As we wrote on Aug. 10, 2020, Section 4261 of the Internal Revenue Code (IRC) generally imposes a 7.5 percent Aviation Tax (FET) on amounts paid for “taxable transportation” along with certain specific dollar fees per Segment. However, certain “aircraft management services” were exempted from the FET after paragraph (e) (5) was added to IRC Section 4261 under the Tax Reduction and Jobs Act 2017. The IRS has completed this exemption by posting a version of the FET’s Final Provisions for Exempting the FET from FET Aircraft Management Services on their website.
Aircraft management services
The FET exemption applies to amounts paid by an “aircraft owner” for aircraft management services, which aircraft management services include:
(i) assisting an aircraft owner with administrative and support services such as planning, flight planning and weather forecasting;
(ii) taking out insurance;
(iii) aircraft maintenance, storage and refueling;
(iv) recruitment, training and provision of pilots and crew members;
(v) Establishing and maintaining security standards; and
(vi) other services necessary to assist in flights operated by an aircraft owner. 1
The general theory is that an aircraft owner does not have to pay FET for amounts related to owning or leasing their own aircraft.
Aircraft owners
Unsurprisingly, the term “aircraft owner” encompasses a person who owns an aircraft managed by an aircraft management company, but also a person who rents the aircraft, except under a “disqualified lease”. 2 A “disqualified lease” is defined as “a lease to the person from a person providing aircraft management services in relation to such aircraft, or a related person (as defined in IRC Section 465 (b) (3) (C)) providing such services) if such a lease is intended for a term of 31 days or less. “3 As such, a person who leases an aircraft for a term of 31 days or less is not eligible for the FET exemption. The final provisions also provide that the beneficiary of an owner trust is an “aircraft owner”, provided the related lease to the beneficiary is not a “disqualified lease”.
Note that the FET exemption does not cover the payment of amounts for aircraft management services by any party related to the aircraft owner (including a person who owns a company that owns an aircraft). However, there has been some public debate about who can be construed as the aircraft owner’s representative who is able to pay amounts for aircraft management services and qualify for the FET exemption. The Finance Department and IRS may provide additional guidance on this point at a later date.
Aircraft owner flies under Part 135
The final provisions provide that the FET exemption will also apply to amounts paid by an aircraft owner for flights on their own aircraft operated under Part 135 of the Federal Aviation Regulations, as those flights will continue to be considered private flights for the owner and not as operated flights for the public under a charter certificate. Why might an aircraft owner choose such a structure? Among other things, the aircraft management company is subject to the “operational control” of the aircraft in accordance with Part 135 of the Federal Aviation Regulations and assumes liability for the safe and legal operation of the aircraft as well as the civil liability risk in the event of a flight-related event that leads to personal injury or property damage leads. While this structure has been avoided by some aircraft owners in the past due to a desire to avoid 7.5 percent FET on amounts paid on their own flights, the clarification set out in the final terms provides aircraft owners with an FET-neutral option when doing so Determination of their operational structure. Note: Part 135 of the Federal Aviation Regulations contains additional FAA operational restrictions (e.g. length of pilot’s day, required destination weather reports, runway lengths, etc.) that can sometimes limit desired flight operations. Therefore, aircraft owners must balance these operational restrictions with the operational control benefits that reside with the aircraft management company.
Note that the above FET exemption only applies to amounts paid by an aircraft owner for flights on their own aircraft. The final rules require the aircraft management company to offer a flight to an aircraft owner with a replacement aircraft (regardless of the reason). FET applies to the “fair market value” of such a flight.
Keep records
Every aircraft owner must keep adequate records that support the FET exemption. The final provisions stipulated that “such records may include the agreement between the aircraft owner and the aircraft management service provider, proof of aircraft ownership, and evidence that the amounts paid for aircraft management services come from the aircraft owner, aircraft management services, provider’s fee schedule, and supporting documents all assignments required according to the proportional assignment rule. “