On Jan. 11, 2021, the Treasury Department released final regulations (TD 9948) on air transportation excise taxes. With a few alterations, these regulations make final the proposed regulations, REG-112042-19, issued the previous July. (See our prior alert.) These regulations provide detailed guidance to implement the tax exemption for payments made by aircraft owners to aircraft management companies for maintaining private aircrafts for individuals and businesses. This exemption was enacted as part of the Tax Cuts and Jobs Act (TCJA) tax reform legislation. The regulations also overhaul existing regulations to cleanup outdated provisions and update rules consistent with previous statutory changes.
The TCJA enacted a provision exempting from excise tax payments to aircraft management companies by aircraft owners, such as businesses with private planes. The proposed regulations provide rules implementing this provision.
Key modifications made in the final regulations include:
- Clarification that beneficiary owner trust arrangements generally qualify as aircraft owners eligible for the exemption
- Removal of proposed anti-abuse rules related to fractional ownership aircraft programs
- Removal of proposed anti-abuse rules related to definition of disqualified leases
- Clarification of the types of flight operations permitted under the private aviation rule, including modification to the definition of private aviation to include operations conducted under Part 135 of the FAA regulations
- Removal of complicated proposed allocation methodology related to substitute aircraft
- Clarification of the definition of aircraft management services (expanded from the proposed regulation by omitting the phrase, ‘that is necessary to keep the aircraft owner's aircraft in an airworthy state.’)
- Removal of proposed regulations that were inconsistent with commercial and noncommercial aviation fuel tax rules.
Washington National Tax observations
The final regulations provide detailed guidance to implement the exemption from tax for payments made by aircraft owners to aircraft management companies for maintaining private aircrafts for individuals and businesses. This is another example of the Treasury Department finalizing provisions related to the TCJA before the change in administration next week.
In issuing the final regulations, the government thoroughly evaluated the comments provided by stakeholders and took to heart many of their proposals. Treasury made a number of changes in the final regulations that are favorable to taxpayers in response to adoption of the suggestions by commentators. These changes relate to removal of proposed anti-abuse rules that may have captured legitimate structures and arrangements, a change to prevent potential unintended double-taxation and clarifications that narrow the scope of the final regulations.
One area where the government has not changed its position from the proposed regulations relates to the limited interpretation of who is an aircraft owner. While not unexpected, the government declined to expand the definition to include payments to the aircraft management company by related companies in the corporate family, or by persons such as family members of the aircraft owner despite requests from commentators to adopt a more expansive rule. Thus, payments by these non-aircraft owners may be taxable. This is significant because businesses have different structures and agreements among the parties related to use of the company aircraft; thus, companies must scrutinize their agreements to determine whether any of their payments will be taxable.
It should not go unnoticed that the regulations also overhaul the existing air transportation regulations. These regulations have not been updated since 1962. The final regulations include a major clean-up of the outdated regulations and also incorporate of a number of new provisions that have been enacted over the years.