DESCRIPTION OF H.R. 3608,

A BILL TO AMEND THE INTERNAL REVENUE CODE OF 1986

TO EXEMPT AMOUNTS PAID FOR AIRCRAFT MANAGEMENT 

SERVICES FROM THE EXCISE TAXES IMPOSED

ON TRANSPORTATION BY AIR

Scheduled for Markup

by the

HOUSE COMMITTEE ON WAYS AND MEANS

on July 13, 2016

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

July 12, 2016

JCX-65-16
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

A. Exemption From Excise Tax of Certain Amounts Paid for Aircraft Management

Services............................................................................................................................... 2

B. Estimated Revenue Effect of the Proposal.......................................................................... 5
1

INTRODUCTION

The House Committee on Ways and Means has scheduled a committee markup of 

H.R. 3608, a bill to amend the Internal Revenue Code of 1986 to exempt amounts paid for 

aircraft management services from the excise taxes imposed on transportation by air, on

July 13, 2016. This document,1 prepared by the staff of the Joint Committee on Taxation, 

provides a description of the bill.

 1

 This document may be cited as follows: Joint Committee on Taxation, Description of H.R. 3608, a Bill to 

Amend the Internal Revenue Code of 1986 to Exempt Amounts Paid for Aircraft Management Services from the 

Excise Taxes Imposed on Transportation by Air, (JCX-65-16), July 12, 2016. This document can also be found on 

the Joint Committee on Taxation website at www.jct.gov. All section references herein are to the Internal Revenue 

Code of 1986, as amended, unless otherwise stated.
2

A. Exemption From Excise Tax of Certain Amounts Paid

for Aircraft Management Services

Present Law

Tax on domestic air transportation 

A Federal excise tax is imposed on the amount paid for taxable transportation of any 

person by air2 and a Federal excise tax is imposed on the amount paid for taxable transportation 

of any property by air.

3

 In general, the tax imposed on domestic flights for the transportation of 

persons consists of two parts: a 7.5 percent tax on the amount paid plus a tax of $3 for each flight 

segment. The tax imposed on the transportation of property is 6.25 percent of the amount paid.

In determining whether a flight constitutes taxable transportation and whether the 

amounts paid for such transportation are subject to tax, the Internal Revenue Service (“IRS”) has 

generally looked at the nature of the payments being made, and who has “possession, command, 

and control” of the aircraft based on the relevant facts and circumstances.4

Applicability of Federal excise tax to aircraft management services

Generally, an aircraft management services company (“management company”) has as its 

business purpose the management of aircraft owned by other persons (“aircraft owners”). In this 

function, management companies provide aircraft owners with administrative and support 

services (such as scheduling, flight planning, and weather forecasting), aircraft maintenance

services, the provision of pilots and crew, and compliance with regulatory standards. Although 

the particular arrangements between management companies and aircraft owners may vary, 

aircraft owners generally pay management companies a monthly fee to cover the fixed expenses 

of maintaining the aircraft (such as insurance, maintenance, and recordkeeping) and a variable 

fee to cover the cost of using the aircraft (such as the provision of pilots, crew, and fuel). 

In addition to general management, aircraft owners frequently contract with management 

companies to place the owner’s aircraft into a fleet of aircraft to be leased to third parties when 

not being used by the owner. 

The applicability of Federal excise tax to aircraft management services has been the 

subject of litigation and has also been addressed in an IRS Chief Counsel Advice memorandum.

5

 

 2 Sec. 4261.

3 Sec. 4271.

4 See, e.g., Rev. Rul. 60-311, 1960-2 C.B. 341, which held that, since the company in question retains the 

elements of possession, command, and control of the aircraft and performs all services in connection with the 

operation of the aircraft, the company is, in fact, furnishing taxable transportation to the lessee; and the tax on the 

transportation of persons applies to the portion of the total payment which is allocable to the transportation of 

persons, provided such allocation is made on a fair and reasonable basis. If no allocation is made, the tax applies to 

the total payment for the lease of the aircraft.

5 CCA 2012-10026 (March, 2012).
3

In the Chief Counsel Advice, the IRS determined under certain factual scenarios that aircraft 

management fees are generally considered amounts paid for taxable transportation of a person 

because possession, command, and control of the aircraft have been ceded by the aircraft owner 

to the management company under the terms of a management agreement. The IRS stated that 

control of the pilots is a factor in determining who has possession, command and control of the 

aircraft. In the scenarios described in the Chief Counsel Advice, while the aircraft is titled in the 

name of the owner, the pilots and crew are management company employees and receive their 

pay, benefits, and income tax reporting documents from the management company. In addition 

to selecting and training the pilots and crew, the management company performs all of the 

maintenance on the aircraft and is responsible for ensuring that all Federal Aviation 

Administration maintenance and related recordkeeping requirements are satisfied. Due to these 

factors, the IRS determined that the management company had possession, command and control 

of the aircraft and, as a result, was furnishing taxable transportation to the owner. 

Because the IRS determined that the management company provided all of the essential 

elements necessary for providing transportation by air and the owner relinquished possession, 

command, and control to the management company, the management company was determined 

to be providing taxable transportation to the owner and was therefore required to collect the 

appropriate Federal excise tax from the aircraft owner and remit it to the IRS.

In a 2015 opinion,

6 an Ohio district court held that the existing revenue rulings (in effect 

for the tax period April 1, 2005, through June 30, 2009, the period that was the subject of the 

litigation) regarding the possession, command and control test, failed to provide precise and not 

speculative notice of a collection obligation as it related to whole-aircraft management 

contracts.7 As a result, the court ruled as a matter of law that because precise and not speculative 

notice was not received, the aircraft management company plaintiff did not have a collection 

obligation with respect to the Federal excise tax on payments received for whole-aircraft 

management services.

Description of Proposal

The proposal exempts certain payments related to the management and maintenance of 

aircraft from the Federal excise tax imposed on transportation of persons and property. 

Exempt payments are those amounts paid by an aircraft owner for management services 

related to maintenance and support of the aircraft or flights on the owner’s aircraft. Applicable 

services include support activities related to the aircraft itself, such as its storage, maintenance, 

and refueling, and those related to its operation, such as the hiring and training of pilots and 

crew, as well as administrative services such as scheduling, flight planning, weather forecasting, 

and establishing and complying with safety standards.

 6 Netjets Large Aircraft Inc. v. United States, 116 A.F.T.R. 2d. 2015-6776 (S.D. Ohio, 2015).

7 The district court held that such notice is required to persons having a deputy tax collection obligation 

under the rationale of the Supreme Court’s holding in Central Illinois Public Service Company v. United States,

435 U.S. 21 (1978).
4

Payments for flight services are exempt only to the extent that they are attributable to 

flights on an aircraft owner’s own aircraft. Thus, if an aircraft owner makes a payment to a 

management company for the provision of a pilot and the pilot provides his services on the 

aircraft owner’s aircraft, such payment is not subject to Federal excise tax. However, if the pilot 

provides his services to the aircraft owner on an aircraft other than the aircraft owner’s (for 

instance, on an aircraft that is part of a fleet of aircraft available for third-party leasing), then 

such payment is subject to Federal excise tax. 

The proposal provides a pro rata allocation rule in the event that a monthly payment 

made to a 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 the aircraft owner’s. In such a 

circumstance, Federal excise tax must be collected on that portion of the payment attributable to 

flights on aircraft not owned by the aircraft owner.

Under the proposal, a lessee of an aircraft is considered an aircraft owner provided that 

the lease is not a “disqualified lease.” A disqualified lease is any lease of an aircraft from a 

management company (or a related party) for a term of 31 days or less. 

Effective Date

The proposal is effective for amounts paid after the date of enactment.
5

B. Estimated Revenue Effect of the Proposal

The proposal is estimated to reduce Federal fiscal year budget receipts by less than 

$500,000 for the period 2017-2026.8

 8

 It has been represented that, beginning in 2013, the Internal Revenue Service suspended tax assessment 

activities related to payments made to management companies to allow for the development and issuance of further 

administrative guidance by the agency. Further guidance on this topic has not been issued. The current suspension 

has been taken into account in estimating the revenue effect of the proposal.