[Federal Register Volume 86, Number 11 (Tuesday, January 19, 2021)]
[Rules and Regulations]
[Pages 4990-5008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-00706]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 40 and 49
[TD 9948]
RIN 1545-BP37
Excise Taxes; Transportation of Persons by Air; Transportation of
Property by Air; Aircraft Management Services
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the
excise taxes imposed on certain amounts paid for transportation of
persons and property by air. Specifically, the final regulations relate
to the exemption for amounts paid for certain aircraft management
services. The final regulations also amend, revise, redesignate, and
remove provisions of existing regulations that are out-of-date or
obsolete and generally update the existing regulations to incorporate
statutory changes, case law, and other published guidance. The final
regulations affect persons that provide air transportation of persons
and property, and persons that pay for those services.
DATES:
Effective Date: These regulations are effective January 14, 2021.
Applicability Dates: For dates of applicability, see Sec. Sec.
40.0-1(e), 49.4261-1(g), 49.4261-2(d), 49.4261-3(e), 49.4261-7(k),
49.4261-9(c), 49.4261-10(i), 49.4262-1(f), 49.4262-2(e), 49.4262-3(e),
49.4281-1(e), 49.4263-1(b), 49.4263-3(b), 49.4271-1(g), and 49.4721-2.
FOR FURTHER INFORMATION CONTACT: Michael H. Beker at (202) 317-6855
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Facilities and Services Excise Tax
Regulations (26 CFR part 49) under sections 4261, 4262, 4263, 4264,
4271, 4281, and 4282 of the Internal Revenue Code (Code). This document
also amends the Excise Tax Procedural Regulations (26 CFR part 40).
Sections 4261 and 4271 impose excise taxes on certain amounts paid
for transportation of persons or property, respectively, by air,
collectively referred to herein as ``air transportation excise tax.''
Section 13822 of Public Law 115-97, 131 Stat. 2054, 2182 (2017),
commonly referred to as the Tax Cuts and Jobs Act (TCJA), added an
exception to the air transportation excise tax in new section
4261(e)(5). Specifically, section 4261(e)(5)(A) provides that ``[n]o
tax shall be imposed by [section 4261] or section 4271 on any amounts
paid by an aircraft owner for aircraft management services related to--
(i) maintenance and support of the aircraft owner's aircraft, or (ii)
flights on the aircraft owner's aircraft.''
Section 4261(e)(5)(B) defines the term ``aircraft management
services'' to include: (a) Assisting an aircraft owner with
administrative and support services, such as scheduling, flight
planning, and weather forecasting; (b)
[[Page 4991]]
obtaining insurance; (c) maintenance, storage, and fueling of aircraft;
(d) hiring, training, and provision of pilots and crew; (e)
establishing and complying with safety standards; and (f) such other
services as are necessary to support flights operated by an aircraft
owner.
Section 4261(e)(5)(C)(i) provides that the term ``aircraft owner''
includes a person who leases an aircraft other than under a
``disqualified lease.'' Section 4261(e)(5)(C)(ii) defines the term
``disqualified lease'' for purposes of section 4261(e)(5)(C)(i) as ``a
lease from a person providing aircraft management services with respect
to the aircraft (or a related person (within the meaning of section
465(b)(3)(C)) to the person providing such services), if the lease is
for a term of 31 days or less.''
Finally, section 4261(e)(5)(D) provides that in the case of amounts
paid to any person which (but for section 4261(e)(5)) are subject to
air transportation excise tax, a portion of which consists of amounts
described in section 4261(e)(5)(A), section 4261(e)(5) ``shall apply on
a pro rata basis only to the portion which consists of amounts
described in'' section 4261(e)(5)(A). The Conference Report
accompanying the TCJA, H.R. Rep. No. 115-466, at 536 (2017) (Conference
Report), provides that in the event that a monthly payment made to an
aircraft management company is allocated in part to exempt services and
flights on the aircraft owner's aircraft, and in part to flights on
aircraft other than that of the aircraft owner, air transportation
excise tax must be collected on that portion of the payment
attributable to flights on aircraft not owned by the aircraft owner.
On July 31, 2020, a notice of proposed rulemaking (REG-112042-19)
was published in the Federal Register (85 FR 46032) under sections
4261, 4262, 4263, 4264, 4271, 4281, and 4282 of the Code, and part 40
of the Excise Tax Procedural Regulations (proposed regulations). No
public hearing was requested or held. The Department of the Treasury
(Treasury Department) and the IRS received three comments in response
to the proposed regulations. The comments addressing the proposed
regulations are summarized in the Summary of Comments and Explanation
of Revisions section of this preamble. All comments were considered and
are available at www.regulations.gov or upon request. After full
consideration of the comments received, this Treasury decision adopts
as final regulations the proposed regulations with the modifications
described in the Summary of Comments and Explanation of Revisions
section of this preamble.
Summary of Comments and Explanation of Revisions
I. Overview
The final regulations retain the basic approach and structure of
the proposed regulations, with certain revisions and modifications.
This Summary of Comments and Explanation of Revisions discusses these
revisions and modifications as well as the comments received in
response to the proposed regulations. The final regulations provide
guidance under sections 4261, 4262, 4263, 4264, 4271, 4281, and 4282 of
the Code related to air transportation excise tax. The final
regulations also provide guidance under part 40 of the Excise Tax
Procedural Regulations.
Part II of this Summary of Comments and Explanation of Revisions
discusses rules related to the exemption from air transportation excise
tax for amounts paid for certain aircraft management services provided
in section 4261(e)(5) of the Code (aircraft management services
exemption). Part III of this Summary of Comments and Explanation of
Revisions discusses Sec. 49.4261-1 and other rules of general
applicability related to the excise tax on amounts paid for the
transportation of persons by air imposed by section 4261, as well as
rules in Sec. 49.4261-7(h)(2) related to aircraft charters. See the
Explanation of Provisions section of the proposed regulations for a
discussion of the rules under 26 CFR part 40 and 26 CFR part 49 that
were included in the proposed regulations, for which no comments were
received. Those proposed rules are adopted by this Treasury decision--
except as discussed in parts II and III of this Summary of Comments and
Explanation of Revisions--without change.
II. Aircraft Management Services Exemption Rules
a. Definition of Aircraft Management Services
Proposed Sec. 49.4261-10(b)(1) defined the term ``aircraft
management services'' to mean the services listed in section
4261(e)(5)(B), as well as ``other services.'' Proposed Sec. 49.4261-
10(b)(1)(ii) defined ``other services'' as any service (including, but
not limited to, purchasing fuel, purchasing aircraft parts, and
arranging for the fueling of an aircraft owner's aircraft) provided
directly or indirectly by an aircraft management services provider to
an aircraft owner, that is necessary to keep the aircraft owner's
aircraft in an airworthy state or to provide air transportation to the
aircraft owner on the aircraft owner's aircraft at a level and quality
of service required under the agreement between the aircraft owner and
the aircraft management services provider.
A commenter stated that the term ``airworthy'' generally indicates
that an aircraft--or one or more of its component parts--meets its type
design and is in a condition of safe operations. The commenter noted
that some services provided by an aircraft management services provider
in maintaining an aircraft do not directly pertain to the airworthiness
of an aircraft. These services include, but are not limited to,
upgrades in equipment, installation of optional equipment, optional
modifications, refurbishment of an aircraft interior, and painting of
an aircraft's exterior. The commenter suggested that the final
regulations remove the phrase ``that is necessary to keep the aircraft
owner's aircraft in an airworthy state'' from the definition of ``other
services.''
The Treasury Department and the IRS agree with the commenter that
the final regulations should clarify that the definition of aircraft
management services is not limited to those services necessary to keep
an owner's aircraft in an airworthy state. As a result, the final
regulations adopt the change suggested by the commenter and remove the
phrase ``that is necessary to keep the aircraft owner's aircraft in an
airworthy state'' from final Sec. 49.4261-10(b)(1)(ii).
b. Definition of Aircraft Owner
i. Leases
Proposed Sec. 49.4261-10(b)(3)(i) provided that the term
``aircraft owner'' means an individual or entity that leases or owns
(that is, holds title to or substantial incidents of ownership in) an
aircraft managed by an aircraft management services provider, commonly
referred to as a ``managed aircraft.'' Proposed Sec. 49.4261-
10(b)(3)(i) further provided that the term ``aircraft owner'' does not
include a lessee of an aircraft under a disqualified lease, as defined
in proposed Sec. 49.4261-10(b)(4).
Regarding leases that qualify a person as an aircraft owner under
proposed Sec. 49.4261-10(b)(3)(i), a commenter noted that while many
aircraft leases are in writing and contain provisions that make it
clear that the arrangement constitutes a lease, that is not the case
for all aircraft leasing arrangements. The commenter further noted that
courts have found that the basic attributes of a lease are ``the right
to possess, use, and control the aircraft'' (citing Petit Jean Air
Service, Inc v. U.S., 74-1 U.S.T.C.
[[Page 4992]]
16, 135 (E.D. Ark. 1974)). To this end, the commenter suggested that
the final regulations add to the end of Sec. 49.4261-10(b)(3)(i) the
sentence ``An arrangement (whether written, oral, or implied) that
transfers the right to possess, use, and control an aircraft to an
individual or entity qualifies as a lease for the purposes of
determining whether that individual or entity meets the definition of
aircraft owner.''
The Treasury Department and the IRS note that the suggested ``right
to possess, use, and control an aircraft'' language from the commenter
is nearly identical to the possession, command, and control test
created through existing published guidance. As described in the
preamble to the proposed regulations, possession, command, and control
is a facts-and-circumstances analytical framework that is used to
determine whether a person is providing taxable transportation to
another person in cases where each of the parties contribute some, but
not all, of the elements necessary for complete air transportation
services. The possession, command, and control test has caused
confusion and uncertainty in the air transportation excise tax area for
decades; in fact, it is partly for that reason--and disagreements
between the IRS and taxpayers over the application of the possession,
command, and control test to aircraft management services
arrangements--that section 4261(e)(5) was added to the Code. See, e.g.,
Conference Report at 535. As explained in the preamble to the proposed
regulations, section 4261(e)(5) directly addresses a situation that,
but for section 4261(e)(5), would be analyzed using the possession,
command, and control test. The preamble to the proposed regulations
further explained that in situations to which the aircraft management
services exemption applies, the possession, command, and control test
is not relevant.
As a result, the Treasury Department and the IRS decline to
introduce into the final regulations a test that is similar to a test
that has been the source of confusion, uncertainty, disagreement, and
difficulties in administration. Therefore, the final regulations do not
adopt the language the commenter proposed to be added to the end of
Sec. 49.4261-10(b)(3)(i) and do not provide a special definition of
the term ``lease'' solely for purposes of the aircraft management
services exemption.
ii. Owner Trusts
A commenter requested clarification regarding whether trustees and
beneficiaries of ``owner trusts'' qualify as aircraft owners for
purposes of the aircraft management services exemption. The commenter
described an owner trust as an ownership structure used for the limited
purpose of registering an aircraft in the U.S. with the Federal
Aviation Administration (FAA). The structure, which is sanctioned by
the FAA, is commonly used by non-U.S. persons to satisfy the U.S.
citizenship requirements applicable to registering an aircraft with the
FAA. Most owner trusts are established using one of a small number of
U.S.-based aviation trust companies--which are not related to the trust
beneficiary--as trustee. The trustee holds legal title to the aircraft
and satisfies the U.S. citizenship requirement for purposes of
registering the aircraft with the FAA, thereby permitting registration
in the U.S. of an aircraft that would otherwise be ineligible for such
registration.
The commenter stated that an owner trust agreement works in
conjunction with an operating agreement that, generally, is separate
from, but closely related to, the trust agreement. The operating
agreement may contain explicit lease language or may instead use the
term ``license to use'' and provides that the beneficiary holds the
exclusive right to lease or license and to possess, use, and operate
the aircraft (typically requiring a nominal rent or license payment to
the trustee, or in some cases, no payment at all). Regardless of how
the transfer of control is described in the operating agreement, the
result is that the beneficiary holds the exclusive right to lease or
license the aircraft, and to possess, use, and operate the aircraft. An
operating agreement will usually require that the beneficiary retain
the crew and maintain the aircraft per FAA guidance and manufacturer's
recommendations. The commenter stated that the relationship created
through the operating agreement is consistent with the trustee's status
as a holder of only bare legal title, sometimes referred to as
``nominal title,'' to the aircraft.
In addition, the commenter explained that the beneficiary of an
owner trust holds many of the attributes of aircraft ownership, other
than legal title. The attributes of aircraft ownership that the
beneficiary possesses include: The right to any income generated by--
and obligation to pay all expenses associated with--the aircraft; the
upside benefit or downside risk as to the aircraft's value; bearing the
risk of loss; being considered the owner of the aircraft for Federal
income tax purposes; and discretion as to when to sell the aircraft.
The commenter noted that since both the trustee and the beneficiary of
an owner trust are owners of interests in the aircraft, payments for
aircraft management services from either party should be eligible for
the aircraft management services exemption. The commenter further noted
that regardless of whether the operating agreement is written in terms
of a lease or a license, the arrangement is not a disqualified lease
(as that term was defined in proposed Sec. 49.4261-10(b)(4)).
For purposes of section 4261(e)(5), such an operating agreement
between the trustee and the beneficiary of an owner trust is treated as
a lease, regardless of whether the document expressly refers to the
arrangement as a lease. Therefore, under the terms of the operating
agreement, the beneficiary of an owner trust is the lessee of the
aircraft held in trust. Both section 4261(e)(5)(C) and proposed Sec.
49.4261-10(b)(3) recognize lessees, other than lessees under a
disqualified lease, as an aircraft owner.
Based on the foregoing, the final regulations include a definition
of ``owner trust.'' The final regulations also clarify that the
beneficiary of an owner trust is an ``aircraft owner'' so long as the
lease is not a disqualified lease.
iii. Affiliated Groups, Disregarded Entities, and Other Close
Relationships
As discussed in the preamble to the proposed regulations, the
proposed regulations applied the principle of statutory interpretation
that, as matters of legislative grace, exemptions to tax should be
narrowly construed. Therefore, the proposed regulations defined
``aircraft owner'' as an individual or entity that leases (other than
under a disqualified lease) or owns (that is, holds title to or
substantial incidents of ownership in) an aircraft managed by an
aircraft management services provider. The proposed regulations did not
include in the definition of ``aircraft owner'' persons that are
related to the aircraft owner (for example, another member of the same
affiliated group (as defined in section 4282 of the Code)), but are not
the aircraft owner itself. As a result, under the proposed regulations,
the aircraft management services exemption applied only to payments for
aircraft management services that are made by the actual aircraft owner
or lessee.
A commenter disagreed with the assertion in the preamble to the
proposed regulations that treating payments from parties who are
directly related to an aircraft owner as though they were from the
aircraft owner, and thus exempt from air transportation excise tax,
``would effectively expand
[[Page 4993]]
the exemption [provided in section 4261(e)(5)] in a manner not
authorized by Congress.'' The commenter claimed that this assertion is
at odds with other Code provisions and implies an unduly narrow and
formalistic interpretation of the statute that is inconsistent with the
flexible approach otherwise evinced in the proposed regulations. The
commenter further claimed that the assertion has no basis in the
legislative history, but rather the legislative history implies that at
least some related-party payments of aircraft management fees should be
excluded from air transportation excise tax under section 4261(e)(5).
The commenter noted that while the statute and legislative history
are relatively silent about who or what the term ``aircraft owner''
includes, the legislative history enumerates several examples of what
the term does not include. Specifically, the legislative history states
that the term ``aircraft owner'' does not include ownership of stock in
a commercial airline or participation in a fractional aircraft
ownership program. The commenter stated that the legislative history
expresses Congress's concern about the use of the aircraft management
services exemption to circumvent the ordinary application of air
transportation excise tax as contemplated in other Code provisions. By
negative inference, the commenter reasoned, Congress did not express
any similar concerns if the aircraft management services exemption
applied to payments made by a party related to the aircraft owner. The
commenter asserted that the narrow interpretation of ``aircraft owner''
in the proposed regulations does nothing to further Congress's goal of
preventing arrangements designed to circumvent the ordinary application
of air transportation excise tax.
The commenter asserted that when an affiliated corporation in a
corporate group pays for aircraft management services on behalf of an
aircraft owning corporate entity within the group, there is no
avoidance of air transportation excise tax. Further, the commenter
asserted that there is statutory precedent for ignoring the distinction
among corporate entities in the air transportation excise tax area;
specifically, the commenter pointed to the affiliated group exemption
provided in section 4282 of the Code. Under section 4282(a), if one
member of an affiliated group is the owner or lessee of an aircraft,
and such aircraft is not available for hire by persons who are not
members of such group, air transportation excise tax does not apply to
any payment received by one member of the affiliated group from another
member of such group for services furnished to such other member in
connection with the use of such aircraft. Citing the legislative
history to section 4282 (see S. Rep. No. 91-706 at 17-18, 1970-1 C.B.
386), the commenter asserted that section 4282 captures Congress's
general approach to related-party payments in the area of air
transportation excise tax; that is, Congress decided to ignore nominal
ownership of an aircraft by one member of an affiliated group and
instead looked to the true economic ownership of the aircraft by the
group. The commenter asserted that the final regulations should do the
same and ignore the formalities of nominal ownership of an aircraft and
apply the aircraft management services exemption to payments by any
party that is the true economic owner of the aircraft.
The commenter requested that the Treasury Department and the IRS
consider expanding the definition of ``aircraft owner'' to include
disregarded entities, members of an affiliated group, and family
members. The commenter also noted that it is not uncommon for an
individual to operate an aircraft but place title to the aircraft in a
single member limited liability company (SMLLC) and that such
arrangement is, in effect, a constructive lease, but that state law
concepts of constructive leases will result in needless and complex
controversy.
Another commenter similarly requested that the Treasury Department
and the IRS consider expanding the definition of ``aircraft owner'' to
include the single member of a SMLLC that holds title to an aircraft.
The commenter reasoned that if the member pays an aircraft management
services provider for aircraft management services on behalf of the
SMLLC, it is economically indistinguishable from a case in which the
individual first transfers funds into the SMLLC and then the SMLLC pays
the aircraft management services provider. In either situation, the
commenter asserted, there is no circumvention of air transportation
excise tax; the only difference is who writes the check paying the
aircraft management services provider.
The Treasury Department and the IRS continue to have the concerns
described in the preamble to the proposed regulations. Specifically,
the Treasury Department and the IRS are concerned that extending the
aircraft management services exemption to payments made by certain
related parties--as suggested by the commenters--would effectively
ignore the requirement that payments be made by the ``aircraft owner.''
Such an interpretation would be inconsistent with a plain reading of
the statute and would violate a fundamental principle of statutory
construction--that effect must be given, if possible, to every word
Congress uses in the statute. See U.S. v. Menasche, 348 U.S. 528, 538-
539 (1955).
Further, as described in the preamble to the proposed regulations,
a fundamental aspect of administering the Federal excise tax laws is
respecting each entity as an entity separate from its owner. See Sec.
1.1361-4(a)(8) of the Income Tax Regulations and Sec. 301.7701-
2(c)(2)(v) of the Procedure and Administration Regulations. This
longstanding treatment of a wholly-owned entity as an entity separate
from its owner for Federal excise tax purposes applies even though the
entity may not be viewed as separate from its owner for Federal income
tax purposes. Consistent with this longstanding treatment, final Sec.
40.0-1(d) of the Excise Tax Procedural Regulations makes it clear that
each business unit that is required to have a separate Employer
Identification Number is treated as a separate person. The Treasury
Department and the IRS decline to create what would effectively be an
exception to the way certain entities are treated for Federal excise
tax purposes because this would create unnecessary confusion among
taxpayers and IRS examiners. For example, it would not be appropriate
to respect an entity for fuel excise tax liability and reporting
purposes but then disregard the same entity for purposes of the
aircraft management services exemption even though a transaction may
involve the same aircraft.
Based on the foregoing, the final regulations do not generally
incorporate the commenters' request to expand the definition of
``aircraft owner'' to include disregarded entities, members of an
affiliated group, or family members of the owner. Instead, the final
regulations clarify that amounts paid for aircraft management services
by a party related to the aircraft owner (including members of an
affiliated group, members of a limited liability company, disregarded
entities, and family members) are not amounts paid by the aircraft
owner solely by virtue of the relationship between the aircraft owner
and the related party. The final regulations further clarify that if
one related party leases an aircraft to another related party, amounts
paid by the lessee to an aircraft management services provider for
aircraft management services related to the leased aircraft qualify for
the aircraft management services exemption,
[[Page 4994]]
provided the lease is not a disqualified lease and all other
requirements of section 4261(e)(5) are satisfied.
v. Principal-Agent
Proposed Sec. 49.4261-10(a)(1) provided, in relevant part, that
the aircraft management services exemption does not apply to amounts
paid to an aircraft management services provider on behalf of an
aircraft owner (other than in a principal-agent scenario in which the
aircraft owner is the principal).
A commenter requested that the final regulations clarify what
relationships qualify as a ``principal-agent scenario'' for purposes of
qualifying payments for the aircraft management services exemption. The
commenter noted that all entities, depending on the type of entity
formation, have one or more officers, directors, managers, members or
partners that may be in a principal-agent relationship with an aircraft
owner. Therefore, the commenter suggested that the final regulations
clarify that for purposes of Sec. 49.4261-10(a)(1), officers and
directors of corporations, managers and members of limited liability
companies (LLCs), and partners of a partnership are deemed agents when
such corporations, LLCs, or partnerships are the aircraft owner.
Alternatively, the commenter suggested that the final regulations
clarify that the agency laws of the individual fifty states should be
recognized for purposes of determining whether a principal-agent
relationship exists between an aircraft owner and another person.
As a general matter, for Federal tax purposes, state agency law
applies in determining whether a principal-agent relationship exists.
Likewise, in the context of the aircraft management services exemption,
state law applies in determining whether the relationship between the
aircraft owner and another person is a principal-agent relationship.
Therefore, the final regulations adopt the principal-agent language
from the proposed regulations as written. The Treasury Department and
the IRS will consider providing additional guidance on this issue and
invite comments regarding whether a principal-agent rule that relates
specifically to the aircraft management services exemption is
necessary. Any comments that favor additional guidance should include
suggestions for how a more detailed principal-agent rule should be
structured. Unless and until the Treasury Department and the IRS
provide additional guidance, state agency law applies in determining
whether a principal-agent relationship exists between the aircraft
owner and another person.
vi. Evidence That Payments Are Made by the Aircraft Owner
Regarding proposed Sec. 49.4261-10(a)(3), a commenter requested
that the final regulations clarify what facts or evidence are
sufficient to show that the aircraft owner is the party making the
payments to the aircraft management services provider so that those
payments qualify for the aircraft management services exemption. The
commenter suggested that the final regulations provide that
``reasonable documentation'' from the aircraft owner stating that
payments for aircraft management services originate from a source
covered by the aircraft management services exemption will satisfy the
aircraft management services provider's obligation to determine whether
a payment comes from a permissible source and constitutes adequate
documentation thereof. The commenter believes that including this rule
in the final regulations will improve administrability for both
aircraft management services providers and the IRS.
The task of verifying the source of every payment received by an
aircraft management services provider for services related to an
aircraft owner's aircraft is a burdensome one for aircraft management
services providers. Verification is important because if a payment is
received from someone other than the aircraft owner (as that term is
defined in the final regulations), the aircraft management services
exemption does not apply and the aircraft management services provider
must collect any applicable air transportation tax on the amount paid.
If the aircraft management services provider fails to do so, section
4263(c) applies. See also Sec. 49.4261-1(b)(2).
The Treasury Department and the IRS recognize that in the context
of the aircraft management services exemption, it is important for
aircraft management services providers to understand their obligations
with regard to verifying that payments are made by aircraft owners and
that failure to verify may trigger the application of section 4263(c).
However, because section 4263(c) has broad implications for all members
of the air transportation industry, issues related to section 4263(c)
require additional study and input from a broader cross-section of
stakeholders in the air transportation industry. Accordingly, these
issues should be addressed in a separate published guidance project.
vii. Substantial Incidents of Ownership
Proposed Sec. 49.4261-10(b)(3)(i) provided, in relevant part, that
the term ``aircraft owner'' means an individual or entity that leases
or owns (that is, holds title to or substantial incidents of ownership
in) an aircraft managed by an aircraft management services provider,
commonly referred to as a ``managed aircraft.'' The Treasury Department
and IRS did not receive comments specifically relating to the
``substantial incidents of ownership'' language. However, the
``substantial incidents of ownership'' language is problematic because,
among other things, it creates an opportunity for abuse by providing a
mechanism by which parties can circumvent the disqualified lease rule
in section 4261(e)(5)(C). For example, parties that wish to enter into
an aircraft lease for 31 days or less could structure the transaction
as a transfer of substantial incidents of ownership in the aircraft for
a period of 31 days or less. By doing so, the parties could avoid
creating a disqualified lease while still availing themselves of the
exemption in section 4261(e)(5). Congress clearly did not intend for
the aircraft management services exemption to apply in such situations
as evidenced by the disqualified lease language in section
4261(e)(5)(C). Because of these concerns, the final regulations clarify
that the phrase ``substantial incidents of ownership'' in Sec.
49.4261-10(b)(3)(i) does not apply to an interest with a duration of 31
days or less.
viii. Other Changes Related to the Definition of Aircraft Owner
As stated earlier, proposed Sec. 49.4261-10(b)(3)(i) defined
``aircraft owner'', in relevant part, in terms of ``an individual or
entity.'' Final Sec. 49.4261-10(b)(3)(i) replaces the phrase
``individual or entity'' with the word ``person.'' This change improves
the precision of the aircraft owner definition because the Code
provides a generally applicable definition of ``person'' in section
7701(a)(1). This change also makes Sec. 49.4261-10(b)(3)(i) easier to
read.
b. Fractional Ownership Aircraft and Other Arrangements
Proposed Sec. 49.4261-10(b)(3)(ii) provided that a participant in
a fractional aircraft ownership program, as defined in section
4043(c)(2) of the Code, does not qualify as an aircraft owner of the
program's managed aircraft if the amount paid for such person's
participation is exempt from air transportation excise tax by reason of
section 4261(j). Proposed Sec. 49.4261-10(b)(3)(ii), referred to
herein as the
[[Page 4995]]
``other arrangements anti-abuse rule,'' further provided that a
participant in a business arrangement that seeks to circumvent the
surtax imposed by section 4043 by operating outside of subpart K of 14
CFR part 91, and that allows an aircraft owner the right to use any of
a fleet of aircraft (through an aircraft interchange agreement, through
holding nominal shares in a fleet of aircraft, or any other similar
arrangement), is not an aircraft owner with respect to any of the
aircraft owned or leased as part of that business arrangement.
A commenter observed that the other arrangements anti-abuse rule
appears to be aimed at persons who create a structure providing access
to a fleet of aircraft that fails to meet the definition of
``fractional ownership aircraft program'' in section 4043 in an effort
to avoid the fuel surtax imposed by section 4043, while retaining the
right to claim the aircraft management services exemption to also avoid
paying air transportation excise tax. The commenter further observed
that the phrase ``seeking to circumvent the surtax imposed by section
4043'' in the other arrangements anti-abuse rule indicates that for the
rule to apply, the primary intent in creating the arrangement must be
to avoid the section 4043 surtax. Thus, the commenter noted, if there
is a legitimate non-tax business purpose for creating the structure,
the other arrangements anti-abuse rule should not apply, and the
aircraft management services exemption should apply to amounts paid for
aircraft management services relating to the aircraft in the structure.
The commenter also observed that the phrase ``right to use any of a
fleet of aircraft (through an aircraft interchange agreement, through
holding nominal shares in a fleet of aircraft, or any other similar
arrangement)'' in the proposed rule appears to apply to structures that
are akin to fractional programs, but do not meet the definition of a
fractional program in section 4043(c)(2).
Based on the foregoing observations, the commenter disagreed with
several aspects of the other arrangements anti-abuse rule. First, the
commenter disagreed with the proposed rule as unclear regarding how it
would apply to structures that provide access to a fleet of aircraft
that exist for reasons unrelated to the applicability of the fuel
surtax imposed by section 4043. The commenter further disagreed with
the proposed rule for failing to define the point at which a structure
becomes enough like a fractional ownership aircraft program for the
rule to apply. Finally, the commenter disagreed with the proposed rule
because the commenter believes that it can be misinterpreted to include
various legitimate structures in which aircraft management services are
provided, including (a) instances where a substitute aircraft is
provided from the aircraft management services provider's charter fleet
(which is addressed in proposed Sec. 49.4261-10(c)); (b) leasing
structures where a lessor is providing an insured and maintained
aircraft but no pilots (which would not have previously been subject to
the tax under the possession, command and control test); and (c) the
routine use of interchange agreements between aircraft owners.
The Treasury Department and the IRS share the concerns of the
commenter that the proposed other arrangements anti-abuse rule may
capture aircraft ownership structures and leasing arrangements that are
legitimate and not created for purposes of circumventing the fuel
surtax imposed by section 4043. The Treasury Department and the IRS are
further concerned that the other arrangements anti-abuse rule would
create too much taxpayer uncertainty and confusion, which would be
compounded by the similarly worded rule in proposed Sec. 49.4261-10(i)
(see later discussion of this rule). As a result, the final regulations
in Sec. 49.4261-10(b)(3)(ii) do not include the other arrangements
anti-abuse rule. Therefore, the final regulations in Sec. 49.4261-
10(b)(3)(ii) merely clarify and confirm that a participant in a
fractional ownership aircraft program is not an aircraft owner for
purposes of the exemption in section 4261(e)(5) if the amount paid for
such person's participation is exempt from the tax imposed by section
4261 by reason of section 4261(j).
c. Definition of Disqualified Lease
Proposed Sec. 49.4261-10(b)(4) provided that the term
``disqualified lease'' has the meaning given to it by section
4261(e)(5)(C)(ii). Proposed Sec. 49.4261-10(b)(4), referred to herein
as the ``disqualified lease anti-abuse rule,'' further provided that a
disqualified lease also includes any arrangement that seeks to
circumvent the rule in section 4261(e)(5)(C)(ii) by providing a lease
term that is greater than 31 days but does not provide the lessee with
exclusive and uninterrupted access and use of the leased aircraft, as
identified by the aircraft's airframe serial number and tail number. In
addition, proposed Sec. 49.4261-10(b)(4) provided that the fact that a
lease permits the lessee to use the aircraft for for-hire flights, as
defined in Sec. 49.4261-10(b)(5), when the lessee is otherwise not
using the aircraft does not, because of this fact alone, cause a lease
with a term that is greater than 31 days to be a disqualified lease.
A commenter disagreed with the disqualified lease anti-abuse rule
as a general matter, because, in the commenter's opinion, it
significantly expands the definition of ``disqualified lease'' beyond
the definition provided in the statute, ensnaring common non-abusive
situations that should not be subject to the rule, and frustrating the
intended purpose of the statute. The commenter also disagreed with
several specific aspects of the disqualified lease anti-abuse rule.
First, the commenter disagreed with the disqualified lease anti-abuse
rule for not including language limiting its application to only a
lease of an aircraft from a person providing aircraft management
services for such aircraft.
Second, the commenter disagreed with the requirement in the
disqualified lease anti-abuse rule that the lease should provide the
lessee with exclusive and uninterrupted access and use of the leased
aircraft as overly broad. The commenter stated that the problem with
this aspect of the disqualified lease anti-abuse rule is that many
aircraft are leased on a non-exclusive basis for valid business
purposes, such as liability protection, state sales and use tax
compliance, and FAA regulatory requirements.
Third, the commenter disagreed with the disqualified lease anti-
abuse rule as improperly subjecting entity-based co-ownership
structures to air transportation excise tax. To illustrate this
concern, the commenter offered as an example a situation in which two
pilots form a limited liability company to purchase an aircraft. For
FAA regulatory compliance reasons, the LLC enters into non-exclusive
aircraft dry leases with each of the pilots who will operate the
aircraft. Since neither lessee in such an arrangement would have
exclusive and uninterrupted use of the aircraft, the proposed
disqualified lease anti-abuse rule would cause those otherwise
qualified leases to be disqualified leases.
Fourth, the commenter observed that the ``for hire'' language in
the disqualified lease anti-abuse rule allows a lessee to use the
leased aircraft to provide ``for hire'' flights. The commenter
disagreed with this aspect of the rule, stating that an aircraft must
typically be leased to an on-demand air taxi operator to conduct such
for-hire flights. Therefore, the commenter continued, an aircraft owner
may lease its aircraft without a crew on a non-exclusive basis directly
to an on-
[[Page 4996]]
demand air taxi operator in addition to leasing its aircraft without a
crew pursuant to a separate non-exclusive lease to a related party for
reasons unrelated to air transportation excise tax; in such a case, the
aircraft will be leased to each lessee on a non-exclusive basis. The
commenter concluded that, based on the language of the disqualified
lease anti-abuse rule, these facts could cause the non-exclusive leases
to be disqualified leases.
Finally, the commenter disagreed with the disqualified lease anti-
abuse rule because the commenter believes that it is possible that an
aircraft owner that provides limited services relating to the aircraft
could be deemed an aircraft management services provider based on the
broad definitions of the terms ``aircraft management services'' and
``aircraft management services provider.'' The commenter explained that
most business aircraft owners provide at least some services, such as
insurance, hangarage, or maintenance, when they lease their aircraft
for valid business reasons such as liability protection planning,
maintenance consistency, insurance requirements, and state sales and
use tax compliance.
To illustrate the commenter's concern, the commenter offered the
example of an entity that purchases an aircraft and enters into two
non-exclusive leases to its parent company and to a sister company with
a term greater than 31 days. The lessor may obtain the hangar and the
insurance for the aircraft since there is typically one hangar and one
insurance policy covering the aircraft even if there is more than one
non-exclusive aircraft lessee. Applying the proposed disqualified lease
anti-abuse rule to this situation, the commenter concluded that the
lessor could be viewed as an aircraft management services provider and
the arrangement would be subject to the disqualified lease anti-abuse
rule. The commenter further concluded that this scenario would
inappropriately broaden the scope of the disqualified lease anti-abuse
rule since the statutory language was not meant to apply the
disqualified lease provision to lessors that provide only partial or
limited services.
The commenter suggested that final Sec. 49.4261-10(b)(4) remove
the disqualified lease anti-abuse rule in its entirety so that the
regulatory definition of ``disqualified lease'' merely restates the
statutory definition of the term.
The Treasury Department and the IRS share the concerns of the
commenter, particularly that the disqualified lease anti-abuse rule may
capture common, legitimate leasing arrangements. Therefore, the final
regulations remove the disqualified lease anti-abuse language from the
definition of ``disqualified lease'' in Sec. 49.4261-10(b)(4). As a
result, the final version of Sec. 49.4261-10(b)(4) simply defines
``disqualified lease'' by reference to its statutory definition in
section 4261(e)(5)(C)(ii).
d. Definition of Private Aviation
Proposed Sec. 49.4261-10(a)(2) limited the aircraft management
services exemption to aircraft management services related to aircraft
used in private aviation. Proposed Sec. 49.4261-10(b)(6) defined the
term ``private aviation'' as the use of an aircraft for civilian
flights except scheduled passenger service. A commenter observed that
the apparent intent of proposed Sec. 49.4261-10(a)(2), when read in
combination with the definition of ``private aviation'' in proposed
Sec. 49.4261-10(b)(6), is to prevent the aircraft management services
exemption from applying to amounts paid for aircraft management
services related to scheduled commercial airline aircraft and flights.
The commenter also observed that proposed Sec. 49.4261-10(d) makes
clear that the aircraft management services exemption is available for
aircraft and flights operated under the charter services rules of part
135 of the FAA regulations (14 CFR part 135). The commenter suggested
that the final regulations clarify that ``scheduled passenger service''
refers to flights conducted by airlines that sell tickets on an
individual seat basis to the general public. The commenter also
suggested that the final regulations further clarify that the term
``private aviation'' includes charter flights operated under part 135
of the FAA regulations.
The Treasury Department and the IRS agree with the commenter that
the final regulations should clarify the types of flight operations
permitted under the private aviation rule in Sec. 49.4261-10(a)(2).
Therefore, the final regulations incorporate the commenter's suggested
changes to the definition of private aviation provided in Sec.
49.4261-10(b)(8). Specifically, the final regulations clarify that
``scheduled passenger service'' refers to flights for which tickets are
sold on an individual seat basis to the general public. In addition,
the definition of private aviation is modified to explicitly include
operations conducted under part 135 of the FAA regulations.
e. Section 4261(e)(5)(D)
Section 4261(e)(5)(D) provides that in the case of amounts paid to
any person which (but for section 4261(e)(5)) are subject to air
transportation excise tax, a portion of which consists of amounts
described in section 4261(e)(5)(A), section 4261(e)(5) ``shall apply on
a pro rata basis only to the portion which consists of amounts
described in'' section 4261(e)(5)(A). The Conference Report provides
that in the event that a monthly payment made to an aircraft management
company is allocated in part to exempt services and flights on the
aircraft owner's aircraft, and in part to flights on aircraft other
than that of the aircraft owner, air transportation excise tax must be
collected on that portion of the payment attributable to flights on
aircraft not owned by the aircraft owner.
Proposed Sec. 49.4261-10(c)(1), which generally tracked the pro
rata allocation language in the Conference Report, provided that if an
aircraft management services provider provides flight services to an
aircraft owner on a substitute aircraft during a calendar quarter, air
transportation excise tax applies to that portion of the amounts paid
by the aircraft owner to the aircraft management services provider,
determined on a pro rata basis, that are related to the flight services
provided on the substitute aircraft. Stated differently, the proposed
regulations provided that when an aircraft owner is provided flights on
a substitute aircraft by an aircraft management services provider (for
example, when the aircraft owner's aircraft is unavailable due to
maintenance), a portion of the amounts paid by the aircraft owner to
the aircraft management services provider is subject to air
transportation excise tax.
Proposed Sec. 49.4261-10(c)(2) proposed a method, based on the
ratio of flight hours provided on a substitute aircraft compared to the
total flight hours provided to the aircraft owner on the aircraft
owner's aircraft and on substitute aircraft during a calendar quarter,
for calculating the taxable portion of the amount paid to the aircraft
management services provider.
A commenter objected to proposed Sec. 49.4261-10(c) as
unnecessary; the commenter reasoned that--assuming flights provided on
a substitute aircraft are treated as charter flights provided by the
aircraft management services provider to the aircraft owner and subject
to air transportation excise tax--there is no need for a special
calculation to determine the amount paid for such flights. Similarly,
again assuming flights provided on a substitute aircraft are treated as
charter flights provided by the aircraft management services provider
to the aircraft owner and subject to air transportation excise tax,
multiple commenters objected to proposed Sec. 49.4261-10(c) because it
could result
[[Page 4997]]
in air transportation excise tax being applied to the same air
transportation twice--once on the amount paid for the charter on the
substitute aircraft and then again on a portion of the amount paid for
aircraft management services to the aircraft management services
provider providing the substitute aircraft.
One commenter offered several comments regarding the allocation
methodology in proposed Sec. 49.4261-10(c)(2). First, the commenter
disagreed with the proposed allocation methodology because it may
result in air transportation excise tax being imposed on amounts paid
for non-transportation items. Second, the commenter disagreed with the
proposed allocation methodology because it may result in the
application of air transportation excise tax to an amount
disproportionate to the fair market value of the transportation
services actually provided on the substitute aircraft. Third, the
commenter disagreed with the proposed allocation methodology because it
promotes a loss of revenue to aircraft management services providers.
The commenter explained that to avoid having to pay air transportation
excise tax on an allocated portion of the amount paid for aircraft
management services, the aircraft owner need only hire the replacement
aircraft from an operator different than the one that provides aircraft
management services to the aircraft owner. Thus, the commenter asserted
that the proposed rule incentivizes aircraft owner behavior that will
result in lost revenue to the aircraft management services provider.
Fourth, the commenter disagreed with the proposed allocation
methodology as increasing taxpayer uncertainty because the amount of
air transportation excise tax that results from the method will not be
known at the time an aircraft management services provider would
invoice an aircraft owner for services provided on a substitute
aircraft.
A third commenter disagreed with the allocation methodology in
proposed Sec. 49.4261-10(c) because the calculation, in the
commenter's view, will ordinarily produce nonsensical results since the
cost profile of a substitute aircraft will likely be different from the
cost profile for the aircraft owner's aircraft. The commenter asserted
that averaging the costs of two aircraft with different cost profiles
will produce an arbitrary result with no rational relationship to a
reasonable, fair market charter rate for flights on the substitute
aircraft. The commenter further asserted that the allocation
methodology calculation will be further skewed if the aircraft owner-
taxpayer owns multiple aircraft with varying flight hours from one
quarter to the next, buys or sells aircraft during the quarter, or pays
multiple aircraft management services providers rather than a single
aircraft management services provider.
All three commenters suggested that the final regulations either
completely remove Sec. 49.4261-10(c), as drafted in the proposed
regulations, or that the final regulations adopt a different approach
than the proposed allocation methodology. All three commenters also
suggested that in situations where a substitute aircraft is provided to
an aircraft owner, air transportation excise tax should be calculated
based on the amount paid by the aircraft owner for the substitute
aircraft (that is, in a manner similar to how air transportation excise
tax is calculated on amounts paid for charter flights). A commenter
also suggested that if an aircraft owner pays less than fair market
value for the use of the substitute aircraft, then air transportation
excise tax should be calculated on the fair market value rather than
the actual amount paid for the substitute aircraft.
In the alternative, if the proposed allocation methodology is
incorporated into the final regulations, a commenter suggested that the
final regulations provide that when an aircraft owner pays for a
substitute aircraft, then the aircraft owner will receive a credit for
any air transportation excise tax that it paid in relation to hiring a
substitute aircraft against the amount of tax calculated under the
allocation methodology. Another commenter suggested that if the
proposed allocation methodology is incorporated into the final
regulations, then the final regulations provide that an aircraft owner
may elect to pay air transportation excise tax on the fair market value
of the flight provided on the substitute aircraft rather than pay the
air transportation excise tax calculated using the proposed
methodology.
The comments prompted the Treasury Department and the IRS to
reevaluate the approach taken in the proposed regulations with regard
to section 4261(e)(5)(D). Based on this reevaluation, the Treasury
Department and the IRS reached two conclusions.
First, section 4261(e)(5)(D) has broader applicability than just
the provision of substitute aircraft as evidenced by the plain language
of that provision.
Second, the allocation methodology in the proposed regulation is
problematic. Specifically, the Treasury Department and the IRS share
the concerns expressed by the commenters, particularly with regard to
the potential for double taxation and uncertainty under the proposed
rule.
For these reasons, the final regulations adopt the general approach
suggested by the commenters. Specifically, final Sec. 49.4261-10(c)(1)
restates section 4261(e)(5)(D) as a generally applicable rule. Final
Sec. 49.4261-10(c)(1) further provides that the tax base for the
portion that is subject to the tax imposed by section 4261(a) is the
amount paid for such flights or services, provided the amount paid is
separable and shown in exact amounts in the records pertaining to the
charge. This rule is consistent with commenter suggestions and also
reflects the general approach in the air transportation excise tax area
that the section 4261(a) tax is imposed on the actual amount paid for
taxable transportation. The separability element of the rule is
consistent with the rule in Sec. 49.4261-2(c) regarding situations in
which a payment covers charges for transportation and nontransportation
services. If the portion of the amount paid that is subject to the tax
imposed by section 4261(a) is not separable and is not shown in exact
amounts in the records pertaining to the charge, the tax base is the
fair market value of the flights or services; however, the tax base
does not exceed the total amount paid (that is, the sum of the portion
that is subject to the tax imposed by section 4261(a) and the portion
that consists of amounts described in section 4261(e)(5)(A)). For
clarity, the final regulations also include a definition of ``fair
market value'' that applies to allocations. The definition of ``fair
market value'' is consistent with commenter suggestions.
In addition, final Sec. 49.4261-10(c)(2) treats the provision of a
flight on a substitute aircraft to the aircraft owner by an aircraft
management services provider as an aircraft charter, with the aircraft
owner as the charterer. The final regulations further provide that the
allocation rule in final Sec. 49.4261-10(c)(1) applies in determining
the tax base.
The final regulations also provide guidance for situations in which
a substitute aircraft is used to provide a for-hire flight. In that
instance, the final regulations instruct taxpayers and collectors to
follow the aircraft charter rules in Sec. 49.4261-7(h)(2).
The final regulations update the first example and add a second
example in Sec. 49.4261-10(h) to illustrate these rules.
f. Aircraft Available for Hire
Proposed Sec. 49.4261-10(e)(1) provided that whether an aircraft
owner permits
[[Page 4998]]
an aircraft management services provider or other person to use its
aircraft to provide for-hire flights (for example, when the aircraft is
not being used by the aircraft owner or when the aircraft is being
moved in deadhead service) does not affect the application of the
aircraft management services exemption. Proposed Sec. 49.4261-10(e)(1)
further provided that an amount paid for for-hire flights on the
aircraft owner's aircraft does not qualify for the aircraft management
services exemption. Therefore, under proposed Sec. 49.4261-10(e)(1),
an amount paid for a for-hire flight on an aircraft owner's aircraft is
subject to air transportation excise tax unless the amount paid is
otherwise exempt from air transportation excise tax other than by
reason of the aircraft management services exemption.
A commenter expressed concern that the wording of proposed Sec.
49.4261-10(e)(1) may cause confusion and result in the misapplication
of air transportation excise tax to amounts paid that should qualify
for the aircraft management services exemption. Specifically, the
commenter's concern relates to the second and third sentences of
proposed Sec. 49.4261-10(e)(1), which explain that amounts paid for
for-hire flights are subject to air transportation excise tax. The
commenter observed that under section 4261(e)(5), amounts paid by an
aircraft owner for flights on the aircraft owner's aircraft are exempt
from air transportation excise tax. The commenter further observed that
under proposed Sec. 49.4261-10(d), operating an aircraft owner's
aircraft under part 135 of the FAA regulations does not affect the
application of the aircraft management services exemption. The
commenter's concern is that aircraft operations conducted under part
135 of the FAA regulations could arguably be considered for-hire
flights; however, proposed Sec. 49.4261-10(e)(1) does not provide a
carve-out for part 135 flights paid for by the aircraft owner.
Therefore, in order to clarify that amounts paid by an aircraft owner
for flights operated under part 135 are not subject to air
transportation excise tax, the commenter suggested that the final
regulations incorporate a carve-out by modifying the second sentence of
proposed Sec. 49.4261-10(e)(1) to read: ``However, an amount paid for
for-hire flights on the aircraft owner's aircraft, except payments made
by such aircraft owner, does not qualify for the section 4261(e)(5)
exemption.'' (emphasis added to denote new wording).
The Treasury Department and the IRS agree with the commenter. As a
result, final Sec. 49.4261-10(e) incorporates the commenter's
suggested change.
g. Coordination With Fuel Tax Provisions
Proposed Sec. 49.4261-10(g) provided that taxable fuel (as defined
in section 4083(a)) or any liquid taxable under section 4041(c) that is
used as fuel on a flight for which amounts paid are exempt from air
transportation excise tax by reason of the aircraft management services
exemption is not fuel used in commercial aviation, as that term is
defined in section 4083(b). Thus, under the proposed rule, if the
aircraft management services exemption applies to amounts paid in
relation to a flight, then the higher noncommercial fuel tax rate (as
compared to the commercial fuel tax rate) automatically applies to fuel
used during such flight.
A commenter stated that proposed Sec. 49.4261-10(g) is
inconsistent with the air transportation excise tax-fuel tax statutory
scheme and contrary to Congressional intent with regard to that scheme.
The commenter asserted that if Congress had intended that all flights
qualifying for the aircraft management services exemption be treated as
non-commercial flights for fuel tax purposes, Congress could have
adopted a corresponding code section to that effect as it did with
other exemptions to air transportation excise tax. Specifically, the
commenter pointed to the exemptions to air transportation excise tax
provided in sections 4261(h) (skydiving), 4261(i) (seaplanes), 4281
(small aircraft on nonestablished lines), and 4282 (affiliated group
members), each of which section 4083(b) explicitly excludes from the
definition of ``commercial aviation'' for purposes of determining
applicable fuel tax rates. By not providing a similar, explicit
definitional exclusion in section 4083(b) (or other Code section) for
the aircraft management services exemption, the commenter asserted,
Congress left the determination of which fuel tax rate--commercial or
non-commercial--applies to a particular flight to the application of
the general definition of ``commercial aviation'' in section 4083(b).
Therefore, the commenter suggested that the final regulations provide
that if the aircraft management services exemption applies to amounts
paid for a flight, the determination of whether fuel used during the
flight is subject to commercial or non-commercial fuel tax rates is
made simply through an application of the definition of commercial
aviation provided in section 4083(b).
The Treasury Department and the IRS agree with the commenter that
proposed Sec. 49.4261-10(g) is inconsistent with the air
transportation excise tax-fuel excise tax statutory scheme. As a
result, the final regulations do not adopt the rule in proposed Sec.
49.4261-10(g). The rule in proposed Sec. 49.4261-10(e)(2) relating to
fuel used in for-hire flights is similarly inconsistent with the air
transportation excise tax-fuel excise tax statutory scheme. Therefore,
the final regulations also do not adopt the rule proposed in Sec.
49.4261-10(e)(2). Because final Sec. 49.4261-10 does not provide fuel
excise tax guidance related to the exemption in section 4261(e)(5),
persons affected by the aircraft management services exemption should
continue to follow current statutory, regulatory, and administrative
guidance related to the rates of tax for aviation fuel.
h. Coordination With Fractional Ownership Aircraft Exemption; Anti-
Abuse Rule
Proposed Sec. 49.4261-10(i) provided, in relevant part, that the
aircraft management services exemption does not apply to any amount
paid for aircraft management services by a participant in any
transaction or arrangement, or through other means, that seeks to
circumvent the surtax imposed by section 4043. A commenter expressed
concern that confusion could result from the phrasing of the first
sentence of proposed Sec. 49.4261-10(i) because it is essentially
identical to the phrasing of the second sentence of proposed Sec.
49.4261-10(b)(3)(ii) (excluding fractional aircraft ownership programs
and similar arrangements from the definition of ``aircraft owner'').
The commenter suggested that the first sentence in the final version of
Sec. 49.4261-10(i) simply cross-reference Sec. 49.4261-10(b)(3)(ii),
rather than repeating the similar language. Specifically, the commenter
suggested the following language for the first sentence of final Sec.
49.4261-10(i): ``The aircraft management services exemption does not
apply to any amount paid for aircraft management services by a
participant in the type of business arrangement described in [Sec.
49.4261-10(b)(3)(ii)] that does not qualify the participant as an
aircraft owner.''
The Treasury Department and the IRS believe that the rule in
proposed Sec. 49.4261-10(i) is problematic for the same reasons as the
other arrangements anti-abuse rule in proposed Sec. 49.4261-
10(b)(3)(ii) (discussed earlier); specifically, it may capture aircraft
ownership structures that are legitimate and not created for purposes
of circumventing the fuel surtax imposed by section 4043. The Treasury
Department and the IRS further believe
[[Page 4999]]
that, like the other arrangements anti-abuse rule in proposed Sec.
49.4261-10(b)(3)(ii), the rule in proposed Sec. 49.4261-10(i) would
have created taxpayer uncertainty and confusion. Because the final
regulations in Sec. 49.4261-10(b)(3)(ii) clarify that a participant in
a fractional ownership aircraft program is not an aircraft owner for
purposes of the exemption in section 4261(e)(5), an additional
coordination rule is redundant. As a result, the final regulations do
not adopt proposed Sec. 49.4261-10(i).
i. Adequate Records
Proposed Sec. 49.4261-10(a)(3) stated that in order to qualify for
the aircraft management services exemption, an aircraft owner and
aircraft management services provider must maintain adequate records to
show that the amounts paid by the aircraft owner to the aircraft
management services provider relate to aircraft management services for
the aircraft owner's aircraft or for flights on the aircraft owner's
aircraft.
A commenter requested that the final regulations provide guidance
on the types of records required to satisfy this requirement. The
Treasury Department and the IRS agree. Accordingly, the final
regulations add language to Sec. 49.4261-10(a)(3) stating that such
records may include the agreement, if any, between the aircraft owner
and the aircraft management services provider, evidence of aircraft
ownership, evidence that amounts paid for aircraft management services
came from the aircraft owner, the aircraft management services
provider's fee schedule, and documents to support any allocations
required under the pro rata allocation rule.
j. Examples
Proposed Sec. 49.4261-10(j) included two examples illustrating
certain aspects of the rules in proposed Sec. 49.4261-10. Proposed
Sec. 49.4261-10(j)(1) (Example 1) illustrated the substitute aircraft
allocation methodology in proposed Sec. 49.4261-10(c)(1) and (2).
Proposed Sec. 49.4261-10(j)(1)(i) (presenting the facts of Example 1)
stated, in relevant part, that:
A commenter stated that it interpreted proposed Sec. 49.4261-
10(j)(1)(i) (presenting the facts of Example 1) as saying that if a
company hires an aircraft management company to provide only pilot
services to the aircraft owner, then--but for the aircraft management
services exemption--air transportation excise tax would apply to the
amounts paid by the aircraft owner to the aircraft management services
provider. Based on its interpretation, the commenter expressed its
opinion that the example presents an extreme position with regard to
the application of air transportation excise tax to an aircraft owner-
aircraft management services provider relationship. The commenter
further stated that the second sentence in proposed Sec. 49.4261-
10(j)(1)(i) may cause confusion regarding the application of the
possession, command, and control test in cases that are not governed by
section 4261(e)(5). In addition, the commenter stated that the second
sentence in proposed Sec. 49.4261-10(j)(1)(i) is irrelevant to the
rest of the example, thereby compounding the other problems that the
commenter mentioned. The commenter suggested that the final regulations
remove the second sentence from Sec. 49.4261-10(j)(1)(i).
As noted earlier, the final regulations include a revised pro rata
allocation rule. The final regulations also revise the first example
(including deletion of the second sentence) and add a second example to
illustrate the revised pro rata allocation rule. In addition, the final
regulations revise the third example (proposed Sec. 49.4261-10(j)(2))
to remove the fuel references in light of the decision not to adopt
proposed Sec. 49.4261-10(e)(2) and (g) in the final regulations.
III. Generally Applicable Air Transportation Excise Tax Rules and
Aircraft Charter Rules
a. Payment and Collection Obligations
Proposed Sec. 49.4261-1(b)(1) restated, in general terms,
statutory provisions and existing regulations related to the duties and
obligations of a person that makes a payment subject to the taxes
imposed by section 4261 (that is, the taxpayer) and a person that
receives such payments (that is, the collector). The duties and
obligations include those imposed on the collector to collect the
applicable tax from the taxpayer, to report the tax on Form 720,
Quarterly Federal Excise Tax Return, and to remit the tax to the IRS.
The duties and obligations enumerated in the proposed regulations also
include the requirement that the collector make semimonthly deposits of
the taxes imposed by section 4261.
Proposed Sec. 49.4261-1(b)(2) restated the rule in section
4263(c), which provides that if any tax imposed by section 4261 is not
paid at the time payment for transportation is made, then, to the
extent the tax is not collected under any other provision of subchapter
C of chapter 33 of the Code, the tax must be paid by the carrier
providing the initial segment of transportation that begins or ends in
the United States.
Regarding proposed Sec. 49.4261-1(b)(1), a commenter expressed
concern that current published guidance (primarily in the form of
revenue rulings) does not adequately address the duties and obligations
of charter brokers with regard to collecting and reporting air
transportation excise tax. The commenter described a charter broker as
an intermediary that charters aircraft from a certificated air carrier
(who actually provides the flight services), and that may act as an
agent of the air carrier, an agent of the passengers, or as a principal
in the chartering transaction. The commenter stated that the lack of
guidance related to charter brokers has created considerable confusion
in the charter broker industry. Further, the commenter stated that the
need for clear and precise guidance is compounded by the aircraft
charter rules provided in proposed Sec. 49.4261-7(h) (discussed later)
and section 4263(c), which imposes liability on the air carrier
providing the initial segment of transportation that begins or ends in
the U.S. in cases where any tax imposed by section 4261 is not paid at
the time the payment for transportation is made. Therefore, the
commenter requested that the final regulations provide guidance
regarding the circumstances in which a charter broker (rather than an
air carrier) is obligated to collect air transportation excise tax and
file Forms 720. The commenter suggested that such guidance should be
consistent with the approaches taken in Rev. Rul. 68-256, 1968-1 C.B.
489; Rev. Rul. 75-296, 1975-2 C.B. 440; and Rev. Rul. 2006-52, 2006-2
C.B. 761.
Regarding proposed Sec. 49.4261-1(b)(2), a commenter stated that
the obligation placed on the air carrier to pay the tax imposed by
section 4261 if the party responsible for collecting it fails to do so
creates confusion and unfair liability exposure for the air carrier.
Further, the commenter stated, as an example, that an IRS examiner
could assert tax liability on the air carrier for uncollected tax when
the air carrier has no means to determine whether another responsible
party, such as a charter broker, had collected and paid over the tax.
To alleviate these concerns, the commenter suggested that the final
regulations provide that if an air carrier documents that it informed
the charter broker of its obligation to collect the taxes imposed by
section 4261 and file Forms 720 (see the discussion of proposed Sec.
49.4261-7(h) later), then the air carrier will not be liable for
uncollected tax under section 4263(c).
[[Page 5000]]
The commenter also suggested that the final regulations provide that if
the IRS asserts liability on an air carrier under section 4263(c)
(irrespective of whether the air carrier can show that it informed the
charter broker of its obligations to collect and report) during an
examination, then the air carrier should be entitled to obtain
information from the IRS on whether the tax was paid by the charter
broker or any other party.
The Treasury Department and the IRS understand and share the
commenters' concerns related to uncertainty and the possibility of
surprise that may result from another party's IRS examination because
of the rules in section 4263(c) and proposed Sec. 49.4261-1(b)(2).
Because the interactions between section 4263(c) and other air
transportation excise tax rules are complex and have broad implications
for other members of the air transportation industry, the Treasury
Department and the IRS believe that these issues require additional
study and input from a broader cross-section of the air transportation
industry. Further, the Treasury Department and the IRS believe that
section 4263(c) issues should be addressed in a separate published
guidance project that could also potentially consider the interplay
between section 4263(c) and the existing regulatory rules in Sec.
49.4261-7(h) and Sec. 49.4291-1.
However, because, as mentioned earlier, proposed Sec. 49.4261-
1(b)(1) merely restated currently applicable statutory and regulatory
rules, the final regulations adopt proposed Sec. 49.4261-1(b)(1)
without change. In addition, the final regulations do not adopt the
second sentence of proposed Sec. 49.4261-1(b)(2) so that the final
regulations simply track the language of section 4263(c), as currently
written, without further comment. The Treasury Department and the IRS
believe it is necessary to finalize these rules because the existing
regulations related to section 4263(c) reflect prior law, which has
created widespread confusion among taxpayers and collectors in the air
transportation area.
b. Aircraft Charters
Proposed Sec. 49.4261-7(h), which generally restated existing
rules in Sec. 49.4261-7(h), provided rules related to the application
of the taxes imposed by section 4261 to situations in which a person
provides air transportation services on an aircraft that was chartered
from--and operated by--another party, commonly referred to as a ``wet
lease.'' Proposed Sec. 49.4261-7(h)(2) provided that the charterer of
an aircraft who sells transportation to other persons must collect and
account for the tax with respect to all amounts paid to the charterer
by such other persons. The proposed rule further provided that, in such
a case, no tax will be due on the amount paid by the charterer for the
charter of the aircraft but that it is the duty of the owner of the
aircraft to advise the charterer of the charterer's obligation for
collecting, accounting for, and paying over the tax to the IRS. This
requirement is intended to ensure the parties communicate with each
other regarding air transportation excise tax and prevent
misunderstandings about which party is responsible for collecting tax
under the arrangement.
Two commenters requested clarification regarding the duty of the
``owner of the aircraft to advise the charterer of the charterer's
obligations for collecting, accounting for, and paying over the tax''
to the IRS imposed under the proposed rule. A commenter stated that in
the air charter industry, the air carrier does not typically own the
aircraft used to provide charter flights. Because the proposed rule
imposes on the aircraft owner the duty to advise the charterer of its
obligations, the commenter stated that confusion about which party must
advise the charterer may result from the phrasing of the proposed rule.
The commenter suggested the proposed rule use the phrase ``air
carrier'' rather than ``owner of the aircraft.''
A commenter also requested clarification about how and when the
duty to advise the charterer of its obligations with regard to air
transportation excise tax must be satisfied. Specifically, the
commenter asked whether the duty to advise applies separately to each
specific charter flight, or whether the duty may be satisfied as part
of a long-term underlying agreement between the aircraft owner and the
charterer such as a lease agreement for the aircraft owner's aircraft
entered into by the aircraft owner and the charterer. The commenter
also requested clarification regarding whether the duty to advise the
charterer of its obligations with regard to air transportation excise
tax creates an obligation on the part of the aircraft owner to collect
the tax if the charterer fails to do so.
The Treasury Department and the IRS understand and share the
commenters' concern that, because the owner of a chartered aircraft may
not be the party that operates the aircraft, the phrasing of the
proposed rule may cause confusion. In addition, the Treasury Department
and the IRS understand the need for clarification regarding the duty of
the aircraft owner to advise the charterer of its collection
obligations. However, because these rules are complex and have broad
applicability to the air transportation industry, additional study and
stakeholder input is required. Accordingly, a separate published
guidance project is necessary to address: (a) the possible shifting of
the duty to advise the charterer about its obligations for collecting,
accounting for, and paying over the tax to the IRS to the air carrier
operating the chartered aircraft instead of the owner of the chartered
aircraft; (b) whether the duty to advise applies separately to each
specific charter flight, or whether the duty may be satisfied as part
of a long-term agreement between the aircraft owner and the charterer;
and (c) whether the duty to advise the charterer of its obligations
with regard to air transportation excise tax creates an obligation on
the part of the aircraft owner to collect the tax if the charterer
fails to do so.
Because proposed Sec. 49.4261-7(h) merely restated currently
applicable rules, the final regulations adopt proposed Sec. 49.4261-
7(h) without change. Until additional guidance is issued, Sec.
49.4261-7(h), as finalized, and other existing published guidance
apply.
Effect on Other Documents
Revenue Ruling 67-414 (1967-2 C.B. 382), Revenue Ruling 72-309
(1972-1 C.B. 348), and Revenue Ruling 2002-34 (2002-1 C.B. 1150) are
obsoleted on January 19, 2021.
Applicability Dates
For dates of applicability, see Sec. Sec. 40.0-1(e), 49.4261-1(g),
49.4261-2(d), 49.4261-3(e), 49.4261-7(k), 49.4261-9(c), 49.4261-10(i),
49.4262-1(f), 49.4262-2(e), 49.4262-3(e), 49.4281-1(e), 49.4263-1(b),
49.4263-3(b), 49.4271-1(g), and 49.4721-2.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that this final rule will not have a significant
economic impact on a substantial number of small entities. Although the
rule may affect a substantial number of small entities, the economic
impact of the regulations is not likely to be significant. Data are not
readily available about the number of
[[Page 5001]]
taxpayers affected, but the number is likely to be substantial for both
large and small entities because the rule may affect entities that
serve as holding companies for aircraft that do not have many revenues
or employees. The economic impact of these regulations is not likely to
be significant, however, because these final regulations primarily
clarify the application of the aircraft management services exception
added to the Code by the TCJA. These final regulations will assist
taxpayers in understanding the rules to qualify for the exemption under
section 4261(e)(5) and make it easier for taxpayers to comply and IRS
examiners to administer the exemption. Accordingly, the Secretary of
the Treasury's delegate certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
Notwithstanding this certification, the Treasury Department and the IRS
welcome comments on the impact of these regulations on small entities.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding this regulation was submitted to the Chief Counsel
for the Office of Advocacy of the Small Business Administration for
comment on its impact on small business. No comments were received from
the Chief Counsel for the Office of Advocacy of the Small Business
Administration.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices and other guidance
cited in this document are published in the Internal Revenue Bulletin
and are available from the Superintendent of Documents, U.S. Government
Publishing Office, Washington, DC 20402, or by visiting the IRS website
at http://www.irs.gov.
Drafting Information
The principal author of these regulations is Michael H. Beker,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects
26 CFR Part 40
Excise taxes, Reporting and recordkeeping requirements.
26 CFR Part 49
Excise taxes, Reporting and recordkeeping requirements, Telephone,
Transportation.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 40 and 49 are amended as follows:
PART 40--EXCISE TAX PROCEDURAL REGULATIONS
0
Paragraph 1. The authority citation for part 40 is amended by removing
the entry for Sec. 40.6071(a)-3 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 40.0-1 is amended by redesignating paragraph (d) as
paragraph (e), adding a new paragraph (d), and revising newly
redesignated paragraph (e) to read as follows:
Sec. 40.0-1 Introduction.
* * * * *
(d) Person. For purposes of this part, each business unit that has,
or is required to have, a separate employer identification number is
treated as a separate person. Thus, business units (for example, a
parent corporation and a subsidiary corporation, a partner and the
partner's partnership, or the various members of a consolidated group),
each of which has, or is required to have, a different employer
identification number, are separate persons.
(e) Applicability date--(1) Paragraphs (a), (b), and (c) of this
section. Paragraphs (a), (b), and (c) of this section apply to returns
for periods beginning after March 31, 2013. For rules that apply before
that date, see 26 CFR part 40, revised as of April 1, 2012.
(2) Paragraph (d) of this section. Paragraph (d) of this section
applies to returns for periods beginning on or after January 19, 2021.
For rules that apply before that date, see 26 CFR part 40, revised as
of April 1, 2020.
Sec. 40.6071(a)-3 [Removed]
0
Par. 3. Section 40.6071(a)-3 is removed.
PART 49--FACILITIES AND SERVICES EXCISE TAX REGULATIONS
0
Par. 4. The authority citation for part 49 continues to read in part as
follows:
Authority: 26 U.S.C. 7805. * * *
0
Par. 5. Section 49.4261-1 is revised to read as follows:
Sec. 49.4261-1 Imposition of tax; in general.
(a) In general. Section 4261 of the Internal Revenue Code (Code)
imposes three separate taxes on amounts paid for certain transportation
of persons by air. Tax attaches at the time of payment for any
transportation taxable under section 4261. The applicability of each
section 4261 tax is generally determined on a flight-by-flight basis.
(1) Percentage tax. Section 4261(a) imposes a 7.5 percent tax on
the amount paid for the taxable transportation of any person. See
section 4262(a) of the Code and Sec. 49.4262-1(a) for the definition
of the term taxable transportation.
(2) Domestic segment tax. Section 4261(b)(1) imposes a $3 tax
(indexed annually for inflation pursuant to section 4261(e)(4)) on the
amount paid for each domestic segment of taxable transportation. See
section 4261(b)(2) for the definition of the term domestic segment. The
domestic segment tax does not apply to a domestic segment beginning or
ending at an airport that is a rural airport for the calendar year in
which the segment begins or ends (as the case may be). See section
4261(e)(1)(B) for the definition of the term rural airport.
(3) International travel facilities tax. Section 4261(c) imposes a
$12 tax (indexed annually for inflation pursuant to section 4261(e)(4))
on any amount paid (whether within or without the United States) for
any transportation by air that begins or ends in the United States. The
international travel facilities tax does not apply to any
transportation that is entirely taxable under section 4261(a)
(determined without regard to sections 4281 and 4282). See section
4261(c)(2). A special rule applies to Alaska and Hawaii flights. See
section 4261(c)(3).
(b) Payment and collection obligations--(1) In general. The taxes
imposed by section 4261 are collected taxes. In general, the person
making the payment subject to tax is the taxpayer. See section 4261(d).
The person receiving the payment is the collector (also commonly
referred to as the collecting agent). See section 4291 of the Code. The
collector must collect the applicable tax from the taxpayer, report the
tax on Form 720, Quarterly Federal Excise Tax Return, and remit the tax
to the Internal Revenue Service. See sections 4291, 6011, and 7501 of
the Code. See Sec. 40.6011(a)-1 of this chapter and Sec. 49.4291-1.
The collector must also make semimonthly deposits of the taxes imposed
by section 4261. See section 6302(e) of the Code. See Sec. Sec. 40.0-
1(c), 40.6302(c)-1, and 40.6302(c)-3 of this chapter. See section
4263(a) and (c) of the Code for special rules relating to the payment
and collection of tax.
(2) Failure to collect tax. If any tax imposed by section 4261 is
not paid at the time payment for transportation is made, then, to the
extent the tax is not collected under any other provision of subchapter
C of chapter 33 of the Code,
[[Page 5002]]
the tax must be paid by the carrier providing the initial segment of
transportation that begins or ends in the United States. See section
4263(c). See section 6672 of the Code for rules relating to the
application of the trust fund recovery penalty.
(c) Type of aircraft. The taxes imposed by section 4261 generally
apply regardless of the type of aircraft on which the transportation is
provided, provided all of the other conditions for liability are
present and no specific statutory exemption applies. See paragraph (f)
of this section for a list of statutory exemptions from tax. Amounts
paid for the transportation of persons by air cushion vehicles, also
known as hovercraft, are not subject to the taxes imposed by section
4261.
(d) Purpose of transportation. The purpose of the transportation
(for example, business or pleasure) is not a factor in determining
taxability under section 4261.
(e) Routes. Amounts paid for transportation may be taxable even if
the transportation is not between two definite points. Unless otherwise
exempt, a payment for continuous transportation that begins and ends at
the same point is subject to tax. See section 4281 of the Code and
Sec. 49.4281-1 for the exemption for small aircraft on nonestablished
lines.
(f) Exemptions from tax; cross-references--(1) Aircraft management
services. For the exemption for certain aircraft management services,
see section 4261(e)(5) of the Code and Sec. 49.4261-10.
(2) Hard minerals, oil, and gas. For the exemption for certain uses
related to the exploration, development, or removal of hard minerals,
oil, or gas, see section 4261(f)(1).
(3) Trees and logging operations. For the exemption for certain
uses related to trees and logging operations, see section 4261(f)(2).
(4) Air ambulances. For the exemption for air ambulances providing
certain emergency medical transportation, see section 4261(g).
(5) Skydiving. For the exemption for certain skydiving uses, see
section 4261(h).
(6) Seaplanes. For the exemption for certain seaplane segments, see
section 4261(i).
(7) Fractionally-owned aircraft. For the exemption for certain
aircraft in fractional ownership aircraft programs, see section
4261(j).
(8) Small aircraft on nonestablished lines. For the exemption for
certain small aircraft on nonestablished lines, see section 4281 of the
Code and Sec. 49.4281-1.
(9) Affiliated groups. For the exemption for certain transportation
of members of an affiliated group, see section 4282.
(10) United States and territories. For exemptions authorized by
the Secretary of the Treasury or his delegate for the exclusive use of
the United States, see section 4293.
(g) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply before that date, see 26
CFR part 49, revised as of April 1, 2020.
0
Par. 6. Section 49.4261-2 is amended by:
0
1. Revising paragraphs (a) and (b).
0
2. Adding paragraph (d).
The revisions and addition read as follows:
Sec. 49.4261-2 Application of tax.
(a) Tax on total amount paid. The tax imposed by section 4261(a) of
the Internal Revenue Code (Code) is measured by the total amount paid
for taxable transportation, whether paid in cash or in kind.
(b) Tax on transportation of each person. The taxes imposed by
section 4261(b) and (c) of the Code are head taxes and, therefore,
apply on a per-passenger basis. The taxes apply to each passenger for
whom an amount is paid, regardless of whether the payment is made as a
single lump sum or is made individually for each passenger. In the case
of charter flights for which a fixed amount is paid, the section
4261(b) and (c) taxes are computed by multiplying the applicable rate
of tax by the number of passengers transported on the aircraft.
* * * * *
(d) Applicability date. Paragraphs (a) and (b) of this section
apply to amounts paid on and after January 19, 2021. For rules that
apply before that date, see 26 CFR part 49, revised as of April 1,
2020.
0
Par. 7. Section 49.4261-3 is amended by:
0
1. Removing ``Sec. 49.4262(c)-1'' wherever it appears and adding
``Sec. 49.4262-3'' in its place.
0
2. In the first sentence of paragraph (a), removing ``The tax imposed
by section 4261(a)'' and adding ``The taxes imposed by section 4261(a)
and (b) of the Internal Revenue Code (Code)'' in its place.
0
3. In the second sentence of paragraph (a), adding ``under section
4261(a) and (b)'' at the end of the sentence.
0
4. Revising paragraphs (b) and (c).
0
5. In paragraph (d), removing ``section 4262(b) and Sec. 49.4262(b)-
1'' and adding ``section 4262(b) of the Code and Sec. 49.4262-2'' in
its place.
0
6. Adding paragraph (e).
The revisions and additions read as follows:
Sec. 49.4261-3 Payments made within the United States.
* * * * *
(b) Other transportation. In the case of transportation, other than
that described in paragraph (a) of this section, for which payment is
made in the United States, the taxes imposed by section 4261(a) and (b)
apply with respect to the amount paid for that portion of such
transportation by air which is directly or indirectly from one port or
station in the United States to another port or station in the United
States, but only if such portion is not a part of uninterrupted
international air transportation within the meaning of section
4262(c)(3) of the Code and Sec. 49.4262-3(c). Transportation that:
(1) Begins in the United States or the 225-mile zone and ends
outside such area,
(2) Begins outside the United States or the 225-mile zone and ends
inside such area, or
(3) Begins outside the United States and ends outside such area, is
taxable only with respect to the portion of the transportation by air
which is directly or indirectly from one port or station in the United
States to another port or station in the United States, but only if
such portion is not a part of ``uninterrupted international air
transportation'' within the meaning of section 4262(c)(3) and Sec.
49.4262-3(c). Thus, on a trip by air from Chicago to London, England,
with a stopover at New York, for which payment is made in the United
States, if the portion from Chicago to New York is not a part of
``uninterrupted international air transportation'' within the meaning
of section 4262(c)(3) and Sec. 49.4262-3(c), the taxes would apply to
the part of the payment which is applicable to the transportation from
Chicago to New York. However, if the portion from Chicago to New York
is a part of ``uninterrupted international air transportation'' within
the meaning of section 4262(c)(3) and Sec. 49.4262-3(c), the taxes
would not apply.
(c) Method of computing tax on taxable portion. Where a payment is
made for transportation which is partially taxable under paragraph (b)
of this section, the tax imposed by section 4261(a) may be computed on
that proportion of the total amount paid which the mileage of the
taxable portion of the transportation bears to the mileage of the
entire trip.
* * * * *
(e) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply
[[Page 5003]]
before that date, see 26 CFR part 49, revised as of April 1, 2020.
Sec. 49.4261-4 [Amended]
0
Par. 8. Section 49.4261-4 is amended by:
0
1. In paragraph (a), removing the first ``4261(a)'' and adding ``4261
of the Internal Revenue Code (Code)'' in its place.
0
2. In paragraph (a), removing ``section 4261(a) (see section 4264(d))''
and adding ``section 4261 (see section 4263(d) of the Code)'' in its
place.
0
3. In paragraph (b), removing ``Sec. 49.4262(c)-1'' and adding ``Sec.
49.4262-3'' in its place.
0
4. In the first sentence of paragraph (d), removing ``Sec. 49.4262(c)-
1'' and adding ``Sec. 49.4262-3'' in its place.
0
5. In the first sentence of paragraph (d), removing ``six-hour'' and
adding ``12-hour'' in its place.
Sec. 49.4261-5 [Amended]
0
Par. 9. Section 49.4261-5 is amended as follows:
0
1. In paragraph (a), removing ``4261(b)'' wherever it appears and
adding ``4261(a) and (b)'' in its place.
0
2. In paragraph (c), removing ``Sec. 49.4262(b)-1'' and adding ``Sec.
49.4262-2'' in its place.
0
Par. 10. Section 49.4261-7 is amended by:
0
1. In the introductory paragraph, removing ``4263, 4292, 4293, or
4294'' and adding ``4261, 4281, 4282, or 4293 of the Internal Revenue
Code,'' in its place.
0
2. Removing and reserving paragraphs (b), (d), (e), and (g).
0
3. Revising paragraph (h).
0
4. In paragraph (i), removing ``paragraph (c) of Sec. 49.4261-2 and
paragraph (f)(4) of Sec. 49.4261-8'' and adding ``Sec. Sec. 49.4261-
2(c) and 49.4261-8(f)(4)'' in its place.
0
5. Adding paragraph (k).
The revision and addition read as follows:
Sec. 49.4261-7 Examples of payments subject to tax.
* * * * *
(h) Aircraft charters--(1) When no charge is made by the charterer
of an aircraft to the persons transported, the amount paid by the
charterer for the charter of the aircraft is subject to tax.
(2) The charterer of an aircraft who sells transportation to other
persons must collect and account for the tax with respect to all
amounts paid to the charterer by such other persons. In such case, no
tax will be due on the amount paid by the charterer for the charter of
the aircraft but it shall be the duty of the owner of the aircraft to
advise the charterer of the charterer's obligation for collecting,
accounting for, and paying over the tax to the Internal Revenue
Service.
* * * * *
(k) Applicability date. Paragraph (h) of this section applies to
amounts paid on and after January 19, 2021. For rules that apply before
that date, see 26 CFR part 49, revised as of April 1, 2020.
Sec. 49.4261-8 [Amended]
0
Par. 11. Section 49.4261-8 is amended as follows:
0
1. In the introductory paragraph, removing ``4263, 4292, 4293, or
4294'' and adding ``4261, 4281, 4282, or 4293 of the Internal Revenue
Code'' in its place.
0
2. Paragraphs (f)(2), (3), and (5) are removed and reserved.
0
Par. 12. Section 49.4261-9 is revised to read as follows:
Sec. 49.4261-9 Mileage awards.
(a) Tax imposed. Any amount paid (and the value of any other
benefit provided) to an air carrier (or any related person) for the
right to provide mileage awards for or other reductions in the cost of
any transportation of persons by air is an amount paid for taxable
transportation and is therefore subject to the tax imposed by section
4261(a) of the Internal Revenue Code. See section 4261(e)(3)(A).
(b) [Reserved]
(c) Applicability date. This section applies to amounts paid on and
after January 19, 2021.
0
Par. 13. Section 49.4261-10 is revised to read as follows:
Sec. 49.4261-10 Aircraft management services.
(a) In general--(1) Overview. This section prescribes rules
relating to the exemption under section 4261(e)(5) of the Internal
Revenue Code (Code) for amounts paid (in cash or in kind) by an
aircraft owner to an aircraft management services provider for certain
aircraft management services (aircraft management services exemption).
Pursuant to section 4261(e)(5), the tax imposed by section 4261 of the
Code does not apply to amounts paid by an aircraft owner to an aircraft
management services provider for aircraft management services related
to maintenance and support of the aircraft owner's aircraft; or related
to flights on the aircraft owner's aircraft (flight services). The
aircraft management services exemption applies to amounts paid by an
aircraft owner to an aircraft management services provider for flight
services on the aircraft owner's aircraft, even if the aircraft owner
is not on the flight. The aircraft management services exemption does
not apply to amounts paid to an aircraft management services provider
by another person on behalf of an aircraft owner (other than in a
principal-agent scenario in which the aircraft owner is the principal).
In addition, amounts paid for aircraft management services by a party
related to the aircraft owner are not amounts paid by the aircraft
owner solely by virtue of the relationship between the aircraft owner
and the related party. However, if an aircraft owner leases an aircraft
to another person, including a related party, amounts paid by the
lessee to an aircraft management services provider for aircraft
management services related to the leased aircraft qualify for the
aircraft management services exemption, provided the lease is not a
disqualified lease and all other requirements of section 4261(e)(5) are
satisfied. For example, amounts paid for aircraft management services
by one member of an affiliated group (as that term is defined in
section 4282 of the Code) for flights on an aircraft owned by another
member of the affiliated group are not amounts paid by the aircraft
owner unless the member owning the aircraft leases the aircraft to the
member of the affiliated group that pays for the aircraft management
services. See paragraph (b) of this section for definitions of terms
used in this section.
(2) Private aviation. The aircraft management services exemption is
limited to aircraft management services related to aircraft used in
private aviation.
(3) Adequate records required. In order to qualify for the aircraft
management services exemption, an aircraft owner and aircraft
management services provider must maintain adequate records to show
that the amounts paid by the aircraft owner to the aircraft management
services provider relate to aircraft management services specifically
for the aircraft owner's aircraft or for flights on the aircraft
owner's aircraft and to support any allocations required under
paragraph (c) under of this section. Such records may include the
agreement, if any, between the aircraft owner and the aircraft
management services provider, evidence of aircraft ownership, evidence
that amounts paid for aircraft management services came from the
aircraft owner, and the aircraft management services provider's fee
schedule.
(b) Definitions. This paragraph provides definitions applicable to
this section.
[[Page 5004]]
(1) Aircraft management services. The term aircraft management
services means--
(i) Statutory services. The services listed in section
4261(e)(5)(B)(i)-(v); and
(ii) Other services. Any service (including, but not limited to,
purchasing fuel, purchasing aircraft parts, and arranging for the
fueling of an aircraft owner's aircraft) provided directly or
indirectly to an aircraft owner in order to provide air transportation
to the aircraft owner on the aircraft owner's aircraft at a level and
quality of service required under the agreement between the aircraft
owner and the aircraft management services provider.
(2) Aircraft management services provider. The term aircraft
management services provider means a person that provides aircraft
management services to an aircraft owner.
(3) Aircraft owner--(i) In general. Except as otherwise provided in
this section, the term aircraft owner means a person that owns an
aircraft managed by an aircraft management services provider (commonly
referred to as a managed aircraft), or a person that leases a managed
aircraft (lessee) pursuant to a lease that is not a disqualified lease.
A person owns a managed aircraft if the person holds legal title to the
aircraft, or if the person holds substantial incidents of ownership in
the aircraft for a period of more than 31 days. A lessee includes the
beneficiary of an owner trust that holds legal title to the managed
aircraft.
(ii) Persons not included in the definition of aircraft owner. A
lessee of an aircraft under a disqualified lease cannot be an aircraft
owner with respect to the aircraft leased pursuant to the disqualified
lease. A person that owns stock in a commercial airline does not
qualify as an aircraft owner of that commercial airline's aircraft. A
participant in a fractional aircraft ownership program, as defined in
section 4043(c)(2) of the Code, does not qualify as an aircraft owner
of the program's managed aircraft if the amount paid for such person's
participation is exempt from the tax imposed by section 4261 reason of
section 4261(j).
(4) Disqualified lease. The term disqualified lease has the meaning
given to it by section 4261(e)(5)(C)(ii).
(5) Fair market value. The term fair market value means the value
of comparable flights or services provided with respect to a comparable
aircraft as of the date such flights or services are provided. The
aircraft management services provider's published fee schedule in
effect on the date(s) the flights or services are provided may be used
as evidence of fair market value.
(6) For-hire flight. The term for-hire flight means the use of an
aircraft to transport passengers for compensation that is paid in cash
or in kind. The term includes, but is not limited to, charter flights,
air taxi flights, and sightseeing flights (commonly referred to as
flightseeing flights).
(7) Owner trust. The term owner trust means an arrangement in which
legal title of an aircraft is held in the name of the trustee of the
trust for the limited purpose of registering the aircraft in the United
States with the Federal Aviation Administration pursuant to the
registration requirements in 49 U.S.C. 40102(a) and 44102(a), and 14
CFR part 47.
(8) Private aviation. The term private aviation means the use of an
aircraft for civilian flights, except scheduled passenger service for
which tickets (or substitutes equivalent to tickets) are sold on a
seat-by-seat basis to the general public. The term includes, but is not
limited to, civilian flights operated under Part 135 (14 CFR part 135)
of the Federal Aviation Regulations prescribed by the Federal Aviation
Administration (FARs).
(9) Substitute aircraft. The term substitute aircraft means an
aircraft, other than the aircraft owner's aircraft, that is provided by
an aircraft management services provider to the aircraft owner when the
aircraft owner's aircraft is not available, regardless of the reason
for the unavailability.
(c) Pro rata allocation--(1) In general. Except as provided in
paragraph (c)(2)(iii) of this section, when an amount paid to an
aircraft management services provider includes a portion that is
subject to the tax imposed by section 4261 and a portion that consists
of amounts described in section 4261(e)(5)(A), the exception in section
4261(e)(5) applies on a pro rata basis only to the portion that
consists of amounts described in section 4261(e)(5)(A). See section
4261(e)(5)(D). In such case, the tax base for the portion that is
subject to the tax imposed by section 4261(a) is the amount paid for
the flights or services, provided the amount paid is separable and
shown in exact amounts in the records pertaining to the charge. If the
portion of the amount paid that is subject to the tax imposed by
section 4261(a) is not separable, the tax base is the fair market value
of the flights or services. However, the tax base determined in the
previous sentence may not exceed the total amount paid (that is, the
sum of the portion that is subject to the tax imposed by section
4261(a) and the portion that consists of amounts described in section
4261(e)(5)(A)).
(2) Substitute aircraft--(i) Flight treated as a charter. If an
aircraft management services provider provides a flight to an aircraft
owner on a substitute aircraft, the flight is treated as a charter
flight provided by the aircraft management services provider to the
aircraft owner, regardless of whether the aircraft owner is on the
flight, and the aircraft owner is treated as the charterer of such
flight. If the flight constitutes taxable transportation, as defined in
section 4262 of the Code, the tax imposed by section 4261(a) applies,
unless the flight is exempt from such tax by reason of an exemption
other than the aircraft management services exemption. See section
4261(b) and (c) for other taxes that may apply to flights provided by
an aircraft management services provider to an aircraft owner on
substitute aircraft.
(ii) General rule for flights provided on substitute aircraft. In
cases where an aircraft management services provider provides a flight
to an aircraft owner on a substitute aircraft and an allocation is
required, the rule in paragraph (c)(1) of this section applies in
determining the tax base. In all other cases, the tax base and the tax
imposed by section 4261(a) thereon must be determined in accordance
with the rules of Sec. 49.4261-7(h)(1), unless the flight is otherwise
exempt from such tax by reason of an exemption other than the aircraft
management services exemption.
(iii) Special rule for for-hire flights provided on substitute
aircraft. In cases where a substitute aircraft is used to provide a
for-hire flight and an amount is paid for the flight by someone other
than the aircraft owner, the tax base and the tax imposed by section
4261(a) thereon must be determined in accordance with the rules in
Sec. 49.4261-7(h)(2), unless the flight is otherwise exempt from such
tax by reason of an exemption other than the aircraft management
services exemption.
(d) Choice of flight rules. Whether a flight on an aircraft owner's
aircraft operates pursuant to the rules under FARs Part 91 (14 CFR part
91) or pursuant to the rules under FARs Part 135 does not affect the
application of section 4261(e)(5).
(e) Aircraft available for hire. Whether an aircraft owner permits
an aircraft management services provider or other person to use its
aircraft to provide for-hire flights (for example, when the aircraft is
not being used by the aircraft owner or when the aircraft is being
moved in deadhead service) does not affect the application of section
4261(e)(5). However, an amount paid for
[[Page 5005]]
for-hire flights on the aircraft owner's aircraft, except payments made
by the aircraft owner, does not qualify for the aircraft management
services exemption under section 4261(e)(5). Therefore, an amount paid
by someone other than the aircraft owner for a for-hire flight on the
aircraft owner's aircraft is subject to the tax imposed by section 4261
unless the flight is otherwise exempt from such tax by reason of an
exemption other than the aircraft management services exemption. See
Sec. 49.4261-7(h) for rules relating to the application of the tax
imposed by section 4261 on amounts paid for certain charter flights.
(f) Billing methods. Except as otherwise provided in this section,
the method an aircraft management services provider bills, invoices, or
otherwise charges an aircraft owner for aircraft management services,
whether by specific itemization of costs, flat monthly or hourly fee,
or otherwise, does not affect the application of section 4261(e)(5).
(g) Multiple aircraft management services providers not
disqualifying. Whether an aircraft owner pays amounts to more than one
aircraft management services provider for aircraft management services
does not affect the application of section 4261(e)(5).
(h) Examples. The following examples illustrate the provisions of
this section.
(1) Example 1--(i) Facts. During the first quarter of 2021, an
aircraft owner pays a $3,000 monthly management fee to an aircraft
management services provider for services related to operating the
aircraft owner's aircraft. The aircraft owner used its own aircraft for
all but one of the flights the owner took during the period. On the one
occasion that the aircraft owner's aircraft was unavailable when the
aircraft owner wanted to fly, the aircraft management services provider
used a substitute aircraft to transport the aircraft owner. The flight
was within the continental United States and the aircraft owner
received no compensation for the transportation of other passengers on
the flight. The aircraft owner paid $1,000 for the flight on the
substitute aircraft. The aircraft management services provider included
the $1,000 charge for the substitute aircraft as a separate line item
on the monthly management fee invoice.
(ii) Analysis. The tax imposed by section 4261(a) applies to
services that do not qualify for the section 4261(e)(5) exemption; in
this case, the flight provided on the substitute aircraft. The flight
provided on the substitute aircraft is treated as a charter flight for
purposes of the tax imposed by section 4261(a), and the owner is
treated as the charterer of the flight. The amount paid by the aircraft
owner for the flight on the substitute aircraft is the section 4261(a)
tax base. The monthly invoice from the aircraft management services
provider to the aircraft owner included a line item in the amount of
$1,000 for the charter flight. Because $1,000 is the actual amount paid
for the flight, this amount is the section 4261(a) tax base. The tax
imposed by section 4261(b) also applies to the flight on a per-
passenger basis. See Sec. 49.4261-2(b) for rules regarding the
application of the tax imposed by section 4261(b).
(2) Example 2--(i) Facts. Same facts as in paragraph (h)(1) of this
section (Example 1), except the invoice does not show the amount paid
for the flight on the substitute aircraft and that amount is not
otherwise separable from the monthly management fee. The fair market
value of the flight on the substitute aircraft is $1,000.
(ii) Analysis. The tax imposed by section 4261(a) applies to the
flight provided on the substitute aircraft. The amount paid for the
flight on the substitute aircraft is not otherwise separable from the
monthly management fee. Because $1,000 is the fair market value of the
flight, and such amount does not exceed the $3,000 monthly management
fee paid by the aircraft owner, this amount is the section 4261(a) tax
base. The tax imposed by section 4261(b) also applies to the flight on
a per-passenger basis. See Sec. 49.4261-2(b) for rules regarding the
application of the tax imposed by section 4261(b).
(3) Example 3--(i) Facts. An aircraft owner pays a monthly
management fee to an aircraft management services provider for aircraft
management services related to the aircraft owner's aircraft. When the
aircraft is not being used by the owner, the owner sometimes permits a
charter company to use the aircraft to provide charter flights. At
other times when the aircraft is not being used by the owner, the owner
permits a tour operator to use the aircraft for flightseeing tours. All
charter and flightseeing flights on the aircraft constitute taxable
transportation, as that term is defined in section 4262, and no
exemptions (other than section 4261(e)(5)) apply. No charter or
flightseeing flights are provided on a substitute aircraft. The
aircraft's maximum certificated takeoff weight is 7,000 pounds.
(ii) Analysis. Amounts paid by the aircraft owner to the aircraft
management services provider for aircraft management services related
to the aircraft owner's aircraft are exempt under section 4261(e)(5).
Amounts paid by the charterer or passengers for the charter flights are
subject to tax under section 4261(a) and (b). See Sec. 49.4261-7(h)
for rules relating to the application of the tax imposed by section
4261 on amounts paid for charter flights. See Sec. 49.4261-2(b) for
rules regarding the application of the tax imposed by section 4261(b).
Amounts paid by flightseeing customers for flightseeing tours are also
subject to tax under section 4261(a) and (b). If a payment for a
flightseeing tour includes charges for nontransportation services, the
charges for the nontransportation services may be excluded in computing
the tax payable provided the payments are separable and provided in
exact amounts. See Sec. 49.4261-2(c).
(i) Applicability date. This section applies to amounts paid on and
after January 19, 2021.
Sec. 49.4262(a)-1 [Redesignated]
0
Par. 14. Section 49.4262(a)-1 is redesignated as Sec. 49.4262-1.
0
Par. 15. Newly redesignated Sec. 49.4262-1 is amended by:
0
1. In paragraph (a) introductory text, removing ``section 4262(b) (see
Sec. 49.4262(b)-1)'' and adding ``section 4262(b) of the Internal
Revenue Code (Code) (see Sec. 49.4262-2)'' in its place.
0
2. In the first sentence of paragraph (a)(1), removing
``Transportation'' and adding ``Transportation by air'' in its place.
0
3. In the first sentence of paragraph (a)(1), removing ``(the ``225-
mile zone'')'' and adding ``(225-mile zone)'' in its place.
0
4. Revising paragraph (a)(2).
0
5. In paragraph (b), removing ``subparagraphs (1) and (5) of this
paragraph'' and adding ``paragraph (b)(1) and (5) of this section'' in
its place.
0
6. In paragraph (b), removing ``subject to the tax'' and adding
``subject to the taxes imposed by section 4261(a) and (b)'' in its
place.
0
7. Revising paragraph (b)(2).
0
8. Removing and reserving paragraph (c).
0
9. Revising introductory paragraph (d); designating Example (1) as
paragraph (d)(1) and revising newly designated paragraph (d)(1).
0
10. In paragraph (d):
0
a. Designating Example (2) as paragraph (d)(2) and removing and
reserving newly designated paragraph (d)(2).
0
b. Designating Example (3) as paragraph (d)(3) and removing ``6 hours''
wherever it appears and adding ``12 hours'' in its place and also
removing ``subject to tax'' wherever it appears and adding ``subject to
the taxes
[[Page 5006]]
imposed by section 4261(a) and (b)'' in its place.
0
c. Designating Example (4) as paragraph (d)(4), and removing ``six
hours'' wherever it appears and adding ``12 hours'' in its place and
also removing ``subject to tax'' wherever it appears and adding
``subject to the taxes imposed by section 4261(a) and (b)'' in its
place.
0
11. Revising paragraph (e).
0
12. Adding paragraph (f).
The revisions and addition read as follows:
Sec. 49.4262-1 Taxable transportation.
(a) * * *
(2) In the case of any other transportation by air, that portion of
such transportation that is directly or indirectly from one port or
station in the United States to another port or station in the United
States, but only if such transportation is not part of uninterrupted
international air transportation within the meaning of section
4262(c)(3) of the Code and Sec. 49.4262-3(c). Transportation from one
port or station in the United States occurs whenever a carrier, after
leaving any port or station in the United States, makes a regularly
scheduled stop at another port or station in the United States
irrespective of whether stopovers are permitted or whether passengers
disembark.
* * * * *
(b) * * *
(2) New York to Vancouver, Canada, with a stop at Toronto, Canada;
* * * * *
(d) Examples. The following examples illustrate the application of
section 4262(a)(2) and the taxes imposed by section 4261(a) and (b) of
the Code:
(1) Example (1). A purchases in New York a ticket for air
transportation from New York to Nassau, Bahamas, with a scheduled
stopover of 14 hours in Miami. The part of the transportation from New
York to Miami is taxable transportation as defined in section 4262(a)
because such transportation is from one station in the United States to
another station in the United States and the trip is not uninterrupted
international air transportation (because the scheduled stopover
interval in Miami is greater than 12 hours). Therefore, the amount paid
for the transportation from New York to Miami is subject to the taxes
imposed by section 4261(a) and (b).
* * * * *
(e) Examples of transportation that is not taxable transportation.
The following examples illustrate transportation that is not taxable
transportation:
(1) New York to Trinidad with no intervening stops;
(2) Minneapolis to Edmonton, Canada, with a stop at Winnipeg,
Canada;
(3) Los Angeles to Mexico City, Mexico, with stops at Tijuana and
Guadalajara, Mexico;
(4) New York to Whitehorse, Yukon Territory, Canada, by air with a
scheduled stopover in Chicago of five hours. Amounts paid for the
transportation referred to in examples set forth in paragraphs (e)(1),
(2), and (3) of this section are not subject to the tax regardless of
where payment is made, since none of the trips:
(i) Begin in the United States or in the 225-mile zone and end in
the United States or in the 225-mile zone, nor
(ii) Contain a portion of transportation which is directly or
indirectly from one port or station in the United States to another
port or station in the United States. The amount paid within the United
States for the transportation referred to in the example set forth in
paragraph (4) of this section is not subject to tax since the entire
trip (including the domestic portion thereof) is uninterrupted
international air transportation within the meaning of section
4262(c)(3) and Sec. 49.4262-3(c). In the event the transportation is
paid for outside the United States, no tax is due since the
transportation does not begin and end in the United States.
* * * * *
(f) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply before that date, see 26
CFR part 49, revised as of April 1, 2020.
Sec. 49.4262(b)-1 [Redesignated]
0
Par. 16. Section 49.4262(b)-1 is redesignated as Sec. 49.4262-2.
0
Par. 17. Newly redesignated Sec. 49.4262-2 is amended as follows:
0
1. In paragraph (a), ``section 4262(b)'' is removed and ``section
4262(b) of the Internal Revenue Code'' is added in its place.
0
2. In paragraph (b)(2), Example (2) is removed and reserved.
0
3. Revise paragraph (d).
0
4. Add paragraph (e).
The revisions and additions read as follows:
Sec. 49.4262-2 Exclusion of certain travel.
* * * * *
(d) Example. The application of paragraph (c) of this section may
be illustrated by the following example: A purchases in San Francisco a
ticket for transportation by air to Honolulu, Hawaii. The portion of
the transportation which is outside the continental United States and
is outside Hawaii is excluded from taxable transportation. The tax
applies to that part of the payment made by A which is applicable to
the portion of the transportation between the airport in San Francisco
and the three-mile limit off the coast of California (a distance of 15
miles) and between the three-mile limit off the coast of Hawaii and the
airport in Honolulu (a distance of 5 miles). The part of the payment
made by A which is applicable to the taxable portion of his
transportation and the tax due thereon are computed in accordance with
paragraph (c)(1) as follows:
Table 1 to Paragraph (d)
------------------------------------------------------------------------
------------------------------------------------------------------------
Mileage of entire trip (San Francisco airport to 2,400
Honolulu airport) (miles)..............................
Mileage in continental United States (miles)............ 15
Mileage in Hawaii (miles)............................... 5
---------------
20
Fare from San Francisco to Honolulu..................... $168.00
Payment for taxable portion (20/2400 x $168)............ $1.40
Tax due (7.5% (rate in effect on date of payment) x $0.11
$1.40).................................................
------------------------------------------------------------------------
(All distances and fares assumed for purposes of this example. This
example addresses only the computation of the tax imposed by section
4261(a). It does not address the computation of any other tax imposed
by section 4261 that may apply to these facts.)
(e) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply
[[Page 5007]]
before that date, see 26 CFR part 49, revised as of April 1, 2020.
Sec. 49.4262(c)-1 [Redesignated]
0
Par. 18. Section 49.4262(c)-1 is redesignated as Sec. 49.4262-3.
0
Par. 19. Newly redesignated Sec. 49.4262-3 is amended as follows:
0
1. In the first sentence of paragraph (a), removing ``includes only the
48 States existing on July 25, 1956 (the date of the enactment of the
Act of July 25, 1956 (Pub. L. 796, 84th Cong., 70 Stat. 644)) and the
District of Columbia'' and adding ``means the District of Columbia and
the States other than Alaska and Hawaii'' in its place.
0
2. In paragraph (a), the last sentence is removed.
0
3. In paragraph (c), removing ``six hours'' wherever it appears and
adding ``12 hours'' in its place.
0
4. In paragraph (c), removing ``6 hours'' wherever it appears and add
``12 hours'' in its place.
0
5. In paragraph (c), removing ``six-hour'' wherever it appears and
adding ``12-hour'' in its place.
0
6. In paragraph (c)(2), removing ``paragraph (a)(2) of Sec.
49.4264(c)-1'' and adding ``Sec. 49.4263-3(a)(2)'' in its place.
0
7. Adding paragraphs (d) and (e).
The additions read as follows:
Sec. 49.4262-3 Definitions.
* * * * *
(d) Transportation. For purposes of the regulations in this
subpart, the term transportation includes layover or waiting time and
movement of the aircraft in deadhead service.
(e) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply before that date, see 26
CFR part 49, revised as of April 1, 2020.
Sec. 49.4263-5 [Redesignated]
0
Par. 20. Section 49.4263-5 is redesignated as Sec. 49.4281-1.
0
Par. 21. Newly redesignated Sec. 49.4281-1 is amended by:
0
1. Revising paragraphs (a) and (b).
0
2. In paragraph (c), adding a sentence at the end of the paragraph.
0
3. Adding paragraphs (d) and (e).
The revisions and additions read as follows:
Sec. 49.4281-1 Small aircraft on nonestablished lines.
(a) In general. Amounts paid for the transportation of persons on a
small aircraft of the type sometimes referred to as air taxis shall be
exempt from the tax imposed under section 4261 of the Internal Revenue
Code provided the aircraft has a maximum certificated takeoff weight of
6,000 pounds or less determined as provided in paragraph (b) of this
section. The exemption does not apply, however, when the aircraft is
operated on an established line or when the aircraft is a jet aircraft.
(b) Maximum certificated takeoff weight. The term maximum
certificated takeoff weight means the maximum certificated takeoff
weight shown in the type certificate or airworthiness certificate
issued by the Federal Aviation Administration.
(c) * * * An aircraft is not considered as operated on an
established line at any time during which the aircraft is being
operated on a flight the sole purpose of which is sightseeing.
(d) Jet aircraft. For purposes of this section, the term jet
aircraft does not include any aircraft which is a rotorcraft (such as a
helicopter) or propeller aircraft.
(e) Applicability date. This section applies to amounts paid on and
January 19, 2021. For rules that apply before that date, see 26 CFR
part 49, revised as of April 1, 2020.
Sec. 49.4264(a)-1 [Redesignated]
0
Par. 22. Section 49.4264(a)-1 is redesignated as Sec. 49.4263-1.
0
Par. 23. Newly redesignated Sec. 49.4263-1 is revised to read as
follows:
Sec. 49.4263-1 Duty to collect the tax; payments made outside the
United States.
(a) Duty to collect tax. Where payment upon which tax is imposed by
section 4261 of the Internal Revenue Code is made outside the United
States for a prepaid order, exchange order, or similar order, the
person furnishing the initial transportation pursuant to such order
must collect the applicable tax. See section 4291 and the regulations
under section 4291 for cases where persons receiving payment must
collect the tax. See section 6672 for rules relating to the application
of the trust fund recovery penalty.
(b) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply before that date, see 26
CFR part 49, revised as of April 1, 2020.
Sec. 49.4264(b)-1 [Redesignated]
0
Par. 24. Section 49.4264(b)-1 is redesignated as Sec. 49.4263-2.
Sec. 49.4263-2 [Amended]
0
Par. 25. Newly redesignated Sec. 49.4263-2 is amended as follows:
0
1. In the first sentence of paragraph (a), removing ``4264(b)'' and
adding ``4263(b) of the Internal Revenue Code (Code)'' in its place.
0
2. In the last sentence of paragraph (a), removing ``office of the
district director for the district in which the person making the
report is located,'' and adding ``Commissioner'' in its place.
0
3. In paragraph (b), adding ``of the Code'' at the end of the
paragraph.
0
4. In paragraph (c), removing ``Illustration.'' and adding ``Example.''
in its place.
0
5. In the last sentence of paragraph (c), removing ``office of the
district director of internal revenue for the district in which the
carrier is located,'' and adding in its place ``Commissioner''.
Sec. 49.4264(c)-1 [Redesignated]
0
Par. 26. Section 49.4264(c)-1 is redesignated as Sec. 49.4263-3.
0
Par. 27. Newly redesignated Sec. 49.4263-3 is amended by:
0
1. Revising paragraph (a).
0
2. In paragraph (b), removing the second sentence.
0
3. In paragraph (b), removing ``4264'' wherever it appears and adding
``4263'' in its place.
0
4. In paragraph (b), adding ``of the Code'' after ``4291'' in the first
sentence.
0
5. Removing and reserving paragraph (c).
0
6. Adding paragraph (d).
The revisions and additions read as follows:
Sec. 49.4263-3 Special rule for the payment of tax.
(a) In general. For the rules applicable under section 4263(c) of
the Internal Revenue Code, see Sec. 49.4261-1(b)(2).
* * * * *
(d) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply before that date, see 26
CFR part 49, revised as of April 1, 2020.
Sec. 49.4264(d)-1 [Redesignated]
0
Par. 28. Section 49.4264(d)-1 is redesignated as Sec. 49.4263-4.
Sec. 49.4263-4 [Amended]
0
Par. 29. Newly redesignated Sec. 49.4263-4 is amended by removing
``4264(d)'' and adding ``4263(d)'' in its place.
Sec. 49.4264(e)-1 [Redesignated]
0
Par. 30. Section 49.4264(e)-1 is redesignated as Sec. 49.4263-5.
Sec. 49.4264(f)-1 [Redesignated]
0
Par. 31. Section 49.4264(f)-1 is redesignated as Sec. 49.4263-6.
Sec. 49.4263-6 [Amended]
0
Par. 32. Newly redesignated Sec. 49.4263-6 is amended by removing and
reserving paragraph (b).
[[Page 5008]]
0
Par. 33. Section 49.4271-1 is amended by revising paragraphs (a) and
(b) and adding paragraph (g) to read as follows:
Sec. 49.4271-1 Tax on transportation of property by air.
(a) Purpose of this section. Section 4271 of the Internal Revenue
Code (Code) imposes a 6.25 percent tax on amounts paid within or
without the United States for the taxable transportation of property
(as defined in section 4272 of the Code). This section sets forth rules
as to the general applicability of the tax. This section also sets
forth rules authorized by section 4272(b)(2) which exempt from tax
payments for the transportation of property by air in the course of
exportation (including shipment to a possession of the United States)
by continuous movement, and in due course so exported.
(b) Imposition of tax--(1) The tax imposed by section 4271 applies
only to amounts paid to persons engaged in the business of transporting
property by air for hire.
(2) The tax imposed by section 4271 does not apply to amounts paid
for the transportation of property by air if such transportation is
furnished on an aircraft having a maximum certificated takeoff weight
(as defined in section 4281(b) of the Code) of 6,000 pounds or less,
unless such aircraft is operated on an established line or when such
aircraft is a jet aircraft. The tax imposed by section 4271 also does
not apply to any payment made by one member of an affiliated group (as
defined in section 4282(b) of the Code) to another member of such group
for services furnished in connection with the use of an aircraft if
such aircraft is owned or leased by a member of the affiliated group
and is not available for hire by persons who are not members of such
group.
* * * * *
(g) Applicability date. This section applies to amounts paid on and
after January 19, 2021. For rules that apply before that date, see 26
CFR part 49, revised as of April 1, 2020.
0
Par. 34. Section 49.4271-2 is added to read as follows:
Sec. 49.4271-2 Aircraft management services.
For rules regarding the exemption for certain amounts paid by
aircraft owners for aircraft management services, see Sec. 49.4261-10.
This section applies to amounts paid on and after January 19, 2021. For
rules that apply before that date, see 26 CFR part 49, revised as of
April 1, 2020.
Sec. 49.4282-1 [Reserved]
0
Par. 35. Add and reserve Sec. 49.4282-1.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: January 10, 2021.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-00706 Filed 1-14-21; 4:15 pm]
BILLING CODE 4830-01-P