Supreme Court To Review Flexjet Tax Case

 - June 15, 2017, 12:06 PM

The U.S. Supreme Court next week is scheduled to consider whether it will accept Bombardier’s review of a case it has filed against the Internal Revenue Service over the taxation of management fees charged by its former Flexjet fractional operation. The case was scheduled for a Supreme Court conference session on June 22 after the U.S. government early this month formally submitted its response to Bombardier’s filing.

Bombardier on February 19 asked the Supreme Court to overturn determinations of earlier courts, which found that the IRS has properly taxed fractional operation management fees as commercial air transportation activities. 

Bombardier is contending, and has received support in the form of amicus briefs from industry associations and other fractional operators, that the IRS has been inconsistent in its approach to management fee taxation and has put Flexjet at a competitive disadvantage to fractional operators who have had different tax treatment.

The U.S. Solicitor General filed its response on June 6, asking the court to reject Bombardier’s appeal. In the filing the government reiterated its belief that the previous courts had properly sided with the IRS. The filing noted that court found in favor of the IRS interpretation of “command, control and possession” of aircraft in determining that the fees constitute commercial activity. 

The government further dismissed the arguments of inconsistent and unclear guidance, saying a 2004 memorandum clearly outlined the IRS intent. As for disparate treatment, the Solicitor General’s filing notes that the IRS applied the same approach to both Flexjet and its competitor NetJets administratively. It was a U.S. District Court ruling—that was not appealed—that resulted in the differing treatment.

Further, the government highlighted that in another case involving IBM, the courts have found that the IRS must be consistent toward the same entity and rejected arguments that the “the outcome in petitioner’s case run[s] afoul of any ‘unfair competitive disadvantage principle.’” The government said the courts were “not faced with dueling IRS rulings issued to competitors at the same time based on identical facts.”

But in response, Bombardier argued that the government’s brief in opposition “does not explain or justify the errors” of the earlier courts’ findings; it only repeats the reasoning.

There is an express, acknowledged circuit conflict concerning the test for determining whether a payment is subject to the ‘ticket tax,’” Bombardier said. “That circuit conflict, however, is a symptom of a larger problem—persistent, widespread confusion about the application of….fees charged by aircraft-management companies like petitioner.”

That confusion, Bombardier added, stems from the IRS failure to issue clear, uniform guidance. “Worse, the IRS has affirmatively taken inconsistent positions at different times and with respect to different companies,” the company said. By upholding the IRS assessments, the courts “eviscerate…the IRS’s duties to provide deputy tax collectors clear notice of their collection obligations and to treat like taxpayers alike.”

Bombardier added that “correcting those errors” of the earlier court determinations “is vital not only for the aviation industry—as the multiple amicus briefs filed by industry participants attest—but also for the wide range of entities charged with collecting various taxes on the IRS’s behalf, including excise, sales and employment taxes.”