Recent Tax Developments In Business Aviation PRESENTED BY

Transcription

1 Recent Tax Developments In Business Aviation PRESENTED BY George P. Rice Rice & Associates

2 Introduction George Rice, CPA Aviation Specialist, member of the NBAA Tax Committee Located in Costa Mesa, CA Between the Hilton Hotel and University of Phoenix at 3090 South Bristol, Suite 100 Clients include public and private companies, FBO s, Part 135 Operators, and high net worth individual aircraft owners. Please visit our website at Legal Disclaimer Rice & Associates

3 Recent Tax Developments In Business Aviation Federal Excise Tax Issues FAA Reconsiders Schwab Opinion New Worries About Passive Activity Losses Other Current Developments Q & A Rice & Associates

4 Federal Excise Tax Issues Implications of FAA Reauthorization Final Regulations Impose FET on Disregarded Entities IRS Chief Counsel Advice asserts FET on Management Companies Rice & Associates

5 Implications of FAA Reauthorization FAA Modernization and Reform Act of 2012 Effective March 31, Extends the FET at 7.5% through 9/30/2015 Does not revert the Anti-Fraud Provisions and fuel tax remains at $.244 per gal. Provides relief from the FET for fractional program flights and adds fuel surcharge Rice & Associates

6 FAA Modernization and Reform Act Exempts program flights from 7.5% FET Adds fuel surcharge of 14.1 cents/gallon Does not apply to aircraft which are not listed in Subpart K specifications Guidance IRS Office of Chief Counsel issued CCA , April 9, 2012 IRS Notice , April 23, 2012 BNA Article CCA Addresses Excise Tax When Fractional Owners Fly on Substitute Aircraft, July 2, 2012 Rice & Associates

7 Final Regulations Impose FET on Disregarded Entities TD 9553 Final Treasury Regulations, October 26, 2011 Confirms Proposed Reg in TD 9356, August 15, 2007 Disregarded Entities (SMLLC s & Q-Sub s) are no longer disregarded for FET purposes, effective retroactive to January 1, 2008 Therefore air transportation supplied by: SMLLC to Individual Owner is subject to FET SMLLC to partnership is subject to FET SMLLC or Q-Sub to Corp exempt as affiliated group Rice & Associates

8 Historical Perspective Excise Tax on Part 91 Operations Charge-backs among affiliated group = no tax. Timeshare Agreements between operating entity and timesharee = tax is due. Interchange Agreements between operating entities = tax is due on equalization payments. Joint Ownership Agreements payments made by the joint owner without operational control to the joint owner with operational control = no tax. Demonstration flights = tax is due. Reimbursements for carriage of elected officials = tax is due. Services provided to an aircraft owner under a management agreement are not subject to excise tax. Rev Rule Rice & Associates

9 Further Historical Perspective IRS has long sought to expand the universe of Part 91 flights subject to FET Rev Ruling Executive Jet Aviation Case, 1997 TAM Excise Tax Air Transportation Audit Guide, April 2008 Field Audits Rice & Associates

10 IRS Chief Counsel Advice Memorandum February 15, 2012 May Have Changed Your World!! Rice & Associates

11 Scenario 1 Owner transport executives, ee s of owner and related entities which constitute an affiliated group, 4282(c) Owner hires a management company to manage aircraft Owner pays monthly mgmt fee, an hourly fee for each flight hour, and separately reimburses all amounts Manager is required to supply pilots but Owner retains ultimate right of refusal; Manager is required to supply pilot training, pay and benefits Owner designates destination, but pilots retain discretion as to safety of flight issues Manager performs all maintenance and FAA record keeping, cleans the aircraft, and provides scheduling, flight planning and weather services. Manager selects and maintains insurance policy, policy names owner as insured party, owner bears all risk of loss and manager does not indemnify owner All flights are flown under FAR Part 91 Rice & Associates

12 Issues 1. Is the control of an aircraft s pilots a factor for determining the person that has possession, command and control of an aircraft? [P,C&C] 2. Who has possession, command and control of the aircraft in each of the three scenarios described below? 3. Are the monthly management fees paid to the aircraft management company in each of the three scenarios described below amounts paid for taxable air transportation of persons, and thus taxable under 4261 of the Internal Revenue Code? Rice & Associates

13 Issue 1: Is the control of an aircraft s pilots a factor for determining the person that has possession, command and control of an aircraft? We conclude control of an aircraft s pilots is a factor for determining who has P,C & C We also conclude that the ability to direct pilots as to destination and time of flights should not be determinative [of who has P, C & C] Rice & Associates

14 Issue 2: Which party has P, C & C? CCA Concludes that: management company has virtually all decision making re: operation and maintenance. Facts are distinguishable from Rev Rule Owner does not have exclusive control over crew Manager does not operate as owner s agent management provides all of the essential elements necessary for the transportation of persons by air Therefore: Owner relinquished P,C & C and Manager provides taxable transportation to owner Rice & Associates

15 Issue 3: Are the monthly management fees paid to the aircraft management company amounts paid for taxable air transportation of persons, and thus taxable under 4261 CCA Argues that: Owner is required to pay management fee Costs covered by mgmt fee are reasonably necessary It is not relevant that mgmt fee may cover indirect costs It is not relevant that mgmt fee is billed separately CCA Concludes: Mgmt fee is precondition thus are amounts paid Therefore subject to tax Rice & Associates

16 Industry Response April 16 th Meeting with IRS Chief Counsel June 19 th Follow-up Meeting Presented 15-page paper NBAA Requested that the IRS: Grant relief for retroactive imposition of tax on management companies Change its view Defer audits while Chief Counsel s office reconsiders IRS expressed some openness asked NBAA to draft a proposed rule Rice & Associates

17 Guidance Resources BNA Article: Chief Counsel Advice Concludes That Transportation Excise Tax Applies to Aircraft Management Services Arrangements, by John Hoover, April 2012 New Taxes Being Levied by the IRS on Corporate Aircraft Operations, by Keith Swirsky and Christopher B. Younger, GKG Law, P.C. An Analysis of the Recent IRS Chief Counsel Advice Asserting That Management Companies are Subject to Transportation Tax, by Phil Crowther, JD, MBA, CPA IRS Chief Counsel Advice States That Excise Tax Applies to Aircraft Management Service Arrangements, by John B. Hoover of Dow Lohnes PLLC, Chairman Federal Tax Working Group of the NBAA Tax Committee ALL CAN BE FOUND AT Rice & Associates

18 Reconsiders Schwab Opinion Allows Reimbursement by Key Executives Concept is Company s control over employee allows recall at any time Conditions Must be Met Board must designate and maintain a list of eligible executives Company must document that the flights were routine personal travel Any such reimbursements are subject to FET Allows Reduced SEC Disclosure and greater deductibility of personal flights Rice & Associates

19 New Worries About Passive Activity Losses New Disclosure Requirements for Grouping Elections, see Rev Proc Proposed Regulations would treat some LLC members as limited partners Reg Rice & Associates

20 Other Current Developments NEXA Advisors Issues New Report Government Use of Aircraft A Taxpayer Value Perspective New Highway Bill Italian Luxury Tax TexasLawyers.com Texas Corporate Jet Abuse Lawyer California Appeals Court Upholds Property Tax on some Fractional Programs Rice & Associates

21 NEXA Advisors Issues New Report Rice & Associates

22 New Highway Bill Provisions of interest to business aviation operators: Applications to operate new air routes over certain National Parks now require approval of NPS Director. Continues the fuel fraud tax on all kerosene at 24.4 cents/gal versus the 21.9 cent rate legally due on aviation kerosene. Rice & Associates

23 Italian Luxury Tax New Luxury Tax Imposed on non-italian registered aircraft, December 2011 up to 7.55 Euro/Kg for aircraft over 10,000 Kg 22,000 lbs x $9.26 = $203,720 In June, parliament modified new law: Tax applies only to aircraft in country more than 45 consecutive days, is not cumulative. If more than 45 days, tax is prorated Does not apply to charters or aerotaxi Aerotaxi rate is 100 euro per pax for less than 1,500 km and 200 euro per pax over 1,500 km. Rice & Associates

24 Texas Corporate Jet Abuse Lawyer Monday July 9th Dozens of jets operated by publically traded corporations made 30% or more of their trips to or from resort destinations The SEC Whistleblower Program & Corporate Jet Abuse Lawsuits Rice & Associates

25 CA Property Tax on Fractional Programs SB 87 was passed into Law in July 2007 Imposed retroactive property tax on program managers, 4 years tax estimated at $9.6 million Priors years estimated at $37.8 million Programs filed suit, cases combined in OC Lower court held unconstitutional Appeals Court held tax constitutional, retroactive application unconstitutional Rice & Associates

26 Tax Education Programs Tax, Regulatory & Risk Management Conference October 28 29, 2012 Orlando, FL Business Aviation Taxes Seminar May 3, 2013 Washington, DC Tax, Regulatory & Risk Management Conference October 20 21, 2013 Las Vegas, NV Rice & Associates

27 Recent Tax Developments In Business Aviation Questions?? Thank you for the opportunity Rice & Associates