Rev. Rul. 76-394

Advice has been requested whether the tax on the transportation of persons by air imposed by section 4261 of the Internal Revenue Code of 1954 applies to amounts paid in the situations described below.

Situation 1. In accordance with an agreement between X company and several other companies, X company purchased an airplane with its own funds, took title to, and registered the plane in its own name. These companies, referred to as "participating" companies, include X company, its wholly-owned subsidiary, and several other companies in which the stockholders of X company have a substantial interest, ranging from 51 percent to 60 percent. The plane is used to transport, within the United States, only executive and managerial employees of the participating companies.

Situation 2. X company is the registered owner of an aircraft that it operates in connection with its business activities within the United States. In addition to being used by X company, the aircraft is used only to transport executives and employees of several other participating companies who are engaged in related business activities within the United States. These other companies have common officers and directors with X company, and the shareholders of X company have a controlling interest in the other companies.

In both Situations 1 and 2, the pilot, copilot, and mechanic for the aircraft are hired with the concurrence of each company but are on the payroll of X company. While the overall disposition of the aircraft is under the control of X company, the aircraft is operated at the direction of the particular company using the aircraft, subject to the discretion of the pilot as to safety requirements. Pursuant to a mutual agreement, each participating company shares in the annual operating expenses, which include the salaries of the pilot and crew, repairs, taxes, fuel, oil, insurance, and depreciation. Each company's share of operating expenses is computed by X company on the percentage of use of the aircraft by that company. Each of the companies other than X pays its share of the operating expenses to X. In both situations, the aircraft used has a maximum certificated takeoff weight of over 6,000 pounds.

The specific questions presented are (1) whether the payments received by X company in Situations 1 and 2 are amounts paid for the transportation of persons by air for purposes of the tax imposed by section 4261 of the Code, and if so, (2) whether such amounts come within the exemption from the tax provided by section 4282(a) for members of an affiliated group.

Section 4261(a) of the Code imposes a tax on the amount paid for taxable transportation of any person by air. The tax imposed by that section, except in certain cases not here relevant, is to be paid by the person making payment for the service.

Section 4282(a) of the Code provides that, under regulations prescribed by the Secretary of the Treasury or his delegate, if (1) one member of an affiliated group is the owner or lessee of an aircraft, and (2) such aircraft is not available for hire by persons who are not members of such group, no tax shall be imposed under section 4261 or 4271 upon any payment received by one member of the affiliated group from another member of such group for services furnished to such other member in connection with the use of such aircraft. Section 4282(b) provides that for purposes of section 4282(a), the term "affiliated group" has the meaning assigned to such term by section 1504(a), except that all corporations shall be treated as includible corporations (without any exclusion under section 1504(b)).

Section 1504(a) of the Code provides that the term "affiliated group" means one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation if (1) stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations; and (2) the common parent corporation owns directly stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of at least one of the other includible corporations. As used in that section, the term "stock" does not include nonvoting stock which is limited and preferred as to dividends.

Rev. Rul. 60-311, 1960-2 C.B. 341, states that where the owner of a vehicle (such as a helicopter) leases it to others for the transportation of persons but retains the elements of possession, command, and control of the vehicle and performs all services in connection with the operation of the vehicle, he is furnishing a taxable transportation service within the meaning of section 4261 of the Code.

Rev. Rul. 68-343, 1968-1 C.B. 491, which sets forth similar facts as in Situation 1, concludes that where several participating companies, in order to transport their executive and managerial personnel within the United States, use an airplane owned by one of the companies which also furnishes the pilot, amounts paid to the owner-company by the other participating companies as to their share of the operating expenses are amounts paid for taxable transportation of persons by air for purposes of the tax imposed by section 4261(a) of the Code.

Since in each situation the title and registration of the aircraft is in the name of X company as owner of the aircraft, and the pilot and crew are on X's payroll, X company is deemed to have the essential elements of possession, command and control of the plane at all times, irrespective of the fact that the other participating companies may direct the pilot as to destination and other details concerning actual flights when they are using the plane. Therefore, X company in each situation is furnishing a transportation service to the other participating companies, and payments made by the other participating companies for their respective shares of the operating expenses are amounts paid for transportation service.

As to the remaining question of whether the exemption provided by section 4282(a) of the Code applies in Situation 1, X and its wholly-owned subsidiary are members of an affiliated group as defined in section 1504(a). However, the other companies are not members of the affiliated group since ownership of the companies is by X's stockholders and not by X or its wholly-owned subsidiary. Therefore, the use of the airplane by the other participating companies is use by persons who are not members of the affiliated group and thus the restricted use of the airplane as required by section 4282(a) is not met.

In Situation 2, the facts indicate that rather than the voting power or stock ownership being vested in one or more of the companies, the ownership of the companies vests in the individual shareholders who hold a common interest in all the companies and there is no common parent company. Therefore, X company and the other participating companies using the aircraft are not an affiliated group within the meaning of section 1504(a) of the Code and the exemption provided by section 4282(a) is not applicable.

Accordingly, in both Situations 1 and 2, amounts paid to X company by the other companies with respect to their use of the aircraft are subject to the tax imposed by section 4261(a) of the Code.

Rev. Rul. 68-343 is amplified and, as amplified, is superseded since the position set forth in that Revenue Ruling is restated in this Revenue Ruling under current law.