IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF OHIO

EASTERN DIVISION

NetJets Large Aircraft, Inc., :

et al.,

 :

Plaintiffs, 

 :

v. Case No. 2:11-cv-1023

 :

 JUDGE EDMUND A. SARGUS, JR.

United States of America, : Magistrate Judge Kemp

Defendant. :

OPINION AND ORDER

Plaintiffs, companies that provide aircraft management and

aviation support services to aircraft owners and leaseholders

(with whole and/or fractional interests in the aircrafts), filed

this action against the United States under the Internal Revenue

Code, 26 U.S.C. §4261, for refund and abatement of excise taxes,

interest and penalties. There are two discovery motions pending

before the Court, as well as a sanctions motion, that relate to

particular arguments Plaintiffs have raised that may be impacted

by the Court’s ruling on the parties’ cross motions for summary

judgment. (Doc. 136). Those motions are United States’ Motion

for Enlargement of Time to Conduct Limited Discovery of Allegedly

Similarly Situated Taxpayers, Pending Resolution of United

States’ Motion for Reconsideration of Magistrate Judge’s April

28, 2014 Opinion and Order (Doc. 84); Plaintiffs’ Motion to

Compel the Production of Documents, or Alternatively, to Preclude

Defendant from Offering Any Evidence or Argument Relating to

Plaintiffs’ Claim that the IRS Failed to Provide Clear Guidance

Regarding Application of the Section 4261 Ticket Tax to Monthly

Management and Fuel Variable Surcharge Fees (Doc. 85); and

Plaintiffs’ motion and supplemental motion for sanctions (Docs.

115 and 119). 

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I. Background

The two discovery motions at issue relate to Counts V and VI

of the complaint. Those two counts, asserted by all four

plaintiffs, present arguments for limiting the application of the

§4261 ticket tax to only one of three fees collected by

Plaintiffs from their customers: occupied hourly fees. The other

two fees, which Plaintiffs argue should not be subject to the 

§4261 ticket tax, are monthly management fees and fuel variable

surcharges. Count V asserts that the IRS cannot impose

retroactive secondary liability on Plaintiffs for the monthly

management fees and fuel variable surcharges because the IRS did

not provide adequate notice of a duty to collect taxes on those

fees. Count VI asserts that the IRS has a duty to treat

similarly situated taxpayers in a consistent manner and that the

IRS has not assessed the ticket tax on monthly management fees or

other fees for certain fractional aircraft management companies. 

Accordingly, Count VI asserts that the IRS cannot impose

secondary liability on Plaintiffs for monthly management fees or

fuel variable surcharges for the time in which IRS has assessed

the tax (through 2009). 

At least a portion of the Court’s January 26, 2015 Opinion

and Order (doc. 136) affects these discovery motions. In

particular, the Court granted NetJets’ motion for summary

judgment regarding whether a 1992 technical advice memorandum

(“TAM”) bars the United States from collecting the §4261 tax on

certain fees. (Doc. 61). As an initial matter, the Court’s

ruling only applies to three of the Plaintiffs. NetJets’ motion

for summary judgment regarding the 1992 TAM was filed by NetJets

Aviation, Inc., NetJets Large Aircraft, Inc., and NetJets

International, Inc., collectively “NetJets.” The Court

considered NetJets’ argument that the IRS was bound by its 1992

TAM, and could not retroactively apply the §4261 tax to monthly

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management fees or fuel variable surcharges unless and until the

TAM was appropriately modified withdrawn or revoked. The Court

concluded that while the TAM itself did not expressly identify

which fees were taxable, “a mountain of undisputed evidence shows

that the 1992 TAM applies the §4261 tax to only the occupied

hourly fee.” (Doc. 136 at 20). After discussing the undisputed

evidence, the Court concluded that, under the circumstances “and

with the application of §4261 to only the occupied hourly fees

consistent with the 1992 TAM’s express language – there is no

genuine issue that the 1992 TAM limits the application of §4261

to only the occupied hourly fee.” (Doc. 136 at 22). 

The Court then examined the law regarding whether the IRS

was bound by its 1992 TAM. The Court reached the following

conclusion: 

As laid out by these IRS procedures, NetJets was

entitled to rely on the 1992 TAM. And the company did

so in good faith during the time period at issue. 

According to Revenue Procedure 2, that TAM should have

been “applied until it is withdrawn or until the

conclusion is modified or revoked by a final decision .

. . .” Rev. Proc. 2014-2, §13.03, 2014-1 I.R.B. 90

(2014). But to this day, the IRS has not modified,

withdrawn, or revoked the 1992 TAM. Nevertheless, in

January 2010, the agency expanded the tax retroactively

to all of NetJets’ fees. 

Because these procedures were not followed while

NetJets relied in good faith on the 1992 TAM, the Court

concludes that the IRS could not retroactively assess

the §4261 tax tot he management fee and variable fuel

surcharge.

(Doc. 136 at 23 (citations omitted)). Because this decision

resolves NetJets’ claims regarding retroactive application of the

§4261 tax to management fees and the variable fuel surcharge,

NetJets has no need for its alternative arguments as to why the

retroactive application of those fees was inappropriate. 

Specifically, NetJets’ claims in Count V and VI, which were

arguments in the alternative, are now moot and NetJets does not

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require discovery as to those claims.

Notwithstanding the resolution of NetJets’ claims, EJM’s

claims in Counts V and VI remain unresolved. EJM is a wholly

owned subsidiary of NetJets, Inc. (Doc. 136 at 26). Unlike the

NetJets companies, EJM provides aviation services to owners of

whole aircrafts (rather than owners of fractional interests in

aircrafts) and also operates a commercial air charter business

that sells charter flights to the general public. (Doc. 136 at

26). As a result, the discovery relevant to EJM’s arguments in

Counts V and VI will differ from the discovery that would have

been relevant to NetJets’ arguments in Counts V and VI. 

II. Analysis

With respect to the United States’ motion relating to

discovery of similarly situated taxpayers, the United States

explains that Plaintiffs have “served discovery requests that

have sought documents about how the IRS applied the §4261 tax to

payments received by fractional ownership aircraft program

operators, or witnesses whose testimony presumably is sought

regarding those issues.” (Doc. 84-1 at 1). And, as a result,

the United States “seeks the ability to serve Rule 30(b)(6)

subpoenas on operators of fractional ownership aircraft programs,

to determine how other allegedly similarly situated taxpayers

collected the §4261 tax from their customers, and the positions

that the IRS took in any examinations of them and what

similarities and differences may exist.” (Doc. 84-1 at 3). 

Fractional ownership aircraft programs would not appear to be

similarly situated to EJM, and therefore, would not be relevant

to EJM’s claims. However, while the United States’ brief in

support of its motion is addressed almost entirely to seeking

discovery from fractional ownership programs, the motion itself

seeks discovery more generally from “similarly situated

taxpayers,” so it is not clear whether the Court’s summary

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judgment ruling renders this motion moot or merely narrows it. 

Similarly, with respect to the Plaintiffs’ motion to compel

or preclude relating to whether the IRS provided clear guidance,

certain of the documents as to which the parties dispute the

applicability of the deliberative process privilege relate to

questions of taxing businesses involving fractional ownership. 

(Doc. 101-1 at ¶10, see, e.g., Bates No. IRS-NJA-01-0028 claims

the privilege with respect to taxes on fees collected from

“aircraft fractional owners”). Whether clear guidance has been

provided to the fractional-ownership Plaintiffs is not relevant

to EJM’s claim that the IRS has not provided it with clear

guidance. However, from the descriptions of the documents, it is

not always clear whether the documents also seek to assert the

privilege as to opinions relating to EJM or opinions that apply

beyond the fractional ownership businesses. For example, the

United States’ description of the privilege asserted in Bates No.

IRS-NJA-01-0028 (mentioned above) states that, in addition to

applying to fees collected from aircraft fractional owners, it

also applies to “the author’s opinions, recommendations, and

views pertaining to plaintiffs’ federal excise taxes pertaining

to fuel claims,” which could encompass views relating to EJM. 

(Doc. 101-1 at ¶10). Similarly, the United States has asserted

the privilege in some instances to “views, analyses and

recommendations with respect to the proposed penalties,” which

could be relevant to the question of notice to EJM. (Doc. 101-1

at ¶10, e.g., Bates No. IRS-NJA-01-0504). As the United States

is in possession of the unredacted copies of the documents, it is

in the best position to address which documents remain relevant

to EJM following the Court’s ruling on the summary judgment

motions. 

Lastly, the motion for sanctions seeks relief from the

alleged spoliation of evidence which was contained on hard drives

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maintained by IRS employees, as well as certain other evidence

relating to prior litigation. Again, it seems that the vast

majority of the evidence discussed in the motion relates to the

fractional aircraft industry - although the supplement focuses

more specifically on evidence relating to EJM. However, the

Court’s ruling on the motion for summary judgment certainly

changes the landscape underlying the motion for sanctions, but in

ways that are likely much more clear to the parties than to the

Court. 

III. Conclusion

For the reasons stated, the Court ORDERS the United States

to show cause within 14 days of the date of this Order as to why

its Motion to Enlarge Time to Conduct Limited Discovery of

Similarly Situated Taxpayers (Doc. 84) should not be denied as

moot in light of the Court’s Opinion and Order dated January 26,

2015. The Court also ORDERS the United States to submit a

supplemental declaration within 14 days of the date of this Order

as which of the documents described in the Declaration of Richard

G. Goldman (Doc. 101-1) relate to EJM or whole aircraft

ownership. Finally, the parties are directed to show cause

within fourteen days why the Court should not deny the motions

for sanctions without prejudice to their refiling, if

appropriate, in a way that is limited to documents that are

relevant to the remaining claims in this case.

/s/ Terence P. Kemp 

United States Magistrate Judge

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