NBAA is backing a lawsuit filed by Bombardier over federal excise taxes (FETs) that the IRS assessed for management fees charged to customers of its then fractional operation, Flexjet. The IRS assessments, which treated the fractional operations management fees as taxable as commercial air transportation activities, applied to activities in 2006 and 2007, before Congress clarified that fractional operation management fees were not taxable as commercial air transportation activities.

Bombardier originally filed the lawsuit in 2012 disputing the tax levies. But a U.S. District Court ruled in March last year that the IRS properly assessed tax on the fees and that Flexjet had been in possession, command and control of the fractional aircraft, making it a commercial activity. The district court further found that Bombardier’s reliance on FAA regulations was “misplaced.”

A three-judge panel of the Fifth Circuit of the U.S. Appeals Court agreed with that determination on July 25, saying the lower court’s determination of possession, command and control was appropriate and in line with the IRS definition of commercial activity. The panel also determined that a previous court ruling involving NetJets does not apply because the business model is different and that an IRS 2004 technical advice memorandum gave clear guidance on the IRS stance of the fees. “We…do not find that the IRS has been meaningfully inconsistent,” the appeals court panel said.

Bombardier is now seeking a full (en banc) Appeals Court review, disputing those findings. Bombardier reiterated that it should not be liable for the taxes because the IRS has been inconsistent in its application and the courts previously ruled that its competitor NetJets is not liable for them. Bombardier further continued to argue that the IRS has been unclear in its guidance on the issue.

“The IRS has for many years taken inconsistent positions as to whether these management fees—which are paid by aircraft owners irrespective of whether they are ever transported on their aircraft—are subject to FET,” the company told the court. “The IRS even specifically advised Bombardier a decade ago—twice—that it was not required to collect FET from the owners who pay Bombardier for management services. The IRS then reversed position and now seeks to collect FET from Bombardier retroactively, even though Bombardier cannot realistically collect FET from the owners responsible for it, and even though another federal court has held that identical types of payment to the largest industry participant (NetJets) are not subject to FET, resulting in a severe competitive disadvantage to Bombardier.”

Bombardier cited a number of incidents where the IRS found that management fees related to fractional activities were not taxable as commercial air transportation and then others where the IRS had reversed course. This violates a “duty of clarity,” the airframer argues, saying the U.S. Supreme Court has determined that such duty “precludes the IRS from imposing tax—especially retroactively—where collecting agents had not been provided ‘precise and not speculative’ guidance as to whether the tax applied.”

The company further argued that the enforcement of the assessments would come “despite the grossly disparate tax treatment afforded to similarly situated industry participants.”

Bombardier also disputed the IRS contention that the activity is commercial, saying, “The IRS is attempting to tax an activity—the business of ‘transporting persons for compensation or hire,’ that FAR 91.1005 and FAR 119.337 say Bombardier cannot lawfully conduct.” The regulations, the company adds, do say that Bombardier could “engage in a noncommercial aviation management business. That is exactly the business in which Bombardier engage[d]—a business not properly subject to FET.”

NBAA filed an amicus brief supporting Bombardier’s contention. “NBAA got involved in this case because it is an example of the challenges businesses face when the IRS attempts to collect millions of dollars in retroactive taxes without clearly stating how the tax should apply,” said Scott O’Brien, NBAA senior manager of tax and finance policy. “We also continue to work directly with Congress, the IRS and the Treasury Department on common-sense guidance as to how FET applies to various business aviation operations.”

“En banc determination is appropriate here because the panel decision conflicts with the Supreme Court’s decision [on duty of clarity],” NBAA told the court in the amicus brief, agreeing with Bombardier. “Moreover, the proceeding involves a question of exceptional importance as it could result in disparate collection obligations imposed on similarly situated taxpayers."

NBAA noted that for decades fractional aircraft ownership management companies did not collect federal transportation excise tax on monthly management fees (MMF). “The IRS repeatedly has accepted the fractional managers’ position that MMFs are not subject to FET, but in this case the IRS took the position that Bombardier should have collected FET on MMFs. Because the IRS violated its duties of consistency and clarity, the panel erred in affirming the district court’s holding,” NBAA contended.

“When the guidance isn’t clear, the taxpayer cannot simply err on one side or the other,” said John Hoover, NBAA Tax Committee member and special counsel at Cooley LLP. “If they don’t collect enough, they’re stuck paying a large tax bill out of their own pocket. If they over-collect FET on their fees, they’re liable to their customers for the excess collected.”

“Holding fractional providers and aircraft management companies liable for these retroactive taxes is not fair and will have a devastating impact on business aviation,” O’Brien added.