Rev. Rul. 74-123

Advice has been requested concerning the application 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.

Under the terms of a contract between a Federal agency and an aviation company, the company provides domestic air transportation for agency personnel on official business. In carrying out its contract the company uses both its own aircraft and aircraft owned by the Federal agency. All the aircraft used under the contract have maximum certificated takeoff weights in excess of 6,000 pounds. The agency pays the company for the service at a specified rate per hour which varies according to ownership and type of aircraft used and the number of crew members required.

The company is obligated to operate the aircraft on scheduled flights between definite points in the United States as provided in the contract. The company provides pilots and crews having the qualifications required by the contract and pays the salaries and other costs connected with their employment. All other personnel required to carry out the contract are provided by the company, and the company's personnel are under its own exclusive control, management and supervision. The Government-owned aircraft are "public aircraft" as defined in the Federal Aviation Administration regulations and, as such, they must be operated and maintained in compliance with the regulations pertaining to such aircraft.

Under the contract the company is responsible for the operating expenses of the Government-owned aircraft, such as fuel and oil. It performs the day-to-day maintenance, inspections, repairs, painting, tie down, storage, and protection of such aircraft. These services are performed on Government-owned aircraft at company expense, except that the agency furnishes at no cost to the company such spare parts and built-up engines as may be required for such aircraft. The agency is responsible for major repair and modifications of its own planes and the company maintains insurance on government-owned aircraft as prescribed by the agency at agency expense. The company has the sole responsibility for the safe operation of Government-owned aircraft and holds the agency harmless from all claims resulting from the performance of its services. Under certain circumstances, however, the agency will assume responsibility for damages resulting from use of Government-owned aircraft in excess of insurance coverage.

Section 4261(a) of the Code imposes a tax on amounts paid for taxable transportation of persons by air. For purposes of the tax imposed by section 4261(a), section 4262 defines "taxable transportation" as including (with exceptions not applicable here) transportation by air that begins and ends in the United States.

When the company uses its own aircraft under the circumstances of this case, amounts paid for the service rendered are clearly subject to the tax on transportation of persons by air imposed by section 4261 of the Code. The question presented is whether the amounts paid for service when the company uses Government-owned aircraft are subject to the tax imposed by section 4261.

The transportation service provided by the company when it operates Government-owned planes is essentially the same service provided by the company when it uses its own aircraft. Under the circumstances of the case, the mere fact that the company uses Government-owned aircraft rather than its own in carrying out the contract is not sufficient to change the nature of the service as "taxable transportation," for purposes of the tax imposed by section 4261 of the Code. Accordingly, amounts paid for the transportation services rendered in Government-owned aircraft are subject to the tax imposed by section 4261.

In computing the transportation tax due on the part of the service that involves use of Government-owned aircraft, the "amounts paid" for the service include not only the amount of money actually paid, but also the value of any contribution made by the agency toward providing the service; for example, the value of the use of Government-owned aircraft, insurance expense, etc. See Rev. Rul. 60-311, 1960-2 C.B. 341. However, in lieu of computing the tax on the foregoing basis, the Internal Revenue Service will accept a tax computed on the amount of company would charge the agency for the particular service if a comparable company-owned rather than Government-owned aircraft were used.