Were two aircraft transfers in a corporate liquidation and merger exempt, and were later crewed charter services taxable?

Plain-English summary

Both corporate aircraft transfers were exempt, and the described crewed time-sharing service was exempt transportation.

Aircraft 308 was distributed with related liabilities and cash as the recipient shareholder's exact ratable portion of the dissolving corporation's assets. The Department treated that as the exempt dissolution transfer described in the cited rule.

Aircraft 327 passed to the surviving corporation in a statutory merger qualifying under the stated provisions. That transfer also was exempt.

The described time-sharing arrangement supplied both Aircraft 308 and a fully qualified crew, so the Department treated it like a charter transportation service rather than a taxable rental.

The Department did not decide the proposed management-company arrangement because no contract existed to review. It warned that an owner-to-management-company arrangement could itself be a taxable aircraft lease even if later third-party chartering was exempt transportation.

The later exempt transfers and charter activity did not retroactively destroy the resale exemption for the corporation's original aircraft purchases.

What this means for you

The transfer exemptions depended on the exact liquidation and merger facts. The charter result depended on who supplied the crew and who possessed or controlled the aircraft; an unreviewed management contract remained unresolved.

Common questions

Q: Was Aircraft 308's liquidating distribution taxable? A: No. It was the recipient shareholder's ratable share of the dissolving corporation's assets.

Q: Was Aircraft 327's merger transfer taxable? A: No.

Q: Was the described crewed time-sharing service taxable? A: No. It was treated as transportation service.

Q: Did the ruling approve the management-company structure? A: No. The Department declined to rule without the contract.

Q: Did the later transfers taint the original resale exemption? A: No.

Citations and references

• Fla. Stat. § 607.1101 and I.R.C. § 368(a)(1)(A) — statutory merger facts
• Fla. Admin. Code r. 12A-1.007(26)(a)3. and 4. — dissolution and merger transfer exemptions
• Fla. Admin. Code r. 12A-1.071(1) and (22) — aircraft leases and charter transportation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-014

Original ruling text

Apr 19, 1995

Re: Technical Assistance Advisement ("TAA") 95A-014 Corporate Transfers of Aircraft Pursuant to Reorganization and Dissolution Parties: XXX (herein "Corp. X) XXX (herein "Corp. Y") XXX (herein "Corp. Z")

Dear :

This response is to your January 13, 1995, request for the issuance of a Technical Assistance Advisement ("TAA") regarding the referenced issue and parties. Your request meets the disclosure and documentation requirements specified in s. 213.22, F.S., and Rule 12A-11.003, F.A.C. Therefore, the Department is hereby issuing the requested TAA.

DISCUSSION OF FACTS

Your letter imparts the following information regarding the issues under advisement herein:

"[Corp. X], a Florida S corporation, purchased two aircraft (such aircraft referred to herein as Aircraft 308' andAircraft 327,'or collectively as the Aircraft') of approximately equivalent fair market value on December 30, 1993. The Aircraft were purchased from separate sellers, and [Corp. X] took delivery of both in Florida. Resale certificates were issued to the sellers at the time of deliver. The purchases qualified for the resale exemption because [Corp. X] leased both of the Aircraft to another entity (the Lessee') under exclusive dry' leases (the Leases'). The Leases commenced immediately with the date of purchase. [Corp. X] incurred purchase money mortgage obligations on each Aircraft equal to 100% of their purchase price.

"[Corp. X] was formed by two individuals (referred to

herein as Owner-A' andOwner-B'). Owner-A and Owner-B held the stock of [Corp. X] equally until the introduction of a new shareholder on December 31, 1994, as discussed more fully below. Owner-A and Owner-B also possess majority ownership and control of the Lessee.

"For valid business reasons, and coincident with the reorganization of a number of related entities comprising the group of companies which operates the business, [Corp. X] management and its shareholders decided to contemporaneously (i) distribute Aircraft 308 (and all of its related liabilities), plus a small cash balance, to a corporation controlled by Owner-A and Owner-B, and (ii) merge [Corp. X] with and into [Corp. Y], a Florida corporation. The Merger transaction qualified as a statutory merger pursuant to the Section 607.1101, Florida Statutes, and Internal Revenue Code (IRC') Section 368(a)(1)(A) (theMerger'). The distribution was effective at 11:59 p.m. on December 31, 1994 and the merger was effective two minutes later, at 12:01 a.m. on January 1, 1995. The distribution and the merger, together, were part of an overall plan of reorganization to cease and terminate the separate existence of [Corp. X]. At the time of this reorganization, the amount of underlying debt for each Aircraft approximated each Aircraft's fair market value.

"The combined distribution of Aircraft 308, its related liabilities and the cash was effected in the form of a liquidating distribution (the `Distribution') to [Corp. Z], a Florida Corporation. [Corp. Z] is owned equally by Owner-A and Owner-B, and, for liability considerations, was formed by them to hold Aircraft 308 upon its distribution from [Corp. X]. [Corp. Z] was admitted as a 49.5% shareholder of [Corp. X] at 5:00 p.m., on December 31, 1994 (thereby terminating [Corp. X's] status as an S corporation), and its interest in [Corp. X] was liquidated by the Distribution at 11:59 p.m. on that same day. The fair market value of the Distribution represented [Corp. Z's] total net assets on the effective date of the distribution. Consequently, as a result of the liquidating

distribution and Merger, Aircraft 327 was transferred to
[Corp. Y], and Aircraft 308 was distributed to [Corp. Z]. Owner-A and Owner-B received stock in [Corp. Y] as a result of the Merger, while [Corp. Z] did not (since its stock interest in [Corp. X] was terminated immediately prior to the Merger).

"Effective as of 11:58 p.m. on December 31, 1994 (i.e., immediately prior to the Merger and cessation of [Corp. X]), [Corp. X] terminated the Lease with respect to Aircraft 308. Aircraft 308 will no longer be exclusively dry leased. Rather, [Corp. Z] will receive a mix of charter or rental income from the operation of Aircraft 308.
[Corp. Z] may enter into a non-exclusive Time Sharing Agreement with a related party whereby [Corp. Z] would receive payments for providing Aircraft 308 and a flight crew to the related party. The Time Sharing Agreement would require provisions of Federal Aviation Regulations Section 91.50(c)(1) and to provide a fully qualified Flight crew for all operations during the term of the Agreement. In addition, [Corp. Z] may charter (through an aircraft management company) Aircraft 308 to both related and unrelated parties and receive charter income therefrom.

"The Lease with respect to Aircraft 327 was terminated by
[Corp. Y] on January 1, 1995, and replaced with an exclusive Dry Lease (the `Dry Lease') entered into with a successor to the original Lessee. Florida sales tax will be collected on payments made pursuant to the Dry Lease. "The relevant taxpayer identification numbers are listed on Exhibit A attached hereto."

In a follow up telephone conversation, you confirmed that the combined distribution of Aircraft 308, its related liabilities and the small cash balance in the form of a liquidating distribution to Corp. Z will exactly equal Corp. Z's ratable portion of the Corp. X's assets.

REQUESTED ADVISEMENT AND RESPONSE

The issues under advisement herein are restated from your letter

with each followed by the Department's response.

ISSUE 1: "Whether the Distribution of Aircraft 308 two minutes prior to the effective time of the Merger will be exempt from sales tax?"

RESPONSE TO ISSUE 1: As you are aware Rule 12A-1.007(26)(a)3., F.A.C., provides:

"The transfer of title by a dissolved corporation to one of its stockholders as part of the stockholder's ratable portion of the assets of the corporation does not constitute a sale by the dissolved corporation to the stockholder and such transfer is exempt."

Based on the facts as represented by your disclosures, the distribution of Aircraft 308 together with related liabilities and small cash balance to Corp Z represents Corp. Z's ratable portion of Corp. X's assets. Corp. Z's entitlement to receive the Distribution flows from its position as a 49.5% stockholder in Corp. X and due to the fact that Corp. Z is not participating in the Merger. Corp. X dissolves two minutes following the Distribution by operation of the Merger and the Distribution of Aircraft 308 to Corp. Z is an event which in substance occurs contemporaneous to the Merger. The transfer of Aircraft 308 from Corp. X to Corp. Z two minutes prior to the effective time of the Merger would fit the pattern of an exempt transfer as described in Rule 12A-1.007(26)(a)3., F.A.C., above. Therefore, the Department finds that the provisions of Rule 12A1.007(26)(a)3., F.A.C., above, operate to exempt the transfer of Aircraft 308 from Corp. X to Corp. Z pursuant to the Distribution as represented in your petition and further described in our follow up telephone conversation.

ISSUE 2: "Whether the transfer of Aircraft 327 pursuant to Section 607.1101, Florida Statutes, and pursuant to IRC Section 368(a)(1)(A) will be exempt from sales tax?"

RESPONSE TO ISSUE 2: As you are further aware, Rule 12A1.007(26)(a)4., F.A.C., provides an exemption for:

"The transfer of title into the name of the surviving corporation by reason of a corporate consolidation or merger in accordance with Chapters 607 or 617, F.S., or a reorganization as defined in Section 368(a)(1) of the Internal Revenue Code solely in exchange for stock."

Under the instant facts, Corp. X is swallowed up by Corp. Y pursuant to a statutory merger under s. 368(a)(1)(A), I.R.C., with Corp. Y left as the surviving entity and Corp. X passing out of existence. Therefore, the transfer of Aircraft 327 from Corp. X to Corp. Y pursuant to the Merger falls squarely within the bounds of Rule 12A-1.007(26)(a)4., F.A.C. Accordingly, neither Corp. X (the transferor) nor Corp. Y (the transferee) are subject to sales or use tax on the transfer of Aircraft 327 by and between them pursuant to the Merger.

ISSUE 3: "Whether the provision of charter services (whether through the Time Sharing Agreement or through an aircraft management company) to the former Lessee or others will be exempt from sales tax?"

RESPONSE TO ISSUE 3: In addressing the issue of whether the charter services provided through either the Time Sharing Agreement or the management company result in taxable transactions, we first must consult the provisions of Rule 12A1.071(1) and (22), F.A.C. These rule provisions specify the elements requisite to a lease of tangible personal property (including aircraft) and the treatment of a true aircraft chartering transaction:

Rule 12A-1.071(1), F.A.C.: "(a) For the purpose of this rule, the term `lease' includes any rental or license to use tangible personal property, unless a different meaning is clearly indicated by the context in which it is used. The term refers to all transactions that are not bailments in which there is a transfer of possession of tangible personal property, without regard to limitations upon the use, for a consideration, without a transfer of title to the property. It is not essential for a transfer of possession of tangible personal property to include the right to move the tangible personal property. It includes

a transaction 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 or control of the person or his employees. All leases of tangible personal property other than conditional-sale type leases as described in paragraph (1)(d) of this Rule, are operating leases. Whether a transaction is a sale' or arental, lease, or license to use' shall be determined in accordance with the provisions of the agreement. "(b) Transfer of possession with respect to an operating lease means that one of the following attributes of tangible personal property ownership has been transferred: "1. Custody or possession of the property, actual or constructive; "2. The right to custody or possession of the property; or, "3. The right to use and control or direct the use of the property...."

Rule 12A-1.071(22), F.A.C.: "The charge made by an air taxi (charter) to transport a passenger to a certain destination (the passenger does not pilot or take possession of the aircraft) is a charge for transportation service rather than a rental and is exempt from tax."

Considering first the potential chartering of Aircraft 308 by and through an aircraft management company to both related and unrelated parties, the Department must respectfully decline to render a finding relative to the sales and use tax consequences which may result from such an arrangement without first having the occasion to examine a copy of the management contract which Corp. Z and the management company enter into. The record reflects that it was mutually agreed in our telephone conversation of February 6, 1995, that the Department must refrain from rendering a determination within this TAA on whether the charter of Aircraft 308 by and through a management company results in a taxable transaction inasmuch as you stipulated that no such agreement presently exists for examination by the Department. However, you are hereby alerted to the fact that the Department has on previous occasions examined aircraft management contracts which the Department held

to constitute the lease of the aircraft from the aircraft owner to the management company. In these cases, the subsequent chartering of the aircraft by the management company to third parties was usually found to be a transportation service not subject to tax (Rule 12A-1.071(22), F.A.C.).

As for the chartering of Aircraft 308 pursuant to the terms and conditions you describe the Time Sharing Agreement as manifesting, the Department would consider the substance of the Time Sharing Agreement as resulting in the performance of a transportation service much the same as that described in Rule 12A-1.071(22), F.A.C. Such services would be substantially analogous to the transportation services provided by a taxi cab company or limousine service with chauffeur provided. The substance of a transaction dictates its treatment for state tax purposes. See Dept. of Revenue v. Seaboard Coastline R.R. Co., 480 So.2d 1349 (Fla. 1 DCA 1985), reh. den. Jan. 28, 1986, rev. den. June 13, 1986; Department of Revenue v. Anheuser-Busch, 527 So.2d 877 (Fla. 1 DCA 1988), reh. den. Aug. 1, 1988.

ISSUE 4: "Whether a transaction exempting the transfer of either Aircraft or subsequent charter activity as described above would taint the previous sales tax exemption with regard to the original purchase of the Aircraft?"

RESPONSE TO ISSUE 4: Your question is responded to in the negative. The fact that the Aircraft are transferred approximately one year later from Corp. X to Corp. Z and Corp. Y, respectively, under the specifically exempt circumstances prescribed in Rule 12A-1.007(26)(a)3. and 4., F.A.C., and then dedicated in whole or part to a charter activity as described above from your letter, will not serve to taint or nullify the exempt character of the original acquisition of the Aircraft by Corp. X for exclusive release (dry lease) purposes.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or

administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/
Control No. 19189