IRS Joins FAA,TSA in Circumventing the Rulemaking Process

Inside Washington Blog by NATA vice president Eric Byer

In March 2012, the Internal Revenue Service (IRS)issued a memo articulating a legal opinion justifying expanding the scope of operations covered by commercial taxes to include: private general aviation operations, when those operations involve the owner utilizing a company providing aircraft management services. In the past, the IRS has consistently considered operations, conducted with the assistance of an aircraft management company, to be private and subject to noncommercial taxes.

As we all know, general aviation aircraft owners often contract with management companies with specific aviation expertise to help ensure that their aircraft is properly maintained and that flights are conducted in accordance with FAA regulations, improving both safety and compliance. After decades of prior audits, guidance and enforcement – that have consistently deemed operations conducted with the assistance of an aircraft management company to be private and thus subject to a noncommercial tax – the IRS is clearly attempting now to consider these operations as commercial.

The new written information is in the form of an internal communication, known as Chief Counsel Advice (CCA), between the IRS Office of the Chief Counsel and the Chief of the Excise Tax Program. In that CCA, three scenarios involving a management agreement were examined and, in each case, the agency determined that management fees should assess commercial air transportation taxes.

Although the CCA is not technically able to be used or cited as precedent, it has already widely circulated within the agency and will certainly influence how ongoing and future audits are approached. This will result in businesses that provide aircraft management mounting potentially costly rebuttals to agents attempting to impose the taxes following the path outlined in the CCA.

Does this sound at all familiar to what we are hearing from other federal agencies, including the Federal Aviation Administration (FAA) and Transportation Security Administration (TSA)? It certainly does. The federal agency, knowing that a new rule would take years to promulgate, elects to circumvent the process by issuing a guidance document that can be easily scripted, released and widely considered mandatory even though technically it is not. The FAA has become a whiz at this in recent years with Advisory Circulars, notices and other guidance materials as has the TSA.

Now industry is actively pursuing remedies to this all-out assault by the IRS because a couple of bureaucratic attorneys, who have non-political positions (meaning they won’t get booted out when a new presidential administration is voted into office) have chosen to turn an industry sideways by deciding they are right to change how taxes are applied, regardless of decades of prior precedent to the contrary. It is everything that is wrong with our federal government at the moment and why rulemaking protocol needs to be recalibrated so that it is timely and effective. The general aviation industry has enough to worry about nowadays, let alone a fishing expedition by the IRS that has legally been shot down over and over again and is simply a free time activity for a bunch of pencil pushers.

If you have not already done so, I strongly encourage you to take action! Visit and click on the Government Affairs section, then choose the association’s Legislative Action Center from the dropdown button. This is an easy tool to link NATA members directly with legislators to weigh in on the matter on Capitol Hill. The direct link to our action call on this issue is:

Byer’s Article first appeared in the Q2 Issue of ABJ.

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