IRS Set to Publish Last Rule on Federal Excise Tax | Holland & Knight LLP

The Internal Revenue Service (IRS) is expected soon to publish its final rule on federal excise tax (FET) exemption for aircraft management companies and owners. The IRS pre-published final rules incorporate several significant changes suggested by National Business Aviation Association (NBAA) to eliminate potential confusion and provide clear standards for taxpayers and the government. The final rule is pending publication in the Federal Register.

The NBAA announced that its advocacy effort, headed by Holland & Knight Partner and NBAA Tax Committee Chair John Hoover, was successful in having several recommendations to prevent the improper application of FET to management companies and aircraft owners included in the final regulations. The NBAA, National Air Transportation Association (NATA) and Mr. Hoover have been working with the IRS and the U.S. Department of the Treasury on these regulations since the enactment of the Tax Cuts and Jobs Act in 2017. (See Holland & Knight previous alerts, “NATA, NBAA Present to Treasury on Federal Excise Tax Exception for Aircraft Management Services,” Nov. 24, 2020, and “NBAA, NATA Submit Comments to IRS on Excise Tax Exemption for Business Aircraft Management Services,” September 30, 2020.)

Mr. Hoover observed that the IRS has conceded on many of the recommendations made by NBAA. He pointed out that the IRS affirmed that owner trust arrangements qualify as aircraft owners eligible for the exemption and that the IRS scrapped a pair of antiabuse rules entirely, as well as a complicated calculation involving substitute aircraft. (See “IRS Grants Some Relief in Final Aviation Excise Tax Regs,” Tax Notes Today, Jan. 12, 2021.)

In response to NBAA comments, the final regulation:

  • affirms that owner trust arrangements, used to register thousands of business aircraft for regulatory compliance purposes, are eligible for the FET exemption.
  • abandons a proposal to expand the definition of disqualified leases from the FET exemption, which would have severely limited the exemption’s application to many common aircraft ownership structures.
  • eliminates a complicated allocation method that would have been required when management companies provide flights on a substitute aircraft. Instead, only the fair market value of those specific charter flights involving substitute aircraft will generally be subject to FET.
  • clarifies that aircraft owners may qualify for the FET exemption regardless of whether they conduct flights on their own aircraft under Part 91 or Part 135 of the Federal Aviation Regulations.