NetJets Not Liable for Transportation Excise Taxes

For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

Nov. 16 — Four companies that provide fractional aircraft ownership and management services have prevailed in a dispute over the IRS's assessment of more than $9.7 million in ticket taxes between 2005 and 2009 (NetJets Large Aircraft Inc. v. United States, S.D. Ohio, No. 2:11-cv-01023, 11/12/15).

U.S. District Court for the Southern District of Ohio Chief Judge Edmund A. Sargus Jr. ruled Nov. 12 that NetJets Large Aircraft Inc. didn't receive “precise and not speculative notice” from the Internal Revenue Service regarding the tax, and therefore wouldn't be responsible for the tax code Section 4261 transportation excise tax (223 DTR K-1, 11/18/11).

NetJets Large Aircraft, which was joined by plaintiffs Executive Jet Management, NetJets Aviation Inc. and NetJets International Inc., operates an aircraft management business in which it provides aviation services to owners of whole aircraft. The IRS assessed the Section 4261 tax against the monthly management fees and passthrough costs paid by NetJets' customers, the aircraft owners, for the tax years at issue.

Drawing a Distinction

The Service drew a distinction between owners who put their aircraft in NetJets' charter business and owners who didn't, saying NetJets was liable only for its customers who entered their planes into the charter business.

NetJets argued that even if the air transportation excise tax applied to the whole-aircraft management services that it provides, NetJets still wouldn't be liable for the tax.

According to NetJets, “the IRS cannot hold a person secondarily liable for failure to collect a tax unless the IRS previously provided that person with ‘precise and not speculative' guidance that it had an obligation to collect the tax.”

The government asked the court to only consider publicly available documents and pronouncements in determining whether NetJets had sufficient notice of its collection obligation.

Failed Notice

“Here, the published guidance from the IRS regarding whole-aircraft management services failed, as a matter of law, to provide EJM with precise and not speculative guidance regarding EJM's obligation to collect the transportation excise tax,” Sargus said, adding that without adequate notice, it would be unfair to hold NetJets secondarily liable for the taxes owed by its customers.

NetJets also moved for sanctions regarding the government's spoliation of evidence in the case. However, the court rejected the sanctions as the “Plaintiffs have now prevailed through summary judgment on the adequate notice and TAM theories,” rendering the motion for sanctions moot (218 DTR K-1, 11/12/14).

John Wolcott Zeiger represented the NetJets plaintiffs. Thomas P. Cole of the DOJ represented the government.

To contact the reporter on this story: Matthew Beddingfield in Washington at
To contact the editor responsible for this story: Brett Ferguson at