Rev. Rul. 58-215

The Internal Revenue Service has been asked whether the tax on the transportation of persons applies to payments by the owner of an aircraft to an airline company for the service, maintenance, overhaul, and operation of such aircraft under the circumstances described below.

A corporation made a bona fide purchase of an aircraft from an airline company for the purpose of transporting its own personnel and to use as a `flying-office car.' Because of the airline's long experience in the operation of this type of aircraft, the corporation entered into an agreement which appointed the airline company its agent to service, maintain, overhaul, and operate the aircraft.

The aircraft is serviced, maintained, and overhauled by the airline company on a scheduled basis for a specified amount, which is paid for by the corporation. The corporation pays to the airline company a certain sum for each hour flown for gasoline, oil, and hydraulic fiuid. Also, at its own expense, the corporation maintains all risk and liability insurance on the aircraft and its operations, with the airline company named as an additional insured for the liability insurance. Furthermore, the corporation reimburses the airline company for landing fees. However, weather and flight information is furnished by the airline company at no cost to the corporation. Also, the airline company indemnifies the corporation for any loss or damages arising out of the hangering, maintaining, servicing, and overhauling of the aircraft.

According to the terms of the agreement, the airline company furnishes, subject to the approval of the corporation, the pilot and copilot to operate the aircraft. After the pilot and the co-pilot have been selected and approved, they are permanently based at a place designated by the corporation. If for any reason the corporation desires that the pilot and/or the co-pilot be relieved of his duties, a new pilot and/or co-pilot will be assigned by the airline subject to the approval of the corporation. The pilot and the co-pilot assigned to the aircraft are under the corporation's exclusive control, subject to the discretion of the pilot and the co-pilot as to safety of operation. The corporation pays to the airline company the salaries of the flight crew based on the established pay scale for the crew selected and approved. Moreover, the airline company maintains workmen's compensation and employees liability insurance on all its employees participating in, or in any way connected with, the operation of the aircraft.

Section 4261 of the Internal Revenue Code of 1954 imposes a tax upon the amount paid within the United States for taxable transportation of persons by rail, motor vehicle, water, or air within the United States.

It is held that, since the corporation owns the aircraft, has exclusive control over the aircraft's personnel, pays the operating expenses of the aircraft, and maintains liability and risk insurance and the airline operates the aircraft as an agent for the corporation, the airline company is not, with respect to this service, furnishing a transportation service for hire. Accordingly, the tax on the transportation of persons does not apply to amounts paid by the corporation to the airline company. Compare Revenue Ruling 57-545, C.B. 1957-2, 749, which holds that the tax on the transportation of persons is applicable to amounts paid by a company to an airline company for the lease of an aircraft, including the maintenance and operation thereof.

The views expressed herein are not inconsistent with those expressed in Revenue Ruling 56-608, C.B. 1956-2, 878, which holds that where a carrier operates a shipper's tank truck equipment with its own employees, under its own exclusive control, management, and supervision as an independent contractor, at its own expense, and not in the name of or as the agent for the shipper, the carrier furnishes a transportation service for hire, irrespective of the fact that the shipper owns the equipment in which its products is transported by the carrier. Therefore, in such a case the amounts paid to the carrier by the shipper are subject to the tax on the transportation of property.

Revenue Ruling 56-608, C.B. 1956-2, 878, distinguished.