Update: Managed Part 91 Aircraft and the “New” IRS position on FET

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Update: Managed Part 91 Aircraft and the "New" 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.

As I wrote about previously, back on March 9, 2012, the Internal Revenue Service (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.

Audit activity has increased

Subsequent to the release of the IRS opinion memo, there was a significant increase in audit activity on managed Part 91 aircraft operations. Many of those audits had adverse outcomes and resulted in large proposed FET assessments. Most of those adverse outcomes have since been appealed by the management companies involved.

Business aviation speaks; news of an informal suspension on FET

Ever since the IRS opinion memo came out, the National Business Aviation Association (NBAA) has been very active in trying to educate the IRS as to why it is incorrectly applying the current FET regulations and case law. As a result, "on May 16, 2013, the IRS informally announced that it will suspend the assessment of FET on owner flights of aircraft managed by aircraft management companies," the NBAA noted. That turn of events was in response to an IRS meeting with NBAA and National Air Transportation Association representatives the week before.

However, not all auditing has subsided

The suspension is intended to give the IRS more time to work through the FET issues with industry representatives. However, the suspension was communicated informally to IRS FET auditors. At this time, there does not appear to be anything in writing prepared by the IRS documenting the suspension. Thus, it remains to be seen how effective the NBAA has really been in stopping audit activity. A situation has already been reported where an IRS auditor believed that no change in policy had occurred.

Next steps

Two members of the NBAA Tax Committee, John Hoover and Joanne Barbera, along with Scott O’Brien of NBAA, have worked very diligently on the issue. They will continue to work with the IRS and Treasury Department to work toward an outcome that is more favorable for business aircraft operators.

Conclusion

Though the times may be trying for operators who are being audited, steps are being taken to try to remedy the issues that have surfaced. It’s best to seek the advice of tax professionals who are familiar with these types of matters if you are selected for an audit. Hopefully, in the near future, a more formal IRS action will occur, which will halt audit activity.

Questions?

If you have any questions about this article or how this situation may impact your operation, contact me at dweil@flightdeptsolutions.com.

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