the offending ones that I asked to be removed in my sweeping request for removal of inconsistent annotations. In any event, based on the analysis in my previous correspondence on this subjcet as well as that of Ms. Abreu and Senior Staff Counsel Ronald Dick (and, I am sure, others), please remove annotation 330.3480.