Rev. Rul. 70-325

Advice has been requested concerning the applicability of the excise tax on the transportation of persons by air, imposed by section 4261(a) of the Internal Revenue Code of 1954, under the circumstances described below.

A, an individual, is the sole stockholder of M company, a corporation. A owns an airplane which he leases to M company under an agreement designated as an aircraft lease, and under which he receives certain specified monthly rental payments. M company operates the plane for the purpose of furnishing transportation within the United States to A, his employees, business associates, and relatives. Under the terms of the lease, M company, at its own cost and expense, licenses and registers the plane; maintains and services the plane; furnishes all fuels, oils, lubricants, etc.; and pays all storage and hangar charges. M company is also required, at its own expense, to maintain insurance providing full value coverage of the plane and coverage for bodily injury and property damage liability. In addition, M company is is required to indemnify A, the lessor, against any loss, liens, claims, or encumbrances, regardless of the nature thereof, arising out of the use of the plane during the period of the lease.

In operating the plane, M company selects, employs, pays, and generally controls the pilot, except to the extent that when transportation is being furnished, the party transported may direct the pilot as to destination and certain other details concerning actual flights. M company establishes an hourly rate that it charges all persons for transportation furnished. The rate established contemplates only the recovery of actual operating expenses. The plane is not of a type that comes within the exemption from tax for small aircraft on nonestablished lines.

Where the owner of an aircraft transfers the complete possession, command, and control of the aircraft to a lessee, the owner is not engaging in a taxable transportation service but is merely leasing his aircraft. See Revenue Ruling 60-311, C.B. 1960-2, 341, which discusses the tax consequences resulting from (1) a lease under which the lessor retains control of the aircraft and (2) a lease under which control is transferred to the lessee. Also see Revenue Ruling 68-343, C.B. 1968-1, 491, which holds that where a parent company has the elements of possession, command, and control of a plane at all times, amounts paid by a wholly-owned subsidiary and other related companies to the parent company under an expense sharing plan are amounts paid for transportation service, irrespective of the fact that the subsidiary and other companies may direct the pilot as to destination and other details concerning actual flights when they are using the plane.

Under the terms of the lease in the instant case whereby M company registers, operates, maintains, and services the plane and furnishes the pilot, A has transferred all the elements of possession, command, and control of the plane to M company, irrespective of the fact that A is the sole stockholder of M company or that he may direct the pilot as to destination on actual flights furnished him. Moreover, transfer of control of the plane to M company is further indicated by the fact that M company assumes full responsibility for any damages, liabilities, losses, claims, etc., arising from its operation of the plane.

Therefore, it is held that M company is furnishing a transportation service to A and other persons, and payments made by them to M company are amounts paid for taxable transportation.