View Point - Who's In Charge Here?
Category: World Aircraft Sales Magazine Columnists
Author: Gil Wolin
Who’s In Charge Here?
In 1962 Gerald Gardner’s “Who’s In Charge Here? ” broke new ground, satirizing the political process by putting words in the mouths of political leaders via cartoon caption balloons inserted in legitimate news photos. The faux quotes questioned both the decisions and behaviors of our fearless leaders. Very funny stuff for the time.
Unfortunately the 2012 version of that question is not funny at all, as the most recent IRS definition of commercial aviation is in direct opposition to the FAA’s, with unintended and potentially dire consequences for corporate aviation.
Since 1958 the FAA has been charged with defining and regulating all aspects of private and commercial aircraft operations in the US. For more than 60 years, entire industry segments have been built based upon the FAA’s definitions of what is – and what is not – commercial air transportation. And that includes aircraft management: Professional aviation organizations providing experience, expertise and oversight to ensure safe and cost-effective aircraft operations.
According to the FAA, owners retained “operational control” of their aircraft when flying their trips, and therefore these trips were non-commercial activities.
That all changed on March 9, 2012, with the release of IRS Chief Counsel Advice Memorandum 2012-10026 which states that aircraft owners or lessees who employ a third party professional aviation company to manage their aircraft actually are buying transportation, not simply management of their aircraft performing their non-commercial flights. Therefore the management company must collect and remit the 7.5% Federal Excise Tax on all fees and other amounts paid to that aircraft management company for the management of the aircraft.
Not a 7.5% tax levied just on the direct operating costs on a trip-by-trip basis, but upon management fees, pilot salaries, maintenance, and hangar costs – virtually everything that the management company bills or re-bills to the owner or lessee - because (according to this IRS memo) aircraft owners and lessees whose aircraft are managed by a third party professional aviation company do not have “possession, command and control” (the IRS’s determination of what constitutes commercial vs. non-commercial aviation) of their own asset.
What’s more, the Memo states, if the management company cannot collect the tax, they themselves are responsible for its payment. And this tax can be applied retroactively to all sums paid in past years – an amount few management companies can afford.
The most shocking aspect of this Memo is its espousal of a position 180 degrees from the previous IRS interpretations upon which an entire industry has been built since 1970, when the Airport and Airways Act first levied the FET ticket tax. While this Memo is not yet an official ruling, it does provide guidance for IRS personnel conducting aircraft management company audits – activities that have seen a dramatic increase in recent months.
John Hoover, Senior Counsel at Dow Lohnes and chairman of the Federal Tax Working Group of the NBAA Tax Committee, is performing yeoman’s work parsing the Memo - an analysis that will be posted on the NBAA’s site. Suffice it to say here that the Memo is not consistent with past IRS guidance. It will take time to resolve the conflicts between this Memo and previous IRS definitions of commercial air transportation, and NBAA continues to lead efforts to do so.
But time is running short. The IRS already appears to have stepped up its audit activity in pursuit of this revenue. Management companies are scrambling to review and perhaps rewrite their management agreements to clarify and define carefully the agency relationship between themselves and their clients, guessing what the IRS might require in order to preserve their clients’ non-commercial flight status.
Until this matter is resolved, aircraft owners using management companies cannot accurately budget their own cost of operation. It becomes a potential deal-killer for prospective aircraft buyers and aircraft financiers who now must allow for an additional 7.5% in operating costs – a six-figure increase in the annual budget.
That’s a tough sell in today’s economy! Perhaps more important is the potential for collateral damage to the business jet charter industry. According to Argus, the leading charter audit and safety company, the vast majority of the 1,231 Part 135 FAA-certificated operators are aircraft management companies. And more than 90% of the 4,787 multi-engine turbine aircraft that they operate are mixed use, managed aircraft – the aircraft flies non-commercial Part 91 flights under the owner’s possession, command and control, as well as Part 135 charter flights under the management company’s Part 135 charter certificate.
How many owners won’t want to accrue against this new potential tax liability? How many simply either will sell the aircraft or take their operation in-house, pulling countless aircraft from the world’s fleet of aircraft available for charter? Charter is a critical point-of-entry for new users of Business Aviation, a way to “try before you buy.” It is an important resource for existing owners, providing back-up and supplemental lift with no capital investment.
For the future health of our industry, the most important question is really… “Who’s In Charge Here? ”
Gil Wolin draws on almost forty years of aviation marketing and management experience as a consultant to the corporate aviation industry. His aviation career incorporates aircraft management, charter and FBO management experience (with TAG Aviation among others), and he is a frequent speaker at aviation, travel and service seminars. Gil is a past director of the RMBTA and NATA, and currently serves on the Advisory Board for Corporate Angel Network and GE Capital Solutions-Corporate Aviation. Gil can be contacted at email@example.com