NBAA2012 Convention Update: Managed Part 91 Aircraft and the IRS position on FET
This is a post by guest author Dave Weil, CEO and Founder of Flight Dept Solutions, LLC. Dave was asked to contribute to this blog because of his expertise in aircraft management and flight department issues. Any thoughts expressed below are entirely Dave’s and do not necessarily reflect the views of Universal Weather and Aviation, Inc.
On March 9, 2012, the IRS Chief Counsel released new guidance affecting aircraft owners and lessees who contract with aircraft management companies to employ pilots and provide services on their behalf. In so doing, the Chief Counsel expressed an opinion that extended the application of the 7.5% Federal Excise Tax (FET) to owners of managed Part 91 aircraft operations in most situations where the management company employs the pilots. I discussed this previously in a two-part article on this blog. Business aviation attorneys are in unanimous agreement that the reasoning used by the IRS in the memorandum is fundamentally incorrect.
Update from NBAA2012
At the Annual NBAA Tax Conference held prior to the NBAA Convention, John Hoover, chairman of the Federal Tax Working Group of the NBAA Tax Committee, provided an update. Additionally, a roundtable workshop on the topic was facilitated by members of the NBAA Tax Committee. The attendees discussed their experiences with the IRS and what management companies were doing about the matter.
The following is a summary of the key points discussed during the conference:
- Many management companies are either being audited or have recently been audited.
- Unfortunately, the longer the IRS memo has been out, the greater the number of IRS auditors who have treated it as law and are using it as justification to aggressively impose the FET retroactively in management company audits.
- A few of the audits have progressed to the Appeals phase, but it may take some time for decisions to be reached in these cases.
- Many management companies have revised their aircraft management agreements, but none that were present have made the one change that is most likely to get the IRS to not impose the FET: having the client’s pilots employed by an entity other than the management company.
- No one knew of any management companies that were seeking to pass on the FET to their clients at this time.
- The NBAA will continue to meet with the IRS to educate them in hopes that a clarification memo is issued to narrow the auditors’ current application of FET.
- There is some indication that the IRS has received complaints from members of Congress on this issue. Ultimately, this may be the most effective way to get the IRS to revise their position on this matter.
At this time, the issue remains a work in progress. The NBAA considers this a priority matter. Members of the NBAA Tax Committee are working closely with NBAA staff to help engineer a favorable resolution with the IRS. However, it will take time for the matter to be resolved one way or another.
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