Rev. Rul. 57-545

Advice has been requested concerning the applicability of the tax on transportation of persons to payments for the lease of an aircraft, including the operation and maintenance thereof, under the circumstances described below.

An airline company leased an aircraft to another company and agreed to operate it for the purpose of transporting officials of the latter company. Under the agreement, the lessee pays a minimum rental charge per month for the use of the aircraft. The rental charge is abated during any period the aircraft is incapable of service unless the airline company, the lessor, provides another aircraft for use of the lessee. At the expense of and in accordance with the specifications of the lessee, the aircraft was painted and extensively modified.

The lessor furnishes the pilot and co-pilot required for operating the aircraft. The lessor's selection of flight personnel is subject to the approval of the lessee. The lessee pays to the lessor the salaries of the flight crew based on the lessor's pay scale for the crew selected and approved.

Under the agreement, the lessor provides food service as may be required by the lessee for which service the lessee pays the actual catering charges plus a fixed percentage for processing such charges. The aircraft is serviced and maintained by the lessor for a specified amount which is paid for by the lessee. Also, the lessee pays to the lessor a certain sum for each hour flown for gasoline, oil, and hydraulic fluid. The lessee reimburses the lessor for landing fees, etc., and any other incidental expenditures made by the lessor.

Weather and flight information is furnished by the lessor at no cost to the lessee. The use and operation of the radio station on the aircraft which is licensed to the lessor is retained by the lessor and is operated by its flight personnel. The lessor, at its own expense, maintains liability insurance on the aircraft and its operation, with the lessee named as an additional insured. All risk of loss and damage to the aircraft and its appurtenances is borne by the lessor. The lessee is not responsible for any claims arising from 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 the transportation of persons by rail, motor vehicle, water, or air within or without the United States.

Under the circumstances stated above, it is held that the lessor is furnishing transportation to the lessee. Accordingly, the payments made by the lessee to the airline company, the lessor, are subject to the tax on the transportation of persons imposed by section 4261 of the Code. However, the tax does not apply to charges for the nontransportation services, namely, food and the fixed percentage paid for processing such charges, and for painting and modifying the aircraft, provided such payments are separable from the payments for rental and operation of the aircraft and are shown separately in the lessor's records.