Rev. Rul. 60-63

The Internal Revenue Service has been asked to rule on the question of the applicability of the tax on the transportation of persons to a payment made after July 31, 1958, for a transportation service chartered to transport mixed loads of both freight and passengers, and to the applicability of the tax on the transportation of persons or the tax on the transportation of property to a payment made on or before July 31, 1958, for a transportation service chartered for such purpose.

A company furnishes a charter service for transporting by air mixed loads of both persons and property. Payment for the service may be based upon a flat rate per mile, or may be computed on an hourly rate. The charge for a flight load is the same whether the load includes both freight and passengers, freight only, or passengers only.

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

Section 4271(a) of the Code, prior to its repeal by the Tax Rate Extension Act of 1958, Public Law 85-475, C.B. 1958-3, 73, imposed a tax equal to three percent of the amount paid within or without the United States for the transportation of property, except coal, by rail, motor vehicle, water, or air from one point in the United States to another. Public Law 85-475 repealed the tax on amounts paid after July 31, 1958, for the transportation of property.

With respect to payments made during the time that payments for both transportation of persons and transportation of property were taxable, the Service consistently held that where a carrier was chartered to carry mixed loads of both persons and property, the total payment for the charter service was subject to either the ten percent tax on the transportation of persons or the three percent tax on the transportation of property. The predominant use of the transportation facility, that is, whether it was used predominantly for transporting passengers or used predominantly for transporting freight, determined whether the ten percent persons tax or the three percent property tax applied to the total payment. If the predominant use could not be determined, the ten percent persons tax applied to the total payment. This position is in effect with respect to payments made on or before July 31, 1958.

In determining the predominant use of the carrier, if there are available, either from tariffs of the carrier furnishing the charter service or from tariffs or other carriers, local tariff rates fro comparable transportation in regular freight and passenger service between the points where a charter trip begins and ends, a comparison of the charges that would be due for the transportation of the property and for the transportation of the passengers if they were being transported in regular service may be used as a basis for such determination. However, the showing that the weight of the property exceeds the weight of the persons transported, or vice versa, is not an acceptable basis for making this determination.

Repeal of the tax on transportation of property and retention of the tax on transportation of persons preclude, by statute, administrative discretion for the use of a `predominant use' test in determining the tax consequences of a payment made after July 31, 1958, for a transportation service chartered to transport mixed loads of both freight and passengers. In view of this, and since a tax is specifically imposed on a payment made for taxable transportation of persons, it is held that, where payment is made after July 31, 1958, for a transportation service chartered to carry mixed loads of freight and passengers, the tax on the transportation of persons applies to the portion of the payment which is allocable to the service of transporting the passengers, provided such allocation is made on a fair and reasonable basis and can be supported by proper records. If no allocation is made the total payment is subject to the persons tax.

Because of the prior position of the Service in following the `predominant use' test and by virtue of the authority contained in section 7805(b) of the Code, this Revenue Ruling, insofar as it relates to payments made after July 31, 1958, for a transportation service used predominantly for transporting property will be applied without retroactive effect as to payments made prior to January 1, 1960. Thus, in the case of a transportation service which under the `predominant use' test is classifiable as a transportation of property movement, no tax will be payable with respect to any part of a payment made during the period August 1, 1958, through December 31, 1959, for such service, including the portion of the service allocable to transporting persons. On the other hand, where a transportation service was used predominantly for transporting persons, the tax will apply to the portion of the payment made after July 31, 1958, which is allocable to the service of transporting persons.

¹ Technical Information Release 196, dated December 28, 1959.