Excise Taxes; Transportation of Persons by Air; Transportation of Property by Air; Aircraft Management Services, 4990-5008 [2021-00706]

Download as PDF khammond on DSKJM1Z7X2PROD with RULES 4990 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations official must file an information return, and furnish the written statement to the payor, as provided by the instructions to Form 1098–F, or any successor form, including instructions as to the amounts (if any) to include on Form 1098–F, only if the government or governmental entity reasonably expects that the aggregate amount required to be paid or incurred pursuant to the order or agreement, relating to the violation of any law, or the investigation or inquiry into the potential violation of any law, will equal or exceed the threshold amount under paragraph (f)(6) of this section. (f) Definitions. The following definitions apply under this section: (1) Appropriate official—(i) One government or governmental entity. If the government or governmental entity has not assigned one of its officers or employees to comply with the reporting requirements of paragraph (a), (b), and (c) of this section, the term appropriate official means the officer or employee of a government or governmental entity having control of the suit, investigation, or inquiry. If the government or governmental entity has assigned one of its officers or employees to comply with the reporting requirements of paragraph (a), (b), and (c) of this section, such officer or employee is the appropriate official. (ii) More than one government or governmental entity—(A) In general. If more than one government or governmental entity is a party to an order or agreement, only the appropriate official of the government or governmental entity listed first on the most recently executed order or agreement is responsible for complying with all reporting requirements under paragraphs (a), (b), and (c) of this section, unless another appropriate official is appointed by agreement under paragraph (f)(1)(ii)(B) of this section. (B) By agreement. The governments or governmental entities that are parties to an order or agreement may agree to appoint one or more other appropriate officials to be responsible for complying with the information reporting requirements of paragraphs (a), (b), and (c) of this section. (2) Government. For purposes of this section, government means the government of the United States, a State, the District of Columbia, or a political subdivision (such as a local government unit) of any of the foregoing. (3) Governmental entity. For purposes of this section, governmental entity means— (i) A corporation or other entity serving as an agency or instrumentality VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 of a government (as defined in paragraph (f)(2) of this section), or (ii) A nongovernmental entity treated as a governmental entity as described in paragraph (f)(4) of this section. (4) Nongovernmental entity treated as governmental entity. For purposes of this section, the definition of nongovernmental entity treated as a governmental entity as set forth in § 1.162–21(e)(3) applies but does not include a nongovernmental entity of a territory of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, a foreign country, or an Indian tribe. (5) Payor. The payor is the person, as defined in section 7701(a)(1), which, pursuant to an order or agreement, has paid or incurred, or is liable to pay or incur, an amount to, or at the direction of, a government or governmental entity in relation to the violation or potential violation of any law. In general, the payor will be the person to which section 162(f) and § 1.162–21 of the regulations apply. (6) Threshold amount. The threshold amount is $50,000. (g) Applicability date. The rules of this section apply only to orders and agreements, pursuant to suits and agreements, which become binding under applicable law on or after January 1, 2022, determined without regard to whether all appeals have been exhausted or the time for filing an appeal has expired. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: January 7, 2021. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2021–00741 Filed 1–14–21; 4:15 pm] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 40 and 49 [TD 9948] RIN 1545–BP37 Excise Taxes; Transportation of Persons by Air; Transportation of Property by Air; Aircraft Management Services Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: PO 00000 Frm 00114 Fmt 4700 Sfmt 4700 This document contains final regulations relating to the excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the final regulations relate to the exemption for amounts paid for certain aircraft management services. The final regulations also amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update the existing regulations to incorporate statutory changes, case law, and other published guidance. The final regulations affect persons that provide air transportation of persons and property, and persons that pay for those services. DATES: Effective Date: These regulations are effective January 14, 2021. Applicability Dates: For dates of applicability, see §§ 40.0–1(e), 49.4261– 1(g), 49.4261–2(d), 49.4261–3(e), 49.4261–7(k), 49.4261–9(c), 49.4261– 10(i), 49.4262–1(f), 49.4262–2(e), 49.4262–3(e), 49.4281–1(e), 49.4263– 1(b), 49.4263–3(b), 49.4271–1(g), and 49.4721–2. FOR FURTHER INFORMATION CONTACT: Michael H. Beker at (202) 317–6855 (not a toll-free number). SUPPLEMENTARY INFORMATION: SUMMARY: Background This document amends the Facilities and Services Excise Tax Regulations (26 CFR part 49) under sections 4261, 4262, 4263, 4264, 4271, 4281, and 4282 of the Internal Revenue Code (Code). This document also amends the Excise Tax Procedural Regulations (26 CFR part 40). Sections 4261 and 4271 impose excise taxes on certain amounts paid for transportation of persons or property, respectively, by air, collectively referred to herein as ‘‘air transportation excise tax.’’ Section 13822 of Public Law 115– 97, 131 Stat. 2054, 2182 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), added an exception to the air transportation excise tax in new section 4261(e)(5). Specifically, section 4261(e)(5)(A) provides that ‘‘[n]o tax shall be imposed by [section 4261] or section 4271 on any amounts paid by an aircraft owner for aircraft management services related to—(i) maintenance and support of the aircraft owner’s aircraft, or (ii) flights on the aircraft owner’s aircraft.’’ Section 4261(e)(5)(B) defines the term ‘‘aircraft management services’’ to include: (a) Assisting an aircraft owner with administrative and support services, such as scheduling, flight planning, and weather forecasting; (b) E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations obtaining insurance; (c) maintenance, storage, and fueling of aircraft; (d) hiring, training, and provision of pilots and crew; (e) establishing and complying with safety standards; and (f) such other services as are necessary to support flights operated by an aircraft owner. Section 4261(e)(5)(C)(i) provides that the term ‘‘aircraft owner’’ includes a person who leases an aircraft other than under a ‘‘disqualified lease.’’ Section 4261(e)(5)(C)(ii) defines the term ‘‘disqualified lease’’ for purposes of section 4261(e)(5)(C)(i) as ‘‘a lease from a person providing aircraft management services with respect to the aircraft (or a related person (within the meaning of section 465(b)(3)(C)) to the person providing such services), if the lease is for a term of 31 days or less.’’ Finally, section 4261(e)(5)(D) provides that in the case of amounts paid to any person which (but for section 4261(e)(5)) are subject to air transportation excise tax, a portion of which consists of amounts described in section 4261(e)(5)(A), section 4261(e)(5) ‘‘shall apply on a pro rata basis only to the portion which consists of amounts described in’’ section 4261(e)(5)(A). The Conference Report accompanying the TCJA, H.R. Rep. No. 115–466, at 536 (2017) (Conference Report), provides that in the event that a monthly payment made to an aircraft management company is allocated in part to exempt services and flights on the aircraft owner’s aircraft, and in part to flights on aircraft other than that of the aircraft owner, air transportation excise tax must be collected on that portion of the payment attributable to flights on aircraft not owned by the aircraft owner. On July 31, 2020, a notice of proposed rulemaking (REG–112042–19) was published in the Federal Register (85 FR 46032) under sections 4261, 4262, 4263, 4264, 4271, 4281, and 4282 of the Code, and part 40 of the Excise Tax Procedural Regulations (proposed regulations). No public hearing was requested or held. The Department of the Treasury (Treasury Department) and the IRS received three comments in response to the proposed regulations. The comments addressing the proposed regulations are summarized in the Summary of Comments and Explanation of Revisions section of this preamble. All comments were considered and are available at www.regulations.gov or upon request. After full consideration of the comments received, this Treasury decision adopts as final regulations the proposed regulations with the modifications described in the VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 Summary of Comments and Explanation of Revisions section of this preamble. Summary of Comments and Explanation of Revisions I. Overview The final regulations retain the basic approach and structure of the proposed regulations, with certain revisions and modifications. This Summary of Comments and Explanation of Revisions discusses these revisions and modifications as well as the comments received in response to the proposed regulations. The final regulations provide guidance under sections 4261, 4262, 4263, 4264, 4271, 4281, and 4282 of the Code related to air transportation excise tax. The final regulations also provide guidance under part 40 of the Excise Tax Procedural Regulations. Part II of this Summary of Comments and Explanation of Revisions discusses rules related to the exemption from air transportation excise tax for amounts paid for certain aircraft management services provided in section 4261(e)(5) of the Code (aircraft management services exemption). Part III of this Summary of Comments and Explanation of Revisions discusses § 49.4261–1 and other rules of general applicability related to the excise tax on amounts paid for the transportation of persons by air imposed by section 4261, as well as rules in § 49.4261–7(h)(2) related to aircraft charters. See the Explanation of Provisions section of the proposed regulations for a discussion of the rules under 26 CFR part 40 and 26 CFR part 49 that were included in the proposed regulations, for which no comments were received. Those proposed rules are adopted by this Treasury decision— except as discussed in parts II and III of this Summary of Comments and Explanation of Revisions—without change. II. Aircraft Management Services Exemption Rules a. Definition of Aircraft Management Services Proposed § 49.4261–10(b)(1) defined the term ‘‘aircraft management services’’ to mean the services listed in section 4261(e)(5)(B), as well as ‘‘other services.’’ Proposed § 49.4261– 10(b)(1)(ii) defined ‘‘other services’’ as any service (including, but not limited to, purchasing fuel, purchasing aircraft parts, and arranging for the fueling of an aircraft owner’s aircraft) provided directly or indirectly by an aircraft management services provider to an aircraft owner, that is necessary to keep the aircraft owner’s aircraft in an airworthy state or to provide air PO 00000 Frm 00115 Fmt 4700 Sfmt 4700 4991 transportation to the aircraft owner on the aircraft owner’s aircraft at a level and quality of service required under the agreement between the aircraft owner and the aircraft management services provider. A commenter stated that the term ‘‘airworthy’’ generally indicates that an aircraft—or one or more of its component parts—meets its type design and is in a condition of safe operations. The commenter noted that some services provided by an aircraft management services provider in maintaining an aircraft do not directly pertain to the airworthiness of an aircraft. These services include, but are not limited to, upgrades in equipment, installation of optional equipment, optional modifications, refurbishment of an aircraft interior, and painting of an aircraft’s exterior. The commenter suggested that the final regulations remove the phrase ‘‘that is necessary to keep the aircraft owner’s aircraft in an airworthy state’’ from the definition of ‘‘other services.’’ The Treasury Department and the IRS agree with the commenter that the final regulations should clarify that the definition of aircraft management services is not limited to those services necessary to keep an owner’s aircraft in an airworthy state. As a result, the final regulations adopt the change suggested by the commenter and remove the phrase ‘‘that is necessary to keep the aircraft owner’s aircraft in an airworthy state’’ from final § 49.4261–10(b)(1)(ii). b. Definition of Aircraft Owner i. Leases Proposed § 49.4261–10(b)(3)(i) provided that the term ‘‘aircraft owner’’ means an individual or entity that leases or owns (that is, holds title to or substantial incidents of ownership in) an aircraft managed by an aircraft management services provider, commonly referred to as a ‘‘managed aircraft.’’ Proposed § 49.4261–10(b)(3)(i) further provided that the term ‘‘aircraft owner’’ does not include a lessee of an aircraft under a disqualified lease, as defined in proposed § 49.4261–10(b)(4). Regarding leases that qualify a person as an aircraft owner under proposed § 49.4261–10(b)(3)(i), a commenter noted that while many aircraft leases are in writing and contain provisions that make it clear that the arrangement constitutes a lease, that is not the case for all aircraft leasing arrangements. The commenter further noted that courts have found that the basic attributes of a lease are ‘‘the right to possess, use, and control the aircraft’’ (citing Petit Jean Air Service, Inc v. U.S., 74–1 U.S.T.C. E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4992 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 16, 135 (E.D. Ark. 1974)). To this end, the commenter suggested that the final regulations add to the end of § 49.4261– 10(b)(3)(i) the sentence ‘‘An arrangement (whether written, oral, or implied) that transfers the right to possess, use, and control an aircraft to an individual or entity qualifies as a lease for the purposes of determining whether that individual or entity meets the definition of aircraft owner.’’ The Treasury Department and the IRS note that the suggested ‘‘right to possess, use, and control an aircraft’’ language from the commenter is nearly identical to the possession, command, and control test created through existing published guidance. As described in the preamble to the proposed regulations, possession, command, and control is a facts-and-circumstances analytical framework that is used to determine whether a person is providing taxable transportation to another person in cases where each of the parties contribute some, but not all, of the elements necessary for complete air transportation services. The possession, command, and control test has caused confusion and uncertainty in the air transportation excise tax area for decades; in fact, it is partly for that reason—and disagreements between the IRS and taxpayers over the application of the possession, command, and control test to aircraft management services arrangements—that section 4261(e)(5) was added to the Code. See, e.g., Conference Report at 535. As explained in the preamble to the proposed regulations, section 4261(e)(5) directly addresses a situation that, but for section 4261(e)(5), would be analyzed using the possession, command, and control test. The preamble to the proposed regulations further explained that in situations to which the aircraft management services exemption applies, the possession, command, and control test is not relevant. As a result, the Treasury Department and the IRS decline to introduce into the final regulations a test that is similar to a test that has been the source of confusion, uncertainty, disagreement, and difficulties in administration. Therefore, the final regulations do not adopt the language the commenter proposed to be added to the end of § 49.4261–10(b)(3)(i) and do not provide a special definition of the term ‘‘lease’’ solely for purposes of the aircraft management services exemption. ii. Owner Trusts A commenter requested clarification regarding whether trustees and beneficiaries of ‘‘owner trusts’’ qualify VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 as aircraft owners for purposes of the aircraft management services exemption. The commenter described an owner trust as an ownership structure used for the limited purpose of registering an aircraft in the U.S. with the Federal Aviation Administration (FAA). The structure, which is sanctioned by the FAA, is commonly used by non-U.S. persons to satisfy the U.S. citizenship requirements applicable to registering an aircraft with the FAA. Most owner trusts are established using one of a small number of U.S.-based aviation trust companies— which are not related to the trust beneficiary—as trustee. The trustee holds legal title to the aircraft and satisfies the U.S. citizenship requirement for purposes of registering the aircraft with the FAA, thereby permitting registration in the U.S. of an aircraft that would otherwise be ineligible for such registration. The commenter stated that an owner trust agreement works in conjunction with an operating agreement that, generally, is separate from, but closely related to, the trust agreement. The operating agreement may contain explicit lease language or may instead use the term ‘‘license to use’’ and provides that the beneficiary holds the exclusive right to lease or license and to possess, use, and operate the aircraft (typically requiring a nominal rent or license payment to the trustee, or in some cases, no payment at all). Regardless of how the transfer of control is described in the operating agreement, the result is that the beneficiary holds the exclusive right to lease or license the aircraft, and to possess, use, and operate the aircraft. An operating agreement will usually require that the beneficiary retain the crew and maintain the aircraft per FAA guidance and manufacturer’s recommendations. The commenter stated that the relationship created through the operating agreement is consistent with the trustee’s status as a holder of only bare legal title, sometimes referred to as ‘‘nominal title,’’ to the aircraft. In addition, the commenter explained that the beneficiary of an owner trust holds many of the attributes of aircraft ownership, other than legal title. The attributes of aircraft ownership that the beneficiary possesses include: The right to any income generated by—and obligation to pay all expenses associated with—the aircraft; the upside benefit or downside risk as to the aircraft’s value; bearing the risk of loss; being considered the owner of the aircraft for Federal income tax purposes; and discretion as to when to sell the aircraft. The commenter noted that since both PO 00000 Frm 00116 Fmt 4700 Sfmt 4700 the trustee and the beneficiary of an owner trust are owners of interests in the aircraft, payments for aircraft management services from either party should be eligible for the aircraft management services exemption. The commenter further noted that regardless of whether the operating agreement is written in terms of a lease or a license, the arrangement is not a disqualified lease (as that term was defined in proposed § 49.4261–10(b)(4)). For purposes of section 4261(e)(5), such an operating agreement between the trustee and the beneficiary of an owner trust is treated as a lease, regardless of whether the document expressly refers to the arrangement as a lease. Therefore, under the terms of the operating agreement, the beneficiary of an owner trust is the lessee of the aircraft held in trust. Both section 4261(e)(5)(C) and proposed § 49.4261– 10(b)(3) recognize lessees, other than lessees under a disqualified lease, as an aircraft owner. Based on the foregoing, the final regulations include a definition of ‘‘owner trust.’’ The final regulations also clarify that the beneficiary of an owner trust is an ‘‘aircraft owner’’ so long as the lease is not a disqualified lease. iii. Affiliated Groups, Disregarded Entities, and Other Close Relationships As discussed in the preamble to the proposed regulations, the proposed regulations applied the principle of statutory interpretation that, as matters of legislative grace, exemptions to tax should be narrowly construed. Therefore, the proposed regulations defined ‘‘aircraft owner’’ as an individual or entity that leases (other than under a disqualified lease) or owns (that is, holds title to or substantial incidents of ownership in) an aircraft managed by an aircraft management services provider. The proposed regulations did not include in the definition of ‘‘aircraft owner’’ persons that are related to the aircraft owner (for example, another member of the same affiliated group (as defined in section 4282 of the Code)), but are not the aircraft owner itself. As a result, under the proposed regulations, the aircraft management services exemption applied only to payments for aircraft management services that are made by the actual aircraft owner or lessee. A commenter disagreed with the assertion in the preamble to the proposed regulations that treating payments from parties who are directly related to an aircraft owner as though they were from the aircraft owner, and thus exempt from air transportation excise tax, ‘‘would effectively expand E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations the exemption [provided in section 4261(e)(5)] in a manner not authorized by Congress.’’ The commenter claimed that this assertion is at odds with other Code provisions and implies an unduly narrow and formalistic interpretation of the statute that is inconsistent with the flexible approach otherwise evinced in the proposed regulations. The commenter further claimed that the assertion has no basis in the legislative history, but rather the legislative history implies that at least some related-party payments of aircraft management fees should be excluded from air transportation excise tax under section 4261(e)(5). The commenter noted that while the statute and legislative history are relatively silent about who or what the term ‘‘aircraft owner’’ includes, the legislative history enumerates several examples of what the term does not include. Specifically, the legislative history states that the term ‘‘aircraft owner’’ does not include ownership of stock in a commercial airline or participation in a fractional aircraft ownership program. The commenter stated that the legislative history expresses Congress’s concern about the use of the aircraft management services exemption to circumvent the ordinary application of air transportation excise tax as contemplated in other Code provisions. By negative inference, the commenter reasoned, Congress did not express any similar concerns if the aircraft management services exemption applied to payments made by a party related to the aircraft owner. The commenter asserted that the narrow interpretation of ‘‘aircraft owner’’ in the proposed regulations does nothing to further Congress’s goal of preventing arrangements designed to circumvent the ordinary application of air transportation excise tax. The commenter asserted that when an affiliated corporation in a corporate group pays for aircraft management services on behalf of an aircraft owning corporate entity within the group, there is no avoidance of air transportation excise tax. Further, the commenter asserted that there is statutory precedent for ignoring the distinction among corporate entities in the air transportation excise tax area; specifically, the commenter pointed to the affiliated group exemption provided in section 4282 of the Code. Under section 4282(a), if one member of an affiliated group is the owner or lessee of an aircraft, and such aircraft is not available for hire by persons who are not members of such group, air transportation excise tax does not apply to any payment received by one member VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 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. Citing the legislative history to section 4282 (see S. Rep. No. 91–706 at 17–18, 1970–1 C.B. 386), the commenter asserted that section 4282 captures Congress’s general approach to relatedparty payments in the area of air transportation excise tax; that is, Congress decided to ignore nominal ownership of an aircraft by one member of an affiliated group and instead looked to the true economic ownership of the aircraft by the group. The commenter asserted that the final regulations should do the same and ignore the formalities of nominal ownership of an aircraft and apply the aircraft management services exemption to payments by any party that is the true economic owner of the aircraft. The commenter requested that the Treasury Department and the IRS consider expanding the definition of ‘‘aircraft owner’’ to include disregarded entities, members of an affiliated group, and family members. The commenter also noted that it is not uncommon for an individual to operate an aircraft but place title to the aircraft in a single member limited liability company (SMLLC) and that such arrangement is, in effect, a constructive lease, but that state law concepts of constructive leases will result in needless and complex controversy. Another commenter similarly requested that the Treasury Department and the IRS consider expanding the definition of ‘‘aircraft owner’’ to include the single member of a SMLLC that holds title to an aircraft. The commenter reasoned that if the member pays an aircraft management services provider for aircraft management services on behalf of the SMLLC, it is economically indistinguishable from a case in which the individual first transfers funds into the SMLLC and then the SMLLC pays the aircraft management services provider. In either situation, the commenter asserted, there is no circumvention of air transportation excise tax; the only difference is who writes the check paying the aircraft management services provider. The Treasury Department and the IRS continue to have the concerns described in the preamble to the proposed regulations. Specifically, the Treasury Department and the IRS are concerned that extending the aircraft management services exemption to payments made by certain related parties—as suggested by the commenters—would effectively ignore the requirement that payments be made by the ‘‘aircraft owner.’’ Such an PO 00000 Frm 00117 Fmt 4700 Sfmt 4700 4993 interpretation would be inconsistent with a plain reading of the statute and would violate a fundamental principle of statutory construction—that effect must be given, if possible, to every word Congress uses in the statute. See U.S. v. Menasche, 348 U.S. 528, 538–539 (1955). Further, as described in the preamble to the proposed regulations, a fundamental aspect of administering the Federal excise tax laws is respecting each entity as an entity separate from its owner. See § 1.1361–4(a)(8) of the Income Tax Regulations and § 301.7701–2(c)(2)(v) of the Procedure and Administration Regulations. This longstanding treatment of a whollyowned entity as an entity separate from its owner for Federal excise tax purposes applies even though the entity may not be viewed as separate from its owner for Federal income tax purposes. Consistent with this longstanding treatment, final § 40.0–1(d) of the Excise Tax Procedural Regulations makes it clear that each business unit that is required to have a separate Employer Identification Number is treated as a separate person. The Treasury Department and the IRS decline to create what would effectively be an exception to the way certain entities are treated for Federal excise tax purposes because this would create unnecessary confusion among taxpayers and IRS examiners. For example, it would not be appropriate to respect an entity for fuel excise tax liability and reporting purposes but then disregard the same entity for purposes of the aircraft management services exemption even though a transaction may involve the same aircraft. Based on the foregoing, the final regulations do not generally incorporate the commenters’ request to expand the definition of ‘‘aircraft owner’’ to include disregarded entities, members of an affiliated group, or family members of the owner. Instead, the final regulations clarify that amounts paid for aircraft management services by a party related to the aircraft owner (including members of an affiliated group, members of a limited liability company, disregarded entities, and family members) are not amounts paid by the aircraft owner solely by virtue of the relationship between the aircraft owner and the related party. The final regulations further clarify that if one related party leases an aircraft to another related party, amounts paid by the lessee to an aircraft management services provider for aircraft management services related to the leased aircraft qualify for the aircraft management services exemption, E:\FR\FM\19JAR1.SGM 19JAR1 4994 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES provided the lease is not a disqualified lease and all other requirements of section 4261(e)(5) are satisfied. v. Principal-Agent Proposed § 49.4261–10(a)(1) provided, in relevant part, that the aircraft management services exemption does not apply to amounts paid to an aircraft management services provider on behalf of an aircraft owner (other than in a principal-agent scenario in which the aircraft owner is the principal). A commenter requested that the final regulations clarify what relationships qualify as a ‘‘principal-agent scenario’’ for purposes of qualifying payments for the aircraft management services exemption. The commenter noted that all entities, depending on the type of entity formation, have one or more officers, directors, managers, members or partners that may be in a principalagent relationship with an aircraft owner. Therefore, the commenter suggested that the final regulations clarify that for purposes of § 49.4261– 10(a)(1), officers and directors of corporations, managers and members of limited liability companies (LLCs), and partners of a partnership are deemed agents when such corporations, LLCs, or partnerships are the aircraft owner. Alternatively, the commenter suggested that the final regulations clarify that the agency laws of the individual fifty states should be recognized for purposes of determining whether a principal-agent relationship exists between an aircraft owner and another person. As a general matter, for Federal tax purposes, state agency law applies in determining whether a principal-agent relationship exists. Likewise, in the context of the aircraft management services exemption, state law applies in determining whether the relationship between the aircraft owner and another person is a principal-agent relationship. Therefore, the final regulations adopt the principal-agent language from the proposed regulations as written. The Treasury Department and the IRS will consider providing additional guidance on this issue and invite comments regarding whether a principal-agent rule that relates specifically to the aircraft management services exemption is necessary. Any comments that favor additional guidance should include suggestions for how a more detailed principal-agent rule should be structured. Unless and until the Treasury Department and the IRS provide additional guidance, state agency law applies in determining whether a principal-agent relationship exists between the aircraft owner and another person. VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 vi. Evidence That Payments Are Made by the Aircraft Owner Regarding proposed § 49.4261– 10(a)(3), a commenter requested that the final regulations clarify what facts or evidence are sufficient to show that the aircraft owner is the party making the payments to the aircraft management services provider so that those payments qualify for the aircraft management services exemption. The commenter suggested that the final regulations provide that ‘‘reasonable documentation’’ from the aircraft owner stating that payments for aircraft management services originate from a source covered by the aircraft management services exemption will satisfy the aircraft management services provider’s obligation to determine whether a payment comes from a permissible source and constitutes adequate documentation thereof. The commenter believes that including this rule in the final regulations will improve administrability for both aircraft management services providers and the IRS. The task of verifying the source of every payment received by an aircraft management services provider for services related to an aircraft owner’s aircraft is a burdensome one for aircraft management services providers. Verification is important because if a payment is received from someone other than the aircraft owner (as that term is defined in the final regulations), the aircraft management services exemption does not apply and the aircraft management services provider must collect any applicable air transportation tax on the amount paid. If the aircraft management services provider fails to do so, section 4263(c) applies. See also § 49.4261–1(b)(2). The Treasury Department and the IRS recognize that in the context of the aircraft management services exemption, it is important for aircraft management services providers to understand their obligations with regard to verifying that payments are made by aircraft owners and that failure to verify may trigger the application of section 4263(c). However, because section 4263(c) has broad implications for all members of the air transportation industry, issues related to section 4263(c) require additional study and input from a broader cross-section of stakeholders in the air transportation industry. Accordingly, these issues should be addressed in a separate published guidance project. PO 00000 Frm 00118 Fmt 4700 Sfmt 4700 vii. Substantial Incidents of Ownership Proposed § 49.4261–10(b)(3)(i) provided, in relevant part, that the term ‘‘aircraft owner’’ means an individual or entity that leases or owns (that is, holds title to or substantial incidents of ownership in) an aircraft managed by an aircraft management services provider, commonly referred to as a ‘‘managed aircraft.’’ The Treasury Department and IRS did not receive comments specifically relating to the ‘‘substantial incidents of ownership’’ language. However, the ‘‘substantial incidents of ownership’’ language is problematic because, among other things, it creates an opportunity for abuse by providing a mechanism by which parties can circumvent the disqualified lease rule in section 4261(e)(5)(C). For example, parties that wish to enter into an aircraft lease for 31 days or less could structure the transaction as a transfer of substantial incidents of ownership in the aircraft for a period of 31 days or less. By doing so, the parties could avoid creating a disqualified lease while still availing themselves of the exemption in section 4261(e)(5). Congress clearly did not intend for the aircraft management services exemption to apply in such situations as evidenced by the disqualified lease language in section 4261(e)(5)(C). Because of these concerns, the final regulations clarify that the phrase ‘‘substantial incidents of ownership’’ in § 49.4261–10(b)(3)(i) does not apply to an interest with a duration of 31 days or less. viii. Other Changes Related to the Definition of Aircraft Owner As stated earlier, proposed § 49.4261– 10(b)(3)(i) defined ‘‘aircraft owner’’, in relevant part, in terms of ‘‘an individual or entity.’’ Final § 49.4261–10(b)(3)(i) replaces the phrase ‘‘individual or entity’’ with the word ‘‘person.’’ This change improves the precision of the aircraft owner definition because the Code provides a generally applicable definition of ‘‘person’’ in section 7701(a)(1). This change also makes § 49.4261–10(b)(3)(i) easier to read. b. Fractional Ownership Aircraft and Other Arrangements Proposed § 49.4261–10(b)(3)(ii) provided that a participant in a fractional aircraft ownership program, as defined in section 4043(c)(2) of the Code, does not qualify as an aircraft owner of the program’s managed aircraft if the amount paid for such person’s participation is exempt from air transportation excise tax by reason of section 4261(j). Proposed § 49.4261– 10(b)(3)(ii), referred to herein as the E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations ‘‘other arrangements anti-abuse rule,’’ further provided that a participant in a business arrangement that seeks to circumvent the surtax imposed by section 4043 by operating outside of subpart K of 14 CFR part 91, and that allows an aircraft owner the right to use any of a fleet of aircraft (through an aircraft interchange agreement, through holding nominal shares in a fleet of aircraft, or any other similar arrangement), is not an aircraft owner with respect to any of the aircraft owned or leased as part of that business arrangement. A commenter observed that the other arrangements anti-abuse rule appears to be aimed at persons who create a structure providing access to a fleet of aircraft that fails to meet the definition of ‘‘fractional ownership aircraft program’’ in section 4043 in an effort to avoid the fuel surtax imposed by section 4043, while retaining the right to claim the aircraft management services exemption to also avoid paying air transportation excise tax. The commenter further observed that the phrase ‘‘seeking to circumvent the surtax imposed by section 4043’’ in the other arrangements anti-abuse rule indicates that for the rule to apply, the primary intent in creating the arrangement must be to avoid the section 4043 surtax. Thus, the commenter noted, if there is a legitimate non-tax business purpose for creating the structure, the other arrangements anti-abuse rule should not apply, and the aircraft management services exemption should apply to amounts paid for aircraft management services relating to the aircraft in the structure. The commenter also observed that the phrase ‘‘right to use any of a fleet of aircraft (through an aircraft interchange agreement, through holding nominal shares in a fleet of aircraft, or any other similar arrangement)’’ in the proposed rule appears to apply to structures that are akin to fractional programs, but do not meet the definition of a fractional program in section 4043(c)(2). Based on the foregoing observations, the commenter disagreed with several aspects of the other arrangements antiabuse rule. First, the commenter disagreed with the proposed rule as unclear regarding how it would apply to structures that provide access to a fleet of aircraft that exist for reasons unrelated to the applicability of the fuel surtax imposed by section 4043. The commenter further disagreed with the proposed rule for failing to define the point at which a structure becomes enough like a fractional ownership aircraft program for the rule to apply. Finally, the commenter disagreed with VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 the proposed rule because the commenter believes that it can be misinterpreted to include various legitimate structures in which aircraft management services are provided, including (a) instances where a substitute aircraft is provided from the aircraft management services provider’s charter fleet (which is addressed in proposed § 49.4261–10(c)); (b) leasing structures where a lessor is providing an insured and maintained aircraft but no pilots (which would not have previously been subject to the tax under the possession, command and control test); and (c) the routine use of interchange agreements between aircraft owners. The Treasury Department and the IRS share the concerns of the commenter that the proposed other arrangements anti-abuse rule may capture aircraft ownership structures and leasing arrangements that are legitimate and not created for purposes of circumventing the fuel surtax imposed by section 4043. The Treasury Department and the IRS are further concerned that the other arrangements anti-abuse rule would create too much taxpayer uncertainty and confusion, which would be compounded by the similarly worded rule in proposed § 49.4261–10(i) (see later discussion of this rule). As a result, the final regulations in § 49.4261– 10(b)(3)(ii) do not include the other arrangements anti-abuse rule. Therefore, the final regulations in § 49.4261– 10(b)(3)(ii) merely clarify and confirm that a participant in a fractional ownership aircraft program is not an aircraft owner for purposes of the exemption in section 4261(e)(5) if the amount paid for such person’s participation is exempt from the tax imposed by section 4261 by reason of section 4261(j). c. Definition of Disqualified Lease Proposed § 49.4261–10(b)(4) provided that the term ‘‘disqualified lease’’ has the meaning given to it by section 4261(e)(5)(C)(ii). Proposed § 49.4261– 10(b)(4), referred to herein as the ‘‘disqualified lease anti-abuse rule,’’ further provided that a disqualified lease also includes any arrangement that seeks to circumvent the rule in section 4261(e)(5)(C)(ii) by providing a lease term that is greater than 31 days but does not provide the lessee with exclusive and uninterrupted access and use of the leased aircraft, as identified by the aircraft’s airframe serial number and tail number. In addition, proposed § 49.4261–10(b)(4) provided that the fact that a lease permits the lessee to use the aircraft for for-hire flights, as defined in § 49.4261–10(b)(5), when the lessee is PO 00000 Frm 00119 Fmt 4700 Sfmt 4700 4995 otherwise not using the aircraft does not, because of this fact alone, cause a lease with a term that is greater than 31 days to be a disqualified lease. A commenter disagreed with the disqualified lease anti-abuse rule as a general matter, because, in the commenter’s opinion, it significantly expands the definition of ‘‘disqualified lease’’ beyond the definition provided in the statute, ensnaring common nonabusive situations that should not be subject to the rule, and frustrating the intended purpose of the statute. The commenter also disagreed with several specific aspects of the disqualified lease anti-abuse rule. First, the commenter disagreed with the disqualified lease anti-abuse rule for not including language limiting its application to only a lease of an aircraft from a person providing aircraft management services for such aircraft. Second, the commenter disagreed with the requirement in the disqualified lease anti-abuse rule that the lease should provide the lessee with exclusive and uninterrupted access and use of the leased aircraft as overly broad. The commenter stated that the problem with this aspect of the disqualified lease anti-abuse rule is that many aircraft are leased on a nonexclusive basis for valid business purposes, such as liability protection, state sales and use tax compliance, and FAA regulatory requirements. Third, the commenter disagreed with the disqualified lease anti-abuse rule as improperly subjecting entity-based coownership structures to air transportation excise tax. To illustrate this concern, the commenter offered as an example a situation in which two pilots form a limited liability company to purchase an aircraft. For FAA regulatory compliance reasons, the LLC enters into non-exclusive aircraft dry leases with each of the pilots who will operate the aircraft. Since neither lessee in such an arrangement would have exclusive and uninterrupted use of the aircraft, the proposed disqualified lease anti-abuse rule would cause those otherwise qualified leases to be disqualified leases. Fourth, the commenter observed that the ‘‘for hire’’ language in the disqualified lease anti-abuse rule allows a lessee to use the leased aircraft to provide ‘‘for hire’’ flights. The commenter disagreed with this aspect of the rule, stating that an aircraft must typically be leased to an on-demand air taxi operator to conduct such for-hire flights. Therefore, the commenter continued, an aircraft owner may lease its aircraft without a crew on a nonexclusive basis directly to an on- E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4996 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations demand air taxi operator in addition to leasing its aircraft without a crew pursuant to a separate non-exclusive lease to a related party for reasons unrelated to air transportation excise tax; in such a case, the aircraft will be leased to each lessee on a non-exclusive basis. The commenter concluded that, based on the language of the disqualified lease anti-abuse rule, these facts could cause the non-exclusive leases to be disqualified leases. Finally, the commenter disagreed with the disqualified lease anti-abuse rule because the commenter believes that it is possible that an aircraft owner that provides limited services relating to the aircraft could be deemed an aircraft management services provider based on the broad definitions of the terms ‘‘aircraft management services’’ and ‘‘aircraft management services provider.’’ The commenter explained that most business aircraft owners provide at least some services, such as insurance, hangarage, or maintenance, when they lease their aircraft for valid business reasons such as liability protection planning, maintenance consistency, insurance requirements, and state sales and use tax compliance. To illustrate the commenter’s concern, the commenter offered the example of an entity that purchases an aircraft and enters into two nonexclusive leases to its parent company and to a sister company with a term greater than 31 days. The lessor may obtain the hangar and the insurance for the aircraft since there is typically one hangar and one insurance policy covering the aircraft even if there is more than one non-exclusive aircraft lessee. Applying the proposed disqualified lease anti-abuse rule to this situation, the commenter concluded that the lessor could be viewed as an aircraft management services provider and the arrangement would be subject to the disqualified lease anti-abuse rule. The commenter further concluded that this scenario would inappropriately broaden the scope of the disqualified lease antiabuse rule since the statutory language was not meant to apply the disqualified lease provision to lessors that provide only partial or limited services. The commenter suggested that final § 49.4261–10(b)(4) remove the disqualified lease anti-abuse rule in its entirety so that the regulatory definition of ‘‘disqualified lease’’ merely restates the statutory definition of the term. The Treasury Department and the IRS share the concerns of the commenter, particularly that the disqualified lease anti-abuse rule may capture common, legitimate leasing arrangements. Therefore, the final regulations remove VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 the disqualified lease anti-abuse language from the definition of ‘‘disqualified lease’’ in § 49.4261– 10(b)(4). As a result, the final version of § 49.4261–10(b)(4) simply defines ‘‘disqualified lease’’ by reference to its statutory definition in section 4261(e)(5)(C)(ii). d. Definition of Private Aviation Proposed § 49.4261–10(a)(2) limited the aircraft management services exemption to aircraft management services related to aircraft used in private aviation. Proposed § 49.4261– 10(b)(6) defined the term ‘‘private aviation’’ as the use of an aircraft for civilian flights except scheduled passenger service. A commenter observed that the apparent intent of proposed § 49.4261–10(a)(2), when read in combination with the definition of ‘‘private aviation’’ in proposed § 49.4261–10(b)(6), is to prevent the aircraft management services exemption from applying to amounts paid for aircraft management services related to scheduled commercial airline aircraft and flights. The commenter also observed that proposed § 49.4261–10(d) makes clear that the aircraft management services exemption is available for aircraft and flights operated under the charter services rules of part 135 of the FAA regulations (14 CFR part 135). The commenter suggested that the final regulations clarify that ‘‘scheduled passenger service’’ refers to flights conducted by airlines that sell tickets on an individual seat basis to the general public. The commenter also suggested that the final regulations further clarify that the term ‘‘private aviation’’ includes charter flights operated under part 135 of the FAA regulations. The Treasury Department and the IRS agree with the commenter that the final regulations should clarify the types of flight operations permitted under the private aviation rule in § 49.4261– 10(a)(2). Therefore, the final regulations incorporate the commenter’s suggested changes to the definition of private aviation provided in § 49.4261–10(b)(8). Specifically, the final regulations clarify that ‘‘scheduled passenger service’’ refers to flights for which tickets are sold on an individual seat basis to the general public. In addition, the definition of private aviation is modified to explicitly include operations conducted under part 135 of the FAA regulations. e. Section 4261(e)(5)(D) Section 4261(e)(5)(D) provides that in the case of amounts paid to any person which (but for section 4261(e)(5)) are subject to air transportation excise tax, PO 00000 Frm 00120 Fmt 4700 Sfmt 4700 a portion of which consists of amounts described in section 4261(e)(5)(A), section 4261(e)(5) ‘‘shall apply on a pro rata basis only to the portion which consists of amounts described in’’ section 4261(e)(5)(A). The Conference Report provides that in the event that a monthly payment made to an aircraft management company is allocated in part to exempt services and flights on the aircraft owner’s aircraft, and in part to flights on aircraft other than that of the aircraft owner, air transportation excise tax must be collected on that portion of the payment attributable to flights on aircraft not owned by the aircraft owner. Proposed § 49.4261–10(c)(1), which generally tracked the pro rata allocation language in the Conference Report, provided that if an aircraft management services provider provides flight services to an aircraft owner on a substitute aircraft during a calendar quarter, air transportation excise tax applies to that portion of the amounts paid by the aircraft owner to the aircraft management services provider, determined on a pro rata basis, that are related to the flight services provided on the substitute aircraft. Stated differently, the proposed regulations provided that when an aircraft owner is provided flights on a substitute aircraft by an aircraft management services provider (for example, when the aircraft owner’s aircraft is unavailable due to maintenance), a portion of the amounts paid by the aircraft owner to the aircraft management services provider is subject to air transportation excise tax. Proposed § 49.4261–10(c)(2) proposed a method, based on the ratio of flight hours provided on a substitute aircraft compared to the total flight hours provided to the aircraft owner on the aircraft owner’s aircraft and on substitute aircraft during a calendar quarter, for calculating the taxable portion of the amount paid to the aircraft management services provider. A commenter objected to proposed § 49.4261–10(c) as unnecessary; the commenter reasoned that—assuming flights provided on a substitute aircraft are treated as charter flights provided by the aircraft management services provider to the aircraft owner and subject to air transportation excise tax— there is no need for a special calculation to determine the amount paid for such flights. Similarly, again assuming flights provided on a substitute aircraft are treated as charter flights provided by the aircraft management services provider to the aircraft owner and subject to air transportation excise tax, multiple commenters objected to proposed § 49.4261–10(c) because it could result E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations in air transportation excise tax being applied to the same air transportation twice—once on the amount paid for the charter on the substitute aircraft and then again on a portion of the amount paid for aircraft management services to the aircraft management services provider providing the substitute aircraft. One commenter offered several comments regarding the allocation methodology in proposed § 49.4261– 10(c)(2). First, the commenter disagreed with the proposed allocation methodology because it may result in air transportation excise tax being imposed on amounts paid for non-transportation items. Second, the commenter disagreed with the proposed allocation methodology because it may result in the application of air transportation excise tax to an amount disproportionate to the fair market value of the transportation services actually provided on the substitute aircraft. Third, the commenter disagreed with the proposed allocation methodology because it promotes a loss of revenue to aircraft management services providers. The commenter explained that to avoid having to pay air transportation excise tax on an allocated portion of the amount paid for aircraft management services, the aircraft owner need only hire the replacement aircraft from an operator different than the one that provides aircraft management services to the aircraft owner. Thus, the commenter asserted that the proposed rule incentivizes aircraft owner behavior that will result in lost revenue to the aircraft management services provider. Fourth, the commenter disagreed with the proposed allocation methodology as increasing taxpayer uncertainty because the amount of air transportation excise tax that results from the method will not be known at the time an aircraft management services provider would invoice an aircraft owner for services provided on a substitute aircraft. A third commenter disagreed with the allocation methodology in proposed § 49.4261–10(c) because the calculation, in the commenter’s view, will ordinarily produce nonsensical results since the cost profile of a substitute aircraft will likely be different from the cost profile for the aircraft owner’s aircraft. The commenter asserted that averaging the costs of two aircraft with different cost profiles will produce an arbitrary result with no rational relationship to a reasonable, fair market charter rate for flights on the substitute aircraft. The commenter further asserted that the allocation methodology calculation will be further skewed if the aircraft ownertaxpayer owns multiple aircraft with VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 varying flight hours from one quarter to the next, buys or sells aircraft during the quarter, or pays multiple aircraft management services providers rather than a single aircraft management services provider. All three commenters suggested that the final regulations either completely remove § 49.4261–10(c), as drafted in the proposed regulations, or that the final regulations adopt a different approach than the proposed allocation methodology. All three commenters also suggested that in situations where a substitute aircraft is provided to an aircraft owner, air transportation excise tax should be calculated based on the amount paid by the aircraft owner for the substitute aircraft (that is, in a manner similar to how air transportation excise tax is calculated on amounts paid for charter flights). A commenter also suggested that if an aircraft owner pays less than fair market value for the use of the substitute aircraft, then air transportation excise tax should be calculated on the fair market value rather than the actual amount paid for the substitute aircraft. In the alternative, if the proposed allocation methodology is incorporated into the final regulations, a commenter suggested that the final regulations provide that when an aircraft owner pays for a substitute aircraft, then the aircraft owner will receive a credit for any air transportation excise tax that it paid in relation to hiring a substitute aircraft against the amount of tax calculated under the allocation methodology. Another commenter suggested that if the proposed allocation methodology is incorporated into the final regulations, then the final regulations provide that an aircraft owner may elect to pay air transportation excise tax on the fair market value of the flight provided on the substitute aircraft rather than pay the air transportation excise tax calculated using the proposed methodology. The comments prompted the Treasury Department and the IRS to reevaluate the approach taken in the proposed regulations with regard to section 4261(e)(5)(D). Based on this reevaluation, the Treasury Department and the IRS reached two conclusions. First, section 4261(e)(5)(D) has broader applicability than just the provision of substitute aircraft as evidenced by the plain language of that provision. Second, the allocation methodology in the proposed regulation is problematic. Specifically, the Treasury Department and the IRS share the concerns expressed by the commenters, PO 00000 Frm 00121 Fmt 4700 Sfmt 4700 4997 particularly with regard to the potential for double taxation and uncertainty under the proposed rule. For these reasons, the final regulations adopt the general approach suggested by the commenters. Specifically, final § 49.4261–10(c)(1) restates section 4261(e)(5)(D) as a generally applicable rule. Final § 49.4261–10(c)(1) further provides that the tax base for the portion that is subject to the tax imposed by section 4261(a) is the amount paid for such flights or services, provided the amount paid is separable and shown in exact amounts in the records pertaining to the charge. This rule is consistent with commenter suggestions and also reflects the general approach in the air transportation excise tax area that the section 4261(a) tax is imposed on the actual amount paid for taxable transportation. The separability element of the rule is consistent with the rule in § 49.4261–2(c) regarding situations in which a payment covers charges for transportation and nontransportation services. If the portion of the amount paid that is subject to the tax imposed by section 4261(a) is not separable and is not shown in exact amounts in the records pertaining to the charge, the tax base is the fair market value of the flights or services; however, the tax base does not exceed the total amount paid (that is, the sum of the portion that is subject to the tax imposed by section 4261(a) and the portion that consists of amounts described in section 4261(e)(5)(A)). For clarity, the final regulations also include a definition of ‘‘fair market value’’ that applies to allocations. The definition of ‘‘fair market value’’ is consistent with commenter suggestions. In addition, final § 49.4261–10(c)(2) treats the provision of a flight on a substitute aircraft to the aircraft owner by an aircraft management services provider as an aircraft charter, with the aircraft owner as the charterer. The final regulations further provide that the allocation rule in final § 49.4261– 10(c)(1) applies in determining the tax base. The final regulations also provide guidance for situations in which a substitute aircraft is used to provide a for-hire flight. In that instance, the final regulations instruct taxpayers and collectors to follow the aircraft charter rules in § 49.4261–7(h)(2). The final regulations update the first example and add a second example in § 49.4261–10(h) to illustrate these rules. f. Aircraft Available for Hire Proposed § 49.4261–10(e)(1) provided that whether an aircraft owner permits E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 4998 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations an aircraft management services provider or other person to use its aircraft to provide for-hire flights (for example, when the aircraft is not being used by the aircraft owner or when the aircraft is being moved in deadhead service) does not affect the application of the aircraft management services exemption. Proposed § 49.4261–10(e)(1) further provided that an amount paid for for-hire flights on the aircraft owner’s aircraft does not qualify for the aircraft management services exemption. Therefore, under proposed § 49.4261–10(e)(1), an amount paid for a for-hire flight on an aircraft owner’s aircraft is subject to air transportation excise tax unless the amount paid is otherwise exempt from air transportation excise tax other than by reason of the aircraft management services exemption. A commenter expressed concern that the wording of proposed § 49.4261– 10(e)(1) may cause confusion and result in the misapplication of air transportation excise tax to amounts paid that should qualify for the aircraft management services exemption. Specifically, the commenter’s concern relates to the second and third sentences of proposed § 49.4261–10(e)(1), which explain that amounts paid for for-hire flights are subject to air transportation excise tax. The commenter observed that under section 4261(e)(5), amounts paid by an aircraft owner for flights on the aircraft owner’s aircraft are exempt from air transportation excise tax. The commenter further observed that under proposed § 49.4261–10(d), operating an aircraft owner’s aircraft under part 135 of the FAA regulations does not affect the application of the aircraft management services exemption. The commenter’s concern is that aircraft operations conducted under part 135 of the FAA regulations could arguably be considered for-hire flights; however, proposed § 49.4261–10(e)(1) does not provide a carve-out for part 135 flights paid for by the aircraft owner. Therefore, in order to clarify that amounts paid by an aircraft owner for flights operated under part 135 are not subject to air transportation excise tax, the commenter suggested that the final regulations incorporate a carve-out by modifying the second sentence of proposed § 49.4261–10(e)(1) to read: ‘‘However, an amount paid for for-hire flights on the aircraft owner’s aircraft, except payments made by such aircraft owner, does not qualify for the section 4261(e)(5) exemption.’’ (emphasis added to denote new wording). The Treasury Department and the IRS agree with the commenter. As a result, VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 final § 49.4261–10(e) incorporates the commenter’s suggested change. g. Coordination With Fuel Tax Provisions Proposed § 49.4261–10(g) provided that taxable fuel (as defined in section 4083(a)) or any liquid taxable under section 4041(c) that is used as fuel on a flight for which amounts paid are exempt from air transportation excise tax by reason of the aircraft management services exemption is not fuel used in commercial aviation, as that term is defined in section 4083(b). Thus, under the proposed rule, if the aircraft management services exemption applies to amounts paid in relation to a flight, then the higher noncommercial fuel tax rate (as compared to the commercial fuel tax rate) automatically applies to fuel used during such flight. A commenter stated that proposed § 49.4261–10(g) is inconsistent with the air transportation excise tax-fuel tax statutory scheme and contrary to Congressional intent with regard to that scheme. The commenter asserted that if Congress had intended that all flights qualifying for the aircraft management services exemption be treated as noncommercial flights for fuel tax purposes, Congress could have adopted a corresponding code section to that effect as it did with other exemptions to air transportation excise tax. Specifically, the commenter pointed to the exemptions to air transportation excise tax provided in sections 4261(h) (skydiving), 4261(i) (seaplanes), 4281 (small aircraft on nonestablished lines), and 4282 (affiliated group members), each of which section 4083(b) explicitly excludes from the definition of ‘‘commercial aviation’’ for purposes of determining applicable fuel tax rates. By not providing a similar, explicit definitional exclusion in section 4083(b) (or other Code section) for the aircraft management services exemption, the commenter asserted, Congress left the determination of which fuel tax rate— commercial or non-commercial— applies to a particular flight to the application of the general definition of ‘‘commercial aviation’’ in section 4083(b). Therefore, the commenter suggested that the final regulations provide that if the aircraft management services exemption applies to amounts paid for a flight, the determination of whether fuel used during the flight is subject to commercial or noncommercial fuel tax rates is made simply through an application of the definition of commercial aviation provided in section 4083(b). The Treasury Department and the IRS agree with the commenter that proposed PO 00000 Frm 00122 Fmt 4700 Sfmt 4700 § 49.4261–10(g) is inconsistent with the air transportation excise tax-fuel excise tax statutory scheme. As a result, the final regulations do not adopt the rule in proposed § 49.4261–10(g). The rule in proposed § 49.4261–10(e)(2) relating to fuel used in for-hire flights is similarly inconsistent with the air transportation excise tax-fuel excise tax statutory scheme. Therefore, the final regulations also do not adopt the rule proposed in § 49.4261–10(e)(2). Because final § 49.4261–10 does not provide fuel excise tax guidance related to the exemption in section 4261(e)(5), persons affected by the aircraft management services exemption should continue to follow current statutory, regulatory, and administrative guidance related to the rates of tax for aviation fuel. h. Coordination With Fractional Ownership Aircraft Exemption; AntiAbuse Rule Proposed § 49.4261–10(i) provided, in relevant part, that the aircraft management services exemption does not apply to any amount paid for aircraft management services by a participant in any transaction or arrangement, or through other means, that seeks to circumvent the surtax imposed by section 4043. A commenter expressed concern that confusion could result from the phrasing of the first sentence of proposed § 49.4261–10(i) because it is essentially identical to the phrasing of the second sentence of proposed § 49.4261–10(b)(3)(ii) (excluding fractional aircraft ownership programs and similar arrangements from the definition of ‘‘aircraft owner’’). The commenter suggested that the first sentence in the final version of § 49.4261–10(i) simply cross-reference § 49.4261–10(b)(3)(ii), rather than repeating the similar language. Specifically, the commenter suggested the following language for the first sentence of final § 49.4261–10(i): ‘‘The aircraft management services exemption does not apply to any amount paid for aircraft management services by a participant in the type of business arrangement described in [§ 49.4261– 10(b)(3)(ii)] that does not qualify the participant as an aircraft owner.’’ The Treasury Department and the IRS believe that the rule in proposed § 49.4261–10(i) is problematic for the same reasons as the other arrangements anti-abuse rule in proposed § 49.4261– 10(b)(3)(ii) (discussed earlier); specifically, it may capture aircraft ownership structures that are legitimate and not created for purposes of circumventing the fuel surtax imposed by section 4043. The Treasury Department and the IRS further believe E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations that, like the other arrangements antiabuse rule in proposed § 49.4261– 10(b)(3)(ii), the rule in proposed § 49.4261–10(i) would have created taxpayer uncertainty and confusion. Because the final regulations in § 49.4261–10(b)(3)(ii) clarify that a participant in a fractional ownership aircraft program is not an aircraft owner for purposes of the exemption in section 4261(e)(5), an additional coordination rule is redundant. As a result, the final regulations do not adopt proposed § 49.4261–10(i). khammond on DSKJM1Z7X2PROD with RULES i. Adequate Records Proposed § 49.4261–10(a)(3) stated that in order to qualify for the aircraft management services exemption, an aircraft owner and aircraft management services provider must maintain adequate records to show that the amounts paid by the aircraft owner to the aircraft management services provider relate to aircraft management services for the aircraft owner’s aircraft or for flights on the aircraft owner’s aircraft. A commenter requested that the final regulations provide guidance on the types of records required to satisfy this requirement. The Treasury Department and the IRS agree. Accordingly, the final regulations add language to § 49.4261– 10(a)(3) stating that such records may include the agreement, if any, between the aircraft owner and the aircraft management services provider, evidence of aircraft ownership, evidence that amounts paid for aircraft management services came from the aircraft owner, the aircraft management services provider’s fee schedule, and documents to support any allocations required under the pro rata allocation rule. j. Examples Proposed § 49.4261–10(j) included two examples illustrating certain aspects of the rules in proposed § 49.4261–10. Proposed § 49.4261– 10(j)(1) (Example 1) illustrated the substitute aircraft allocation methodology in proposed § 49.4261– 10(c)(1) and (2). Proposed § 49.4261– 10(j)(1)(i) (presenting the facts of Example 1) stated, in relevant part, that: A commenter stated that it interpreted proposed § 49.4261–10(j)(1)(i) (presenting the facts of Example 1) as saying that if a company hires an aircraft management company to provide only pilot services to the aircraft owner, then—but for the aircraft management services exemption—air transportation excise tax would apply to the amounts paid by the aircraft owner to the aircraft management services provider. Based on its interpretation, the VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 commenter expressed its opinion that the example presents an extreme position with regard to the application of air transportation excise tax to an aircraft owner-aircraft management services provider relationship. The commenter further stated that the second sentence in proposed § 49.4261– 10(j)(1)(i) may cause confusion regarding the application of the possession, command, and control test in cases that are not governed by section 4261(e)(5). In addition, the commenter stated that the second sentence in proposed § 49.4261–10(j)(1)(i) is irrelevant to the rest of the example, thereby compounding the other problems that the commenter mentioned. The commenter suggested that the final regulations remove the second sentence from § 49.4261– 10(j)(1)(i). As noted earlier, the final regulations include a revised pro rata allocation rule. The final regulations also revise the first example (including deletion of the second sentence) and add a second example to illustrate the revised pro rata allocation rule. In addition, the final regulations revise the third example (proposed § 49.4261–10(j)(2)) to remove the fuel references in light of the decision not to adopt proposed § 49.4261–10(e)(2) and (g) in the final regulations. III. Generally Applicable Air Transportation Excise Tax Rules and Aircraft Charter Rules a. Payment and Collection Obligations Proposed § 49.4261–1(b)(1) restated, in general terms, statutory provisions and existing regulations related to the duties and obligations of a person that makes a payment subject to the taxes imposed by section 4261 (that is, the taxpayer) and a person that receives such payments (that is, the collector). The duties and obligations include those imposed on the collector to collect the applicable tax from the taxpayer, to report the tax on Form 720, Quarterly Federal Excise Tax Return, and to remit the tax to the IRS. The duties and obligations enumerated in the proposed regulations also include the requirement that the collector make semimonthly deposits of the taxes imposed by section 4261. Proposed § 49.4261–1(b)(2) restated the rule in section 4263(c), which provides that if any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, to the extent the tax is not collected under any other provision of subchapter C of chapter 33 of the Code, the tax must be paid by the carrier PO 00000 Frm 00123 Fmt 4700 Sfmt 4700 4999 providing the initial segment of transportation that begins or ends in the United States. Regarding proposed § 49.4261–1(b)(1), a commenter expressed concern that current published guidance (primarily in the form of revenue rulings) does not adequately address the duties and obligations of charter brokers with regard to collecting and reporting air transportation excise tax. The commenter described a charter broker as an intermediary that charters aircraft from a certificated air carrier (who actually provides the flight services), and that may act as an agent of the air carrier, an agent of the passengers, or as a principal in the chartering transaction. The commenter stated that the lack of guidance related to charter brokers has created considerable confusion in the charter broker industry. Further, the commenter stated that the need for clear and precise guidance is compounded by the aircraft charter rules provided in proposed § 49.4261–7(h) (discussed later) and section 4263(c), which imposes liability on the air carrier providing the initial segment of transportation that begins or ends in the U.S. in cases where any tax imposed by section 4261 is not paid at the time the payment for transportation is made. Therefore, the commenter requested that the final regulations provide guidance regarding the circumstances in which a charter broker (rather than an air carrier) is obligated to collect air transportation excise tax and file Forms 720. The commenter suggested that such guidance should be consistent with the approaches taken in Rev. Rul. 68–256, 1968–1 C.B. 489; Rev. Rul. 75–296, 1975–2 C.B. 440; and Rev. Rul. 2006–52, 2006–2 C.B. 761. Regarding proposed § 49.4261–1(b)(2), a commenter stated that the obligation placed on the air carrier to pay the tax imposed by section 4261 if the party responsible for collecting it fails to do so creates confusion and unfair liability exposure for the air carrier. Further, the commenter stated, as an example, that an IRS examiner could assert tax liability on the air carrier for uncollected tax when the air carrier has no means to determine whether another responsible party, such as a charter broker, had collected and paid over the tax. To alleviate these concerns, the commenter suggested that the final regulations provide that if an air carrier documents that it informed the charter broker of its obligation to collect the taxes imposed by section 4261 and file Forms 720 (see the discussion of proposed § 49.4261–7(h) later), then the air carrier will not be liable for uncollected tax under section 4263(c). E:\FR\FM\19JAR1.SGM 19JAR1 5000 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES The commenter also suggested that the final regulations provide that if the IRS asserts liability on an air carrier under section 4263(c) (irrespective of whether the air carrier can show that it informed the charter broker of its obligations to collect and report) during an examination, then the air carrier should be entitled to obtain information from the IRS on whether the tax was paid by the charter broker or any other party. The Treasury Department and the IRS understand and share the commenters’ concerns related to uncertainty and the possibility of surprise that may result from another party’s IRS examination because of the rules in section 4263(c) and proposed § 49.4261–1(b)(2). Because the interactions between section 4263(c) and other air transportation excise tax rules are complex and have broad implications for other members of the air transportation industry, the Treasury Department and the IRS believe that these issues require additional study and input from a broader cross-section of the air transportation industry. Further, the Treasury Department and the IRS believe that section 4263(c) issues should be addressed in a separate published guidance project that could also potentially consider the interplay between section 4263(c) and the existing regulatory rules in § 49.4261–7(h) and § 49.4291–1. However, because, as mentioned earlier, proposed § 49.4261–1(b)(1) merely restated currently applicable statutory and regulatory rules, the final regulations adopt proposed § 49.4261– 1(b)(1) without change. In addition, the final regulations do not adopt the second sentence of proposed § 49.4261– 1(b)(2) so that the final regulations simply track the language of section 4263(c), as currently written, without further comment. The Treasury Department and the IRS believe it is necessary to finalize these rules because the existing regulations related to section 4263(c) reflect prior law, which has created widespread confusion among taxpayers and collectors in the air transportation area. b. Aircraft Charters Proposed § 49.4261–7(h), which generally restated existing rules in § 49.4261–7(h), provided rules related to the application of the taxes imposed by section 4261 to situations in which a person provides air transportation services on an aircraft that was chartered from—and operated by— another party, commonly referred to as a ‘‘wet lease.’’ Proposed § 49.4261– 7(h)(2) provided that the charterer of an aircraft who sells transportation to other VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 persons must collect and account for the tax with respect to all amounts paid to the charterer by such other persons. The proposed rule further provided that, in such a case, no tax will be due on the amount paid by the charterer for the charter of the aircraft but that it is the duty of the owner of the aircraft to advise the charterer of the charterer’s obligation for collecting, accounting for, and paying over the tax to the IRS. This requirement is intended to ensure the parties communicate with each other regarding air transportation excise tax and prevent misunderstandings about which party is responsible for collecting tax under the arrangement. Two commenters requested clarification regarding the duty of the ‘‘owner of the aircraft to advise the charterer of the charterer’s obligations for collecting, accounting for, and paying over the tax’’ to the IRS imposed under the proposed rule. A commenter stated that in the air charter industry, the air carrier does not typically own the aircraft used to provide charter flights. Because the proposed rule imposes on the aircraft owner the duty to advise the charterer of its obligations, the commenter stated that confusion about which party must advise the charterer may result from the phrasing of the proposed rule. The commenter suggested the proposed rule use the phrase ‘‘air carrier’’ rather than ‘‘owner of the aircraft.’’ A commenter also requested clarification about how and when the duty to advise the charterer of its obligations with regard to air transportation excise tax must be satisfied. Specifically, the commenter asked whether the duty to advise applies separately to each specific charter flight, or whether the duty may be satisfied as part of a long-term underlying agreement between the aircraft owner and the charterer such as a lease agreement for the aircraft owner’s aircraft entered into by the aircraft owner and the charterer. The commenter also requested clarification regarding whether the duty to advise the charterer of its obligations with regard to air transportation excise tax creates an obligation on the part of the aircraft owner to collect the tax if the charterer fails to do so. The Treasury Department and the IRS understand and share the commenters’ concern that, because the owner of a chartered aircraft may not be the party that operates the aircraft, the phrasing of the proposed rule may cause confusion. In addition, the Treasury Department and the IRS understand the need for clarification regarding the duty of the aircraft owner to advise the charterer of PO 00000 Frm 00124 Fmt 4700 Sfmt 4700 its collection obligations. However, because these rules are complex and have broad applicability to the air transportation industry, additional study and stakeholder input is required. Accordingly, a separate published guidance project is necessary to address: (a) the possible shifting of the duty to advise the charterer about its obligations for collecting, accounting for, and paying over the tax to the IRS to the air carrier operating the chartered aircraft instead of the owner of the chartered aircraft; (b) whether the duty to advise applies separately to each specific charter flight, or whether the duty may be satisfied as part of a long-term agreement between the aircraft owner and the charterer; and (c) whether the duty to advise the charterer of its obligations with regard to air transportation excise tax creates an obligation on the part of the aircraft owner to collect the tax if the charterer fails to do so. Because proposed § 49.4261–7(h) merely restated currently applicable rules, the final regulations adopt proposed § 49.4261–7(h) without change. Until additional guidance is issued, § 49.4261–7(h), as finalized, and other existing published guidance apply. Effect on Other Documents Revenue Ruling 67–414 (1967–2 C.B. 382), Revenue Ruling 72–309 (1972–1 C.B. 348), and Revenue Ruling 2002–34 (2002–1 C.B. 1150) are obsoleted on January 19, 2021. Applicability Dates For dates of applicability, see §§ 40.0– 1(e), 49.4261–1(g), 49.4261–2(d), 49.4261–3(e), 49.4261–7(k), 49.4261– 9(c), 49.4261–10(i), 49.4262–1(f), 49.4262–2(e), 49.4262–3(e), 49.4281– 1(e), 49.4263–1(b), 49.4263–3(b), 49.4271–1(g), and 49.4721–2. Special Analyses This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this final rule will not have a significant economic impact on a substantial number of small entities. Although the rule may affect a substantial number of small entities, the economic impact of the regulations is not likely to be significant. Data are not readily available about the number of E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations taxpayers affected, but the number is likely to be substantial for both large and small entities because the rule may affect entities that serve as holding companies for aircraft that do not have many revenues or employees. The economic impact of these regulations is not likely to be significant, however, because these final regulations primarily clarify the application of the aircraft management services exception added to the Code by the TCJA. These final regulations will assist taxpayers in understanding the rules to qualify for the exemption under section 4261(e)(5) and make it easier for taxpayers to comply and IRS examiners to administer the exemption. Accordingly, the Secretary of the Treasury’s delegate certifies that the rule will not have a significant economic impact on a substantial number of small entities. Notwithstanding this certification, the Treasury Department and the IRS welcome comments on the impact of these regulations on small entities. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business. No comments were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices and other guidance cited in this document are published in the Internal Revenue Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. The principal author of these regulations is Michael H. Beker, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development. Paragraph 1. The authority citation for part 40 is amended by removing the entry for § 40.6071(a)–3 to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 40.0–1 is amended by redesignating paragraph (d) as paragraph (e), adding a new paragraph (d), and revising newly redesignated paragraph (e) to read as follows: ■ § 40.0–1 Introduction. * * * * * (d) Person. For purposes of this part, each business unit that has, or is required to have, a separate employer identification number is treated as a separate person. Thus, business units (for example, a parent corporation and a subsidiary corporation, a partner and the partner’s partnership, or the various members of a consolidated group), each of which has, or is required to have, a different employer identification number, are separate persons. (e) Applicability date—(1) Paragraphs (a), (b), and (c) of this section. Paragraphs (a), (b), and (c) of this section apply to returns for periods beginning after March 31, 2013. For rules that apply before that date, see 26 CFR part 40, revised as of April 1, 2012. (2) Paragraph (d) of this section. Paragraph (d) of this section applies to returns for periods beginning on or after January 19, 2021. For rules that apply before that date, see 26 CFR part 40, revised as of April 1, 2020. § 40.6071(a)–3 [Removed] Par. 3. Section 40.6071(a)–3 is removed. PART 49—FACILITIES AND SERVICES EXCISE TAX REGULATIONS Par. 4. The authority citation for part 49 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805. * * * Par. 5. Section 49.4261–1 is revised to read as follows: 26 CFR Part 40 khammond on DSKJM1Z7X2PROD with RULES PART 40—EXCISE TAX PROCEDURAL REGULATIONS ■ List of Subjects § 49.4261–1 Excise taxes, Reporting and recordkeeping requirements. 26 CFR Part 49 Excise taxes, Reporting and recordkeeping requirements, Telephone, Transportation. 16:33 Jan 17, 2021 Accordingly, 26 CFR parts 40 and 49 are amended as follows: ■ Drafting Information VerDate Sep<11>2014 Adoption of Amendments to the Regulations Jkt 253001 Imposition of tax; in general. (a) In general. Section 4261 of the Internal Revenue Code (Code) imposes three separate taxes on amounts paid for certain transportation of persons by air. Tax attaches at the time of payment for any transportation taxable under section 4261. The applicability of each section PO 00000 Frm 00125 Fmt 4700 Sfmt 4700 5001 4261 tax is generally determined on a flight-by-flight basis. (1) Percentage tax. Section 4261(a) imposes a 7.5 percent tax on the amount paid for the taxable transportation of any person. See section 4262(a) of the Code and § 49.4262–1(a) for the definition of the term taxable transportation. (2) Domestic segment tax. Section 4261(b)(1) imposes a $3 tax (indexed annually for inflation pursuant to section 4261(e)(4)) on the amount paid for each domestic segment of taxable transportation. See section 4261(b)(2) for the definition of the term domestic segment. The domestic segment tax does not apply to a domestic segment beginning or ending at an airport that is a rural airport for the calendar year in which the segment begins or ends (as the case may be). See section 4261(e)(1)(B) for the definition of the term rural airport. (3) International travel facilities tax. Section 4261(c) imposes a $12 tax (indexed annually for inflation pursuant to section 4261(e)(4)) on any amount paid (whether within or without the United States) for any transportation by air that begins or ends in the United States. The international travel facilities tax does not apply to any transportation that is entirely taxable under section 4261(a) (determined without regard to sections 4281 and 4282). See section 4261(c)(2). A special rule applies to Alaska and Hawaii flights. See section 4261(c)(3). (b) Payment and collection obligations—(1) In general. The taxes imposed by section 4261 are collected taxes. In general, the person making the payment subject to tax is the taxpayer. See section 4261(d). The person receiving the payment is the collector (also commonly referred to as the collecting agent). See section 4291 of the Code. The collector must collect the applicable tax from the taxpayer, report the tax on Form 720, Quarterly Federal Excise Tax Return, and remit the tax to the Internal Revenue Service. See sections 4291, 6011, and 7501 of the Code. See § 40.6011(a)–1 of this chapter and § 49.4291–1. The collector must also make semimonthly deposits of the taxes imposed by section 4261. See section 6302(e) of the Code. See §§ 40.0– 1(c), 40.6302(c)–1, and 40.6302(c)–3 of this chapter. See section 4263(a) and (c) of the Code for special rules relating to the payment and collection of tax. (2) Failure to collect tax. If any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, to the extent the tax is not collected under any other provision of subchapter C of chapter 33 of the Code, E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 5002 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations the tax must be paid by the carrier providing the initial segment of transportation that begins or ends in the United States. See section 4263(c). See section 6672 of the Code for rules relating to the application of the trust fund recovery penalty. (c) Type of aircraft. The taxes imposed by section 4261 generally apply regardless of the type of aircraft on which the transportation is provided, provided all of the other conditions for liability are present and no specific statutory exemption applies. See paragraph (f) of this section for a list of statutory exemptions from tax. Amounts paid for the transportation of persons by air cushion vehicles, also known as hovercraft, are not subject to the taxes imposed by section 4261. (d) Purpose of transportation. The purpose of the transportation (for example, business or pleasure) is not a factor in determining taxability under section 4261. (e) Routes. Amounts paid for transportation may be taxable even if the transportation is not between two definite points. Unless otherwise exempt, a payment for continuous transportation that begins and ends at the same point is subject to tax. See section 4281 of the Code and § 49.4281– 1 for the exemption for small aircraft on nonestablished lines. (f) Exemptions from tax; crossreferences—(1) Aircraft management services. For the exemption for certain aircraft management services, see section 4261(e)(5) of the Code and § 49.4261–10. (2) Hard minerals, oil, and gas. For the exemption for certain uses related to the exploration, development, or removal of hard minerals, oil, or gas, see section 4261(f)(1). (3) Trees and logging operations. For the exemption for certain uses related to trees and logging operations, see section 4261(f)(2). (4) Air ambulances. For the exemption for air ambulances providing certain emergency medical transportation, see section 4261(g). (5) Skydiving. For the exemption for certain skydiving uses, see section 4261(h). (6) Seaplanes. For the exemption for certain seaplane segments, see section 4261(i). (7) Fractionally-owned aircraft. For the exemption for certain aircraft in fractional ownership aircraft programs, see section 4261(j). (8) Small aircraft on nonestablished lines. For the exemption for certain small aircraft on nonestablished lines, see section 4281 of the Code and § 49.4281–1. VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 (9) Affiliated groups. For the exemption for certain transportation of members of an affiliated group, see section 4282. (10) United States and territories. For exemptions authorized by the Secretary of the Treasury or his delegate for the exclusive use of the United States, see section 4293. (g) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. ■ Par. 6. Section 49.4261–2 is amended by: ■ 1. Revising paragraphs (a) and (b). ■ 2. Adding paragraph (d). The revisions and addition read as follows: § 49.4261–2 Application of tax. (a) Tax on total amount paid. The tax imposed by section 4261(a) of the Internal Revenue Code (Code) is measured by the total amount paid for taxable transportation, whether paid in cash or in kind. (b) Tax on transportation of each person. The taxes imposed by section 4261(b) and (c) of the Code are head taxes and, therefore, apply on a perpassenger basis. The taxes apply to each passenger for whom an amount is paid, regardless of whether the payment is made as a single lump sum or is made individually for each passenger. In the case of charter flights for which a fixed amount is paid, the section 4261(b) and (c) taxes are computed by multiplying the applicable rate of tax by the number of passengers transported on the aircraft. * * * * * (d) Applicability date. Paragraphs (a) and (b) of this section apply to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. ■ Par. 7. Section 49.4261–3 is amended by: ■ 1. Removing ‘‘§ 49.4262(c)–1’’ wherever it appears and adding ‘‘§ 49.4262–3’’ in its place. ■ 2. In the first sentence of paragraph (a), removing ‘‘The tax imposed by section 4261(a)’’ and adding ‘‘The taxes imposed by section 4261(a) and (b) of the Internal Revenue Code (Code)’’ in its place. ■ 3. In the second sentence of paragraph (a), adding ‘‘under section 4261(a) and (b)’’ at the end of the sentence. ■ 4. Revising paragraphs (b) and (c). ■ 5. In paragraph (d), removing ‘‘section 4262(b) and § 49.4262(b)–1’’ and adding ‘‘section 4262(b) of the Code and § 49.4262–2’’ in its place. ■ 6. Adding paragraph (e). PO 00000 Frm 00126 Fmt 4700 Sfmt 4700 The revisions and additions read as follows: § 49.4261–3 Payments made within the United States. * * * * * (b) Other transportation. In the case of transportation, other than that described in paragraph (a) of this section, for which payment is made in the United States, the taxes imposed by section 4261(a) and (b) apply with respect to the amount paid for that portion of such transportation by air which is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such portion is not a part of uninterrupted international air transportation within the meaning of section 4262(c)(3) of the Code and § 49.4262–3(c). Transportation that: (1) Begins in the United States or the 225–mile zone and ends outside such area, (2) Begins outside the United States or the 225–mile zone and ends inside such area, or (3) Begins outside the United States and ends outside such area, is taxable only with respect to the portion of the transportation by air which is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such portion is not a part of ‘‘uninterrupted international air transportation’’ within the meaning of section 4262(c)(3) and § 49.4262–3(c). Thus, on a trip by air from Chicago to London, England, with a stopover at New York, for which payment is made in the United States, if the portion from Chicago to New York is not a part of ‘‘uninterrupted international air transportation’’ within the meaning of section 4262(c)(3) and § 49.4262–3(c), the taxes would apply to the part of the payment which is applicable to the transportation from Chicago to New York. However, if the portion from Chicago to New York is a part of ‘‘uninterrupted international air transportation’’ within the meaning of section 4262(c)(3) and § 49.4262–3(c), the taxes would not apply. (c) Method of computing tax on taxable portion. Where a payment is made for transportation which is partially taxable under paragraph (b) of this section, the tax imposed by section 4261(a) may be computed on that proportion of the total amount paid which the mileage of the taxable portion of the transportation bears to the mileage of the entire trip. * * * * * (e) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations before that date, see 26 CFR part 49, revised as of April 1, 2020. § 49.4261–4 [Amended] Par. 8. Section 49.4261–4 is amended by: ■ 1. In paragraph (a), removing the first ‘‘4261(a)’’ and adding ‘‘4261 of the Internal Revenue Code (Code)’’ in its place. ■ 2. In paragraph (a), removing ‘‘section 4261(a) (see section 4264(d))’’ and adding ‘‘section 4261 (see section 4263(d) of the Code)’’ in its place. ■ 3. In paragraph (b), removing ‘‘§ 49.4262(c)–1’’ and adding ‘‘§ 49.4262–3’’ in its place. ■ 4. In the first sentence of paragraph (d), removing ‘‘§ 49.4262(c)–1’’ and adding ‘‘§ 49.4262–3’’ in its place. ■ 5. In the first sentence of paragraph (d), removing ‘‘six-hour’’ and adding ‘‘12-hour’’ in its place. ■ § 49.4261–5 [Amended] § 49.4261–7 Examples of payments subject to tax. khammond on DSKJM1Z7X2PROD with RULES * * * * * (h) Aircraft charters—(1) When no charge is made by the charterer of an aircraft to the persons transported, the amount paid by the charterer for the charter of the aircraft is subject to tax. (2) The charterer of an aircraft who sells transportation to other persons must collect and account for the tax with respect to all amounts paid to the charterer by such other persons. In such case, no tax will be due on the amount paid by the charterer for the charter of the aircraft but it shall be the duty of the owner of the aircraft to advise the 16:33 Jan 17, 2021 § 49.4261–8 Jkt 253001 [Amended] Par. 11. Section 49.4261–8 is amended as follows: ■ 1. In the introductory paragraph, removing ‘‘4263, 4292, 4293, or 4294’’ and adding ‘‘4261, 4281, 4282, or 4293 of the Internal Revenue Code’’ in its place. ■ 2. Paragraphs (f)(2), (3), and (5) are removed and reserved. ■ Par. 12. Section 49.4261–9 is revised to read as follows: ■ § 49.4261–9 Par. 9. Section 49.4261–5 is amended as follows: ■ 1. In paragraph (a), removing ‘‘4261(b)’’ wherever it appears and adding ‘‘4261(a) and (b)’’ in its place. ■ 2. In paragraph (c), removing ‘‘§ 49.4262(b)–1’’ and adding ‘‘§ 49.4262–2’’ in its place. ■ Par. 10. Section 49.4261–7 is amended by: ■ 1. In the introductory paragraph, removing ‘‘4263, 4292, 4293, or 4294’’ and adding ‘‘4261, 4281, 4282, or 4293 of the Internal Revenue Code,’’ in its place. ■ 2. Removing and reserving paragraphs (b), (d), (e), and (g). ■ 3. Revising paragraph (h). ■ 4. In paragraph (i), removing ‘‘paragraph (c) of § 49.4261–2 and paragraph (f)(4) of § 49.4261–8’’ and adding ‘‘§§ 49.4261–2(c) and 49.4261– 8(f)(4)’’ in its place. ■ 5. Adding paragraph (k). The revision and addition read as follows: ■ VerDate Sep<11>2014 charterer of the charterer’s obligation for collecting, accounting for, and paying over the tax to the Internal Revenue Service. * * * * * (k) Applicability date. Paragraph (h) of this section applies to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. Mileage awards. (a) Tax imposed. Any amount paid (and the value of any other benefit provided) to an air carrier (or any related person) for the right to provide mileage awards for or other reductions in the cost of any transportation of persons by air is an amount paid for taxable transportation and is therefore subject to the tax imposed by section 4261(a) of the Internal Revenue Code. See section 4261(e)(3)(A). (b) [Reserved] (c) Applicability date. This section applies to amounts paid on and after January 19, 2021. ■ Par. 13. Section 49.4261–10 is revised to read as follows: § 49.4261–10 services. Aircraft management (a) In general—(1) Overview. This section prescribes rules relating to the exemption under section 4261(e)(5) of the Internal Revenue Code (Code) for amounts paid (in cash or in kind) by an aircraft owner to an aircraft management services provider for certain aircraft management services (aircraft management services exemption). Pursuant to section 4261(e)(5), the tax imposed by section 4261 of the Code does not apply to amounts paid by an aircraft owner to an aircraft management services provider for aircraft management services related to maintenance and support of the aircraft owner’s aircraft; or related to flights on the aircraft owner’s aircraft (flight services). The aircraft management services exemption applies to amounts paid by an aircraft owner to an aircraft management services provider for flight services on the aircraft owner’s aircraft, even if the aircraft owner is not on the PO 00000 Frm 00127 Fmt 4700 Sfmt 4700 5003 flight. The aircraft management services exemption does not apply to amounts paid to an aircraft management services provider by another person on behalf of an aircraft owner (other than in a principal-agent scenario in which the aircraft owner is the principal). In addition, amounts paid for aircraft management services by a party related to the aircraft owner are not amounts paid by the aircraft owner solely by virtue of the relationship between the aircraft owner and the related party. However, if an aircraft owner leases an aircraft to another person, including a related party, amounts paid by the lessee to an aircraft management services provider for aircraft management services related to the leased aircraft qualify for the aircraft management services exemption, provided the lease is not a disqualified lease and all other requirements of section 4261(e)(5) are satisfied. For example, amounts paid for aircraft management services by one member of an affiliated group (as that term is defined in section 4282 of the Code) for flights on an aircraft owned by another member of the affiliated group are not amounts paid by the aircraft owner unless the member owning the aircraft leases the aircraft to the member of the affiliated group that pays for the aircraft management services. See paragraph (b) of this section for definitions of terms used in this section. (2) Private aviation. The aircraft management services exemption is limited to aircraft management services related to aircraft used in private aviation. (3) Adequate records required. In order to qualify for the aircraft management services exemption, an aircraft owner and aircraft management services provider must maintain adequate records to show that the amounts paid by the aircraft owner to the aircraft management services provider relate to aircraft management services specifically for the aircraft owner’s aircraft or for flights on the aircraft owner’s aircraft and to support any allocations required under paragraph (c) under of this section. Such records may include the agreement, if any, between the aircraft owner and the aircraft management services provider, evidence of aircraft ownership, evidence that amounts paid for aircraft management services came from the aircraft owner, and the aircraft management services provider’s fee schedule. (b) Definitions. This paragraph provides definitions applicable to this section. E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES 5004 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations (1) Aircraft management services. The term aircraft management services means— (i) Statutory services. The services listed in section 4261(e)(5)(B)(i)–(v); and (ii) Other services. Any service (including, but not limited to, purchasing fuel, purchasing aircraft parts, and arranging for the fueling of an aircraft owner’s aircraft) provided directly or indirectly to an aircraft owner in order to provide air transportation to the aircraft owner on the aircraft owner’s aircraft at a level and quality of service required under the agreement between the aircraft owner and the aircraft management services provider. (2) Aircraft management services provider. The term aircraft management services provider means a person that provides aircraft management services to an aircraft owner. (3) Aircraft owner—(i) In general. Except as otherwise provided in this section, the term aircraft owner means a person that owns an aircraft managed by an aircraft management services provider (commonly referred to as a managed aircraft), or a person that leases a managed aircraft (lessee) pursuant to a lease that is not a disqualified lease. A person owns a managed aircraft if the person holds legal title to the aircraft, or if the person holds substantial incidents of ownership in the aircraft for a period of more than 31 days. A lessee includes the beneficiary of an owner trust that holds legal title to the managed aircraft. (ii) Persons not included in the definition of aircraft owner. A lessee of an aircraft under a disqualified lease cannot be an aircraft owner with respect to the aircraft leased pursuant to the disqualified lease. A person that owns stock in a commercial airline does not qualify as an aircraft owner of that commercial airline’s aircraft. A participant in a fractional aircraft ownership program, as defined in section 4043(c)(2) of the Code, does not qualify as an aircraft owner of the program’s managed aircraft if the amount paid for such person’s participation is exempt from the tax imposed by section 4261 reason of section 4261(j). (4) Disqualified lease. The term disqualified lease has the meaning given to it by section 4261(e)(5)(C)(ii). (5) Fair market value. The term fair market value means the value of comparable flights or services provided with respect to a comparable aircraft as of the date such flights or services are provided. The aircraft management services provider’s published fee schedule in effect on the date(s) the VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 flights or services are provided may be used as evidence of fair market value. (6) For-hire flight. The term for-hire flight means the use of an aircraft to transport passengers for compensation that is paid in cash or in kind. The term includes, but is not limited to, charter flights, air taxi flights, and sightseeing flights (commonly referred to as flightseeing flights). (7) Owner trust. The term owner trust means an arrangement in which legal title of an aircraft is held in the name of the trustee of the trust for the limited purpose of registering the aircraft in the United States with the Federal Aviation Administration pursuant to the registration requirements in 49 U.S.C. 40102(a) and 44102(a), and 14 CFR part 47. (8) Private aviation. The term private aviation means the use of an aircraft for civilian flights, except scheduled passenger service for which tickets (or substitutes equivalent to tickets) are sold on a seat-by-seat basis to the general public. The term includes, but is not limited to, civilian flights operated under Part 135 (14 CFR part 135) of the Federal Aviation Regulations prescribed by the Federal Aviation Administration (FARs). (9) Substitute aircraft. The term substitute aircraft means an aircraft, other than the aircraft owner’s aircraft, that is provided by an aircraft management services provider to the aircraft owner when the aircraft owner’s aircraft is not available, regardless of the reason for the unavailability. (c) Pro rata allocation—(1) In general. Except as provided in paragraph (c)(2)(iii) of this section, when an amount paid to an aircraft management services provider includes a portion that is subject to the tax imposed by section 4261 and a portion that consists of amounts described in section 4261(e)(5)(A), the exception in section 4261(e)(5) applies on a pro rata basis only to the portion that consists of amounts described in section 4261(e)(5)(A). See section 4261(e)(5)(D). In such case, the tax base for the portion that is subject to the tax imposed by section 4261(a) is the amount paid for the flights or services, provided the amount paid is separable and shown in exact amounts in the records pertaining to the charge. If the portion of the amount paid that is subject to the tax imposed by section 4261(a) is not separable, the tax base is the fair market value of the flights or services. However, the tax base determined in the previous sentence may not exceed the total amount paid (that is, the sum of the portion that is subject to the tax imposed by section 4261(a) and the PO 00000 Frm 00128 Fmt 4700 Sfmt 4700 portion that consists of amounts described in section 4261(e)(5)(A)). (2) Substitute aircraft—(i) Flight treated as a charter. If an aircraft management services provider provides a flight to an aircraft owner on a substitute aircraft, the flight is treated as a charter flight provided by the aircraft management services provider to the aircraft owner, regardless of whether the aircraft owner is on the flight, and the aircraft owner is treated as the charterer of such flight. If the flight constitutes taxable transportation, as defined in section 4262 of the Code, the tax imposed by section 4261(a) applies, unless the flight is exempt from such tax by reason of an exemption other than the aircraft management services exemption. See section 4261(b) and (c) for other taxes that may apply to flights provided by an aircraft management services provider to an aircraft owner on substitute aircraft. (ii) General rule for flights provided on substitute aircraft. In cases where an aircraft management services provider provides a flight to an aircraft owner on a substitute aircraft and an allocation is required, the rule in paragraph (c)(1) of this section applies in determining the tax base. In all other cases, the tax base and the tax imposed by section 4261(a) thereon must be determined in accordance with the rules of § 49.4261– 7(h)(1), unless the flight is otherwise exempt from such tax by reason of an exemption other than the aircraft management services exemption. (iii) Special rule for for-hire flights provided on substitute aircraft. In cases where a substitute aircraft is used to provide a for-hire flight and an amount is paid for the flight by someone other than the aircraft owner, the tax base and the tax imposed by section 4261(a) thereon must be determined in accordance with the rules in § 49.4261– 7(h)(2), unless the flight is otherwise exempt from such tax by reason of an exemption other than the aircraft management services exemption. (d) Choice of flight rules. Whether a flight on an aircraft owner’s aircraft operates pursuant to the rules under FARs Part 91 (14 CFR part 91) or pursuant to the rules under FARs Part 135 does not affect the application of section 4261(e)(5). (e) Aircraft available for hire. Whether an aircraft owner permits an aircraft management services provider or other person to use its aircraft to provide forhire flights (for example, when the aircraft is not being used by the aircraft owner or when the aircraft is being moved in deadhead service) does not affect the application of section 4261(e)(5). However, an amount paid for E:\FR\FM\19JAR1.SGM 19JAR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations for-hire flights on the aircraft owner’s aircraft, except payments made by the aircraft owner, does not qualify for the aircraft management services exemption under section 4261(e)(5). Therefore, an amount paid by someone other than the aircraft owner for a for-hire flight on the aircraft owner’s aircraft is subject to the tax imposed by section 4261 unless the flight is otherwise exempt from such tax by reason of an exemption other than the aircraft management services exemption. See § 49.4261–7(h) for rules relating to the application of the tax imposed by section 4261 on amounts paid for certain charter flights. (f) Billing methods. Except as otherwise provided in this section, the method an aircraft management services provider bills, invoices, or otherwise charges an aircraft owner for aircraft management services, whether by specific itemization of costs, flat monthly or hourly fee, or otherwise, does not affect the application of section 4261(e)(5). (g) Multiple aircraft management services providers not disqualifying. Whether an aircraft owner pays amounts to more than one aircraft management services provider for aircraft management services does not affect the application of section 4261(e)(5). (h) Examples. The following examples illustrate the provisions of this section. (1) Example 1—(i) Facts. During the first quarter of 2021, an aircraft owner pays a $3,000 monthly management fee to an aircraft management services provider for services related to operating the aircraft owner’s aircraft. The aircraft owner used its own aircraft for all but one of the flights the owner took during the period. On the one occasion that the aircraft owner’s aircraft was unavailable when the aircraft owner wanted to fly, the aircraft management services provider used a substitute aircraft to transport the aircraft owner. The flight was within the continental United States and the aircraft owner received no compensation for the transportation of other passengers on the flight. The aircraft owner paid $1,000 for the flight on the substitute aircraft. The aircraft management services provider included the $1,000 charge for the substitute aircraft as a separate line item on the monthly management fee invoice. (ii) Analysis. The tax imposed by section 4261(a) applies to services that do not qualify for the section 4261(e)(5) exemption; in this case, the flight provided on the substitute aircraft. The flight provided on the substitute aircraft is treated as a charter flight for purposes of the tax imposed by section 4261(a), and the owner is treated as the charterer of the flight. The amount paid by the VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 aircraft owner for the flight on the substitute aircraft is the section 4261(a) tax base. The monthly invoice from the aircraft management services provider to the aircraft owner included a line item in the amount of $1,000 for the charter flight. Because $1,000 is the actual amount paid for the flight, this amount is the section 4261(a) tax base. The tax imposed by section 4261(b) also applies to the flight on a per-passenger basis. See § 49.4261–2(b) for rules regarding the application of the tax imposed by section 4261(b). (2) Example 2—(i) Facts. Same facts as in paragraph (h)(1) of this section (Example 1), except the invoice does not show the amount paid for the flight on the substitute aircraft and that amount is not otherwise separable from the monthly management fee. The fair market value of the flight on the substitute aircraft is $1,000. (ii) Analysis. The tax imposed by section 4261(a) applies to the flight provided on the substitute aircraft. The amount paid for the flight on the substitute aircraft is not otherwise separable from the monthly management fee. Because $1,000 is the fair market value of the flight, and such amount does not exceed the $3,000 monthly management fee paid by the aircraft owner, this amount is the section 4261(a) tax base. The tax imposed by section 4261(b) also applies to the flight on a per-passenger basis. See § 49.4261–2(b) for rules regarding the application of the tax imposed by section 4261(b). (3) Example 3—(i) Facts. An aircraft owner pays a monthly management fee to an aircraft management services provider for aircraft management services related to the aircraft owner’s aircraft. When the aircraft is not being used by the owner, the owner sometimes permits a charter company to use the aircraft to provide charter flights. At other times when the aircraft is not being used by the owner, the owner permits a tour operator to use the aircraft for flightseeing tours. All charter and flightseeing flights on the aircraft constitute taxable transportation, as that term is defined in section 4262, and no exemptions (other than section 4261(e)(5)) apply. No charter or flightseeing flights are provided on a substitute aircraft. The aircraft’s maximum certificated takeoff weight is 7,000 pounds. (ii) Analysis. Amounts paid by the aircraft owner to the aircraft management services provider for aircraft management services related to the aircraft owner’s aircraft are exempt under section 4261(e)(5). Amounts paid by the charterer or passengers for the PO 00000 Frm 00129 Fmt 4700 Sfmt 4700 5005 charter flights are subject to tax under section 4261(a) and (b). See § 49.4261– 7(h) for rules relating to the application of the tax imposed by section 4261 on amounts paid for charter flights. See § 49.4261–2(b) for rules regarding the application of the tax imposed by section 4261(b). Amounts paid by flightseeing customers for flightseeing tours are also subject to tax under section 4261(a) and (b). If a payment for a flightseeing tour includes charges for nontransportation services, the charges for the nontransportation services may be excluded in computing the tax payable provided the payments are separable and provided in exact amounts. See § 49.4261–2(c). (i) Applicability date. This section applies to amounts paid on and after January 19, 2021. § 49.4262(a)–1 [Redesignated] Par. 14. Section 49.4262(a)–1 is redesignated as § 49.4262–1. ■ Par. 15. Newly redesignated § 49.4262–1 is amended by: ■ 1. In paragraph (a) introductory text, removing ‘‘section 4262(b) (see § 49.4262(b)–1)’’ and adding ‘‘section 4262(b) of the Internal Revenue Code (Code) (see § 49.4262–2)’’ in its place. ■ 2. In the first sentence of paragraph (a)(1), removing ‘‘Transportation’’ and adding ‘‘Transportation by air’’ in its place. ■ 3. In the first sentence of paragraph (a)(1), removing ‘‘(the ‘‘225-mile zone’’)’’ and adding ‘‘(225-mile zone)’’ in its place. ■ 4. Revising paragraph (a)(2). ■ 5. In paragraph (b), removing ‘‘subparagraphs (1) and (5) of this paragraph’’ and adding ‘‘paragraph (b)(1) and (5) of this section’’ in its place. ■ 6. In paragraph (b), removing ‘‘subject to the tax’’ and adding ‘‘subject to the taxes imposed by section 4261(a) and (b)’’ in its place. ■ 7. Revising paragraph (b)(2). ■ 8. Removing and reserving paragraph (c). ■ 9. Revising introductory paragraph (d); designating Example (1) as paragraph (d)(1) and revising newly designated paragraph (d)(1). ■ 10. In paragraph (d): ■ a. Designating Example (2) as paragraph (d)(2) and removing and reserving newly designated paragraph (d)(2). ■ b. Designating Example (3) as paragraph (d)(3) and removing ‘‘6 hours’’ wherever it appears and adding ‘‘12 hours’’ in its place and also removing ‘‘subject to tax’’ wherever it appears and adding ‘‘subject to the taxes ■ E:\FR\FM\19JAR1.SGM 19JAR1 5006 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations imposed by section 4261(a) and (b)’’ in its place. ■ c. Designating Example (4) as paragraph (d)(4), and removing ‘‘six hours’’ wherever it appears and adding ‘‘12 hours’’ in its place and also removing ‘‘subject to tax’’ wherever it appears and adding ‘‘subject to the taxes imposed by section 4261(a) and (b)’’ in its place. ■ 11. Revising paragraph (e). ■ 12. Adding paragraph (f). The revisions and addition read as follows: § 49.4262–1 Taxable transportation. (a) * * * (2) In the case of any other transportation by air, that portion of such transportation that is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such transportation is not part of uninterrupted international air transportation within the meaning of section 4262(c)(3) of the Code and § 49.4262–3(c). Transportation from one port or station in the United States occurs whenever a carrier, after leaving any port or station in the United States, makes a regularly scheduled stop at another port or station in the United States irrespective of whether stopovers are permitted or whether passengers disembark. * * * * * (b) * * * (2) New York to Vancouver, Canada, with a stop at Toronto, Canada; * * * * * (d) Examples. The following examples illustrate the application of section 4262(a)(2) and the taxes imposed by section 4261(a) and (b) of the Code: (1) Example (1). A purchases in New York a ticket for air transportation from New York to Nassau, Bahamas, with a scheduled stopover of 14 hours in Miami. The part of the transportation from New York to Miami is taxable transportation as defined in section 4262(a) because such transportation is from one station in the United States to another station in the United States and the trip is not uninterrupted international air transportation (because the scheduled stopover interval in Miami is greater than 12 hours). Therefore, the amount paid for the transportation from New York to Miami is subject to the taxes imposed by section 4261(a) and (b). * * * * * (e) Examples of transportation that is not taxable transportation. The following examples illustrate transportation that is not taxable transportation: (1) New York to Trinidad with no intervening stops; (2) Minneapolis to Edmonton, Canada, with a stop at Winnipeg, Canada; (3) Los Angeles to Mexico City, Mexico, with stops at Tijuana and Guadalajara, Mexico; (4) New York to Whitehorse, Yukon Territory, Canada, by air with a scheduled stopover in Chicago of five hours. Amounts paid for the transportation referred to in examples set forth in paragraphs (e)(1), (2), and (3) of this section are not subject to the tax regardless of where payment is made, since none of the trips: (i) Begin in the United States or in the 225–mile zone and end in the United States or in the 225–mile zone, nor (ii) Contain a portion of transportation which is directly or indirectly from one port or station in the United States to another port or station in the United States. The amount paid within the United States for the transportation referred to in the example set forth in paragraph (4) of this section is not subject to tax since the entire trip (including the domestic portion thereof) is uninterrupted international air transportation within the meaning of section 4262(c)(3) and § 49.4262–3(c). In the event the transportation is paid for outside the United States, no tax is due since the transportation does not begin and end in the United States. * * * * * (f) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. § 49.4262(b)–1 [Redesignated] Par. 16. Section 49.4262(b)–1 is redesignated as § 49.4262–2. ■ Par. 17. Newly redesignated § 49.4262–2 is amended as follows: ■ 1. In paragraph (a), ‘‘section 4262(b)’’ is removed and ‘‘section 4262(b) of the Internal Revenue Code’’ is added in its place. ■ 2. In paragraph (b)(2), Example (2) is removed and reserved. ■ 3. Revise paragraph (d). ■ 4. Add paragraph (e). The revisions and additions read as follows: ■ § 49.4262–2 Exclusion of certain travel. * * * * * (d) Example. The application of paragraph (c) of this section may be illustrated by the following example: A purchases in San Francisco a ticket for transportation by air to Honolulu, Hawaii. The portion of the transportation which is outside the continental United States and is outside Hawaii is excluded from taxable transportation. The tax applies to that part of the payment made by A which is applicable to the portion of the transportation between the airport in San Francisco and the three-mile limit off the coast of California (a distance of 15 miles) and between the three-mile limit off the coast of Hawaii and the airport in Honolulu (a distance of 5 miles). The part of the payment made by A which is applicable to the taxable portion of his transportation and the tax due thereon are computed in accordance with paragraph (c)(1) as follows: khammond on DSKJM1Z7X2PROD with RULES TABLE 1 TO PARAGRAPH (d) Mileage of entire trip (San Francisco airport to Honolulu airport) (miles) ........................................................................................... Mileage in continental United States (miles) ....................................................................................................................................... Mileage in Hawaii (miles) .................................................................................................................................................................... 2,400 15 5 Fare from San Francisco to Honolulu ................................................................................................................................................. Payment for taxable portion (20/2400 × $168) ................................................................................................................................... Tax due (7.5% (rate in effect on date of payment) × $1.40) .............................................................................................................. 20 $168.00 $1.40 $0.11 (All distances and fares assumed for purposes of this example. This example addresses only the computation of the tax imposed by section 4261(a). It does VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 not address the computation of any other tax imposed by section 4261 that may apply to these facts.) PO 00000 Frm 00130 Fmt 4700 Sfmt 4700 (e) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply E:\FR\FM\19JAR1.SGM 19JAR1 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations before that date, see 26 CFR part 49, revised as of April 1, 2020. § 49.4262(c)–1 [Redesignated] Par. 18. Section 49.4262(c)–1 is redesignated as § 49.4262–3. ■ Par. 19. Newly redesignated § 49.4262–3 is amended as follows: ■ 1. In the first sentence of paragraph (a), removing ‘‘includes only the 48 States existing on July 25, 1956 (the date of the enactment of the Act of July 25, 1956 (Pub. L. 796, 84th Cong., 70 Stat. 644)) and the District of Columbia’’ and adding ‘‘means the District of Columbia and the States other than Alaska and Hawaii’’ in its place. ■ 2. In paragraph (a), the last sentence is removed. ■ 3. In paragraph (c), removing ‘‘six hours’’ wherever it appears and adding ‘‘12 hours’’ in its place. ■ 4. In paragraph (c), removing ‘‘6 hours’’ wherever it appears and add ‘‘12 hours’’ in its place. ■ 5. In paragraph (c), removing ‘‘sixhour’’ wherever it appears and adding ‘‘12-hour’’ in its place. ■ 6. In paragraph (c)(2), removing ‘‘paragraph (a)(2) of § 49.4264(c)–1’’ and adding ‘‘§ 49.4263–3(a)(2)’’ in its place. ■ 7. Adding paragraphs (d) and (e). The additions read as follows: ■ § 49.4262–3 Definitions. * * * * * (d) Transportation. For purposes of the regulations in this subpart, the term transportation includes layover or waiting time and movement of the aircraft in deadhead service. (e) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. § 49.4263–5 [Redesignated] Par. 20. Section 49.4263–5 is redesignated as § 49.4281–1. ■ Par. 21. Newly redesignated § 49.4281–1 is amended by: ■ 1. Revising paragraphs (a) and (b). ■ 2. In paragraph (c), adding a sentence at the end of the paragraph. ■ 3. Adding paragraphs (d) and (e). The revisions and additions read as follows: ■ khammond on DSKJM1Z7X2PROD with RULES [Redesignated] Par. 22. Section 49.4264(a)–1 is redesignated as § 49.4263–1. ■ Par. 23. Newly redesignated § 49.4263–1 is revised to read as follows: ■ § 49.4263–1 Duty to collect the tax; payments made outside the United States. (a) Duty to collect tax. Where payment upon which tax is imposed by section 4261 of the Internal Revenue Code is made outside the United States for a prepaid order, exchange order, or similar order, the person furnishing the initial transportation pursuant to such order must collect the applicable tax. See section 4291 and the regulations under section 4291 for cases where persons receiving payment must collect the tax. See section 6672 for rules relating to the application of the trust fund recovery penalty. (b) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. § 49.4264(b)–1 [Redesignated] Jkt 253001 § 49.4263–2 [Amended] PO 00000 Frm 00131 Fmt 4700 Sfmt 4700 § 49.4264(c)–1 [Redesignated] Par. 26. Section 49.4264(c)–1 is redesignated as § 49.4263–3. ■ Par. 27. Newly redesignated § 49.4263–3 is amended by: ■ 1. Revising paragraph (a). ■ 2. In paragraph (b), removing the second sentence. ■ 3. In paragraph (b), removing ‘‘4264’’ wherever it appears and adding ‘‘4263’’ in its place. ■ 4. In paragraph (b), adding ‘‘of the Code’’ after ‘‘4291’’ in the first sentence. ■ 5. Removing and reserving paragraph (c). ■ 6. Adding paragraph (d). The revisions and additions read as follows: ■ § 49.4263–3 of tax. Special rule for the payment (a) In general. For the rules applicable under section 4263(c) of the Internal Revenue Code, see § 49.4261–1(b)(2). * * * * * (d) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. § 49.4264(d)–1 [Redesignated] Par. 28. Section 49.4264(d)–1 is redesignated as § 49.4263–4. ■ § 49.4263–4 [Amended] Par. 29. Newly redesignated § 49.4263–4 is amended by removing ‘‘4264(d)’’ and adding ‘‘4263(d)’’ in its place. ■ § 49.4264(e)–1 [Redesignated] Par. 30. Section 49.4264(e)–1 is redesignated as § 49.4263–5. § 49.4264(f)–1 [Redesignated] Par. 31. Section 49.4264(f)–1 is redesignated as § 49.4263–6. ■ Par. 25. Newly redesignated § 49.4263–2 is amended as follows: ■ 1. In the first sentence of paragraph (a), removing ‘‘4264(b)’’ and adding ‘‘4263(b) of the Internal Revenue Code (Code)’’ in its place. ■ 2. In the last sentence of paragraph (a), removing ‘‘office of the district director for the district in which the person making the report is located,’’ and adding ‘‘Commissioner’’ in its place. ■ 3. In paragraph (b), adding ‘‘of the Code’’ at the end of the paragraph. ■ 4. In paragraph (c), removing ‘‘Illustration.’’ and adding ‘‘Example.’’ in its place. ■ 5. In the last sentence of paragraph (c), removing ‘‘office of the district director of internal revenue for the district in which the carrier is located,’’ and adding in its place ‘‘Commissioner’’. ■ ■ ■ (a) In general. Amounts paid for the transportation of persons on a small aircraft of the type sometimes referred to as air taxis shall be exempt from the tax imposed under section 4261 of the Internal Revenue Code provided the aircraft has a maximum certificated takeoff weight of 6,000 pounds or less 16:33 Jan 17, 2021 § 49.4264(a)–1 Par. 24. Section 49.4264(b)–1 is redesignated as § 49.4263–2. § 49.4281–1 Small aircraft on nonestablished lines. VerDate Sep<11>2014 determined as provided in paragraph (b) of this section. The exemption does not apply, however, when the aircraft is operated on an established line or when the aircraft is a jet aircraft. (b) Maximum certificated takeoff weight. The term maximum certificated takeoff weight means the maximum certificated takeoff weight shown in the type certificate or airworthiness certificate issued by the Federal Aviation Administration. (c) * * * An aircraft is not considered as operated on an established line at any time during which the aircraft is being operated on a flight the sole purpose of which is sightseeing. (d) Jet aircraft. For purposes of this section, the term jet aircraft does not include any aircraft which is a rotorcraft (such as a helicopter) or propeller aircraft. (e) Applicability date. This section applies to amounts paid on and January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. 5007 § 49.4263–6 [Amended] Par. 32. Newly redesignated § 49.4263–6 is amended by removing and reserving paragraph (b). ■ E:\FR\FM\19JAR1.SGM 19JAR1 5008 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations Par. 33. Section 49.4271–1 is amended by revising paragraphs (a) and (b) and adding paragraph (g) to read as follows: ■ § 49.4271–1 Tax on transportation of property by air. (a) Purpose of this section. Section 4271 of the Internal Revenue Code (Code) imposes a 6.25 percent tax on amounts paid within or without the United States for the taxable transportation of property (as defined in section 4272 of the Code). This section sets forth rules as to the general applicability of the tax. This section also sets forth rules authorized by section 4272(b)(2) which exempt from tax payments for the transportation of property by air in the course of exportation (including shipment to a possession of the United States) by continuous movement, and in due course so exported. (b) Imposition of tax—(1) The tax imposed by section 4271 applies only to amounts paid to persons engaged in the business of transporting property by air for hire. (2) The tax imposed by section 4271 does not apply to amounts paid for the transportation of property by air if such transportation is furnished on an aircraft having a maximum certificated takeoff weight (as defined in section 4281(b) of the Code) of 6,000 pounds or less, unless such aircraft is operated on an established line or when such aircraft is a jet aircraft. The tax imposed by section 4271 also does not apply to any payment made by one member of an affiliated group (as defined in section 4282(b) of the Code) to another member of such group for services furnished in connection with the use of an aircraft if such aircraft is owned or leased by a member of the affiliated group and is not available for hire by persons who are not members of such group. * * * * * (g) Applicability date. This section applies to amounts paid on and after January 19, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. Par. 34. Section 49.4271–2 is added to read as follows: khammond on DSKJM1Z7X2PROD with RULES ■ § 49.4282–1 ■ [Reserved] Par. 35. Add and reserve § 49.4282–1. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: January 10, 2021. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2021–00706 Filed 1–14–21; 4:15 pm] BILLING CODE 4830–01–P DEPARTMENT OF EDUCATION 34 CFR Parts 600, 602, 668, 673, 674, 682, and 685 Federal Student Aid Programs (Student Assistance General Provisions, Federal Perkins Loan Program, William D. Ford Federal Direct Loan Program, and FederalWork Study Programs) Office of Postsecondary Education, Department of Education. ACTION: Updated waivers and modifications of statutory and regulatory provisions; correction. AGENCY: On December 11, 2020, the Department of Education published in the Federal Register a notice updating waivers and modifications of statutory and regulatory provisions governing the Federal student financial aid programs under the authority of the Higher Education Relief Opportunities for Students Act of 2003 (HEROES Act). This document corrects the date through which certain waivers and modifications extend. DATES: Effective January 19, 2021. FOR FURTHER INFORMATION CONTACT: Barbara Hoblitzell, by telephone: (202) 453–7583 or by email: Barbara.Hoblitzell@ed.gov, or Gregory Martin, by telephone: (202) 453–7535 or by email: Gregory.Martin@ed.gov. If you use a telecommunications device for the deaf (TDD) or text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1–800–877– 8339. SUMMARY: SUPPLEMENTARY INFORMATION: Corrections: In FR document 2020– 27042, appearing on page 79856 in the § 49.4271–2 Aircraft management services. Federal Register of December 11, 2020, the following corrections are made: For rules regarding the exemption for 1. On page 79857, in the third certain amounts paid by aircraft owners column, in the third paragraph, in the for aircraft management services, see third sentence, remove the word § 49.4261–10. This section applies to ‘‘further’’, and add a new fourth amounts paid on and after January 19, sentence ‘‘On December 4, 2020, the 2021. For rules that apply before that Secretary further extended those date, see 26 CFR part 49, revised as of benefits through January 31, 2021.’’ April 1, 2020. VerDate Sep<11>2014 16:33 Jan 17, 2021 Jkt 253001 PO 00000 Frm 00132 Fmt 4700 Sfmt 4700 2. On page 79862, in the first column, in the section titled ‘‘Repayment of a Loan (34 CFR 682.209)’’, remove the fifth sentence and add in its place ‘‘Following the President’s Memorandum of August 8, 2020, and the Secretary’s subsequent announcement on December 4, 2021, the Secretary is further extending until January 31, 2021, in accordance with the prior announcement, the waivers of the regulatory provisions in §§ 682.202 and 682.209 that require that interest be charged on FFEL loans held by the Department from March 13, 2020, through March 27, 2020, and from October 1, 2020 through January 31, 2021.’’ 3. On page 79862, in the second column, in the section titled ‘‘Obligation to Repay (34 CFR 685.207)’’, remove the fifth, sixth, and seventh sentences and add in their place ‘‘The period of this benefit was extended to December 31, 2020 by the President’s Memorandum of August 8, 2020. On December 4, 2020, the Secretary further extended the period of this benefit through January 31, 2021. Accordingly, Direct Loans are automatically placed in an administrative forbearance status that is currently scheduled to be in effect from March 13, 2020, through January 31, 2021.’’ 4. On page 79863, in the first column, in the section titled ‘‘Capitalization of Interest Under the Income-Contingent Repayment Plan (34 CFR 685.209)’’, in the second paragraph, remove ‘‘January’’ and add in its place ‘‘February’’. 5. On page 79863, in the first column, in the section titled ‘‘Capitalization of Interest Under the Income-Contingent Repayment Plan (34 CFR 685.209)’’, in the fourth paragraph, remove ‘‘December 31, 2020’’ and add in its place ‘‘January 31, 2021’’. 6. On page 79863, in the second column, in the section titled ‘‘Section 3513 of the CARES Act’’, remove the second paragraph and add in its place ‘‘On August 8, 2020, the President issued a memorandum directing the Secretary to continue to waive interest and payments on such loans until December 31, 2020. On December 4, 2020, the Secretary further extended these benefits through January 31, 2021. Therefore, in accordance with the prior announcement, the Secretary is using her authority under the HEROES Act to modify the terms of the benefits provided under section 3513 of the CARES Act such that they will continue to be provided to borrowers until January 31, 2021.’’ Accessible Format: On request to one of the program contact persons listed under FOR FURTHER INFORMATION E:\FR\FM\19JAR1.SGM 19JAR1

Agencies

[Federal Register Volume 86, Number 11 (Tuesday, January 19, 2021)]
[Rules and Regulations]
[Pages 4990-5008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-00706]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 40 and 49

[TD 9948]
RIN 1545-BP37


Excise Taxes; Transportation of Persons by Air; Transportation of 
Property by Air; Aircraft Management Services

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the 
excise taxes imposed on certain amounts paid for transportation of 
persons and property by air. Specifically, the final regulations relate 
to the exemption for amounts paid for certain aircraft management 
services. The final regulations also amend, revise, redesignate, and 
remove provisions of existing regulations that are out-of-date or 
obsolete and generally update the existing regulations to incorporate 
statutory changes, case law, and other published guidance. The final 
regulations affect persons that provide air transportation of persons 
and property, and persons that pay for those services.

DATES: 
    Effective Date: These regulations are effective January 14, 2021.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
40.0-1(e), 49.4261-1(g), 49.4261-2(d), 49.4261-3(e), 49.4261-7(k), 
49.4261-9(c), 49.4261-10(i), 49.4262-1(f), 49.4262-2(e), 49.4262-3(e), 
49.4281-1(e), 49.4263-1(b), 49.4263-3(b), 49.4271-1(g), and 49.4721-2.

FOR FURTHER INFORMATION CONTACT: Michael H. Beker at (202) 317-6855 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends the Facilities and Services Excise Tax 
Regulations (26 CFR part 49) under sections 4261, 4262, 4263, 4264, 
4271, 4281, and 4282 of the Internal Revenue Code (Code). This document 
also amends the Excise Tax Procedural Regulations (26 CFR part 40).
    Sections 4261 and 4271 impose excise taxes on certain amounts paid 
for transportation of persons or property, respectively, by air, 
collectively referred to herein as ``air transportation excise tax.'' 
Section 13822 of Public Law 115-97, 131 Stat. 2054, 2182 (2017), 
commonly referred to as the Tax Cuts and Jobs Act (TCJA), added an 
exception to the air transportation excise tax in new section 
4261(e)(5). Specifically, section 4261(e)(5)(A) provides that ``[n]o 
tax shall be imposed by [section 4261] or section 4271 on any amounts 
paid by an aircraft owner for aircraft management services related to--
(i) maintenance and support of the aircraft owner's aircraft, or (ii) 
flights on the aircraft owner's aircraft.''
    Section 4261(e)(5)(B) defines the term ``aircraft management 
services'' to include: (a) Assisting an aircraft owner with 
administrative and support services, such as scheduling, flight 
planning, and weather forecasting; (b)

[[Page 4991]]

obtaining insurance; (c) maintenance, storage, and fueling of aircraft; 
(d) hiring, training, and provision of pilots and crew; (e) 
establishing and complying with safety standards; and (f) such other 
services as are necessary to support flights operated by an aircraft 
owner.
    Section 4261(e)(5)(C)(i) provides that the term ``aircraft owner'' 
includes a person who leases an aircraft other than under a 
``disqualified lease.'' Section 4261(e)(5)(C)(ii) defines the term 
``disqualified lease'' for purposes of section 4261(e)(5)(C)(i) as ``a 
lease from a person providing aircraft management services with respect 
to the aircraft (or a related person (within the meaning of section 
465(b)(3)(C)) to the person providing such services), if the lease is 
for a term of 31 days or less.''
    Finally, section 4261(e)(5)(D) provides that in the case of amounts 
paid to any person which (but for section 4261(e)(5)) are subject to 
air transportation excise tax, a portion of which consists of amounts 
described in section 4261(e)(5)(A), section 4261(e)(5) ``shall apply on 
a pro rata basis only to the portion which consists of amounts 
described in'' section 4261(e)(5)(A). The Conference Report 
accompanying the TCJA, H.R. Rep. No. 115-466, at 536 (2017) (Conference 
Report), provides that in the event that a monthly payment made to an 
aircraft management company is allocated in part to exempt services and 
flights on the aircraft owner's aircraft, and in part to flights on 
aircraft other than that of the aircraft owner, air transportation 
excise tax must be collected on that portion of the payment 
attributable to flights on aircraft not owned by the aircraft owner.
    On July 31, 2020, a notice of proposed rulemaking (REG-112042-19) 
was published in the Federal Register (85 FR 46032) under sections 
4261, 4262, 4263, 4264, 4271, 4281, and 4282 of the Code, and part 40 
of the Excise Tax Procedural Regulations (proposed regulations). No 
public hearing was requested or held. The Department of the Treasury 
(Treasury Department) and the IRS received three comments in response 
to the proposed regulations. The comments addressing the proposed 
regulations are summarized in the Summary of Comments and Explanation 
of Revisions section of this preamble. All comments were considered and 
are available at www.regulations.gov or upon request. After full 
consideration of the comments received, this Treasury decision adopts 
as final regulations the proposed regulations with the modifications 
described in the Summary of Comments and Explanation of Revisions 
section of this preamble.

Summary of Comments and Explanation of Revisions

I. Overview

    The final regulations retain the basic approach and structure of 
the proposed regulations, with certain revisions and modifications. 
This Summary of Comments and Explanation of Revisions discusses these 
revisions and modifications as well as the comments received in 
response to the proposed regulations. The final regulations provide 
guidance under sections 4261, 4262, 4263, 4264, 4271, 4281, and 4282 of 
the Code related to air transportation excise tax. The final 
regulations also provide guidance under part 40 of the Excise Tax 
Procedural Regulations.
    Part II of this Summary of Comments and Explanation of Revisions 
discusses rules related to the exemption from air transportation excise 
tax for amounts paid for certain aircraft management services provided 
in section 4261(e)(5) of the Code (aircraft management services 
exemption). Part III of this Summary of Comments and Explanation of 
Revisions discusses Sec.  49.4261-1 and other rules of general 
applicability related to the excise tax on amounts paid for the 
transportation of persons by air imposed by section 4261, as well as 
rules in Sec.  49.4261-7(h)(2) related to aircraft charters. See the 
Explanation of Provisions section of the proposed regulations for a 
discussion of the rules under 26 CFR part 40 and 26 CFR part 49 that 
were included in the proposed regulations, for which no comments were 
received. Those proposed rules are adopted by this Treasury decision--
except as discussed in parts II and III of this Summary of Comments and 
Explanation of Revisions--without change.

II. Aircraft Management Services Exemption Rules

a. Definition of Aircraft Management Services

    Proposed Sec.  49.4261-10(b)(1) defined the term ``aircraft 
management services'' to mean the services listed in section 
4261(e)(5)(B), as well as ``other services.'' Proposed Sec.  49.4261-
10(b)(1)(ii) defined ``other services'' as any service (including, but 
not limited to, purchasing fuel, purchasing aircraft parts, and 
arranging for the fueling of an aircraft owner's aircraft) provided 
directly or indirectly by an aircraft management services provider to 
an aircraft owner, that is necessary to keep the aircraft owner's 
aircraft in an airworthy state or to provide air transportation to the 
aircraft owner on the aircraft owner's aircraft at a level and quality 
of service required under the agreement between the aircraft owner and 
the aircraft management services provider.
    A commenter stated that the term ``airworthy'' generally indicates 
that an aircraft--or one or more of its component parts--meets its type 
design and is in a condition of safe operations. The commenter noted 
that some services provided by an aircraft management services provider 
in maintaining an aircraft do not directly pertain to the airworthiness 
of an aircraft. These services include, but are not limited to, 
upgrades in equipment, installation of optional equipment, optional 
modifications, refurbishment of an aircraft interior, and painting of 
an aircraft's exterior. The commenter suggested that the final 
regulations remove the phrase ``that is necessary to keep the aircraft 
owner's aircraft in an airworthy state'' from the definition of ``other 
services.''
    The Treasury Department and the IRS agree with the commenter that 
the final regulations should clarify that the definition of aircraft 
management services is not limited to those services necessary to keep 
an owner's aircraft in an airworthy state. As a result, the final 
regulations adopt the change suggested by the commenter and remove the 
phrase ``that is necessary to keep the aircraft owner's aircraft in an 
airworthy state'' from final Sec.  49.4261-10(b)(1)(ii).

b. Definition of Aircraft Owner

i. Leases
    Proposed Sec.  49.4261-10(b)(3)(i) provided that the term 
``aircraft owner'' means an individual or entity that leases or owns 
(that is, holds title to or substantial incidents of ownership in) an 
aircraft managed by an aircraft management services provider, commonly 
referred to as a ``managed aircraft.'' Proposed Sec.  49.4261-
10(b)(3)(i) further provided that the term ``aircraft owner'' does not 
include a lessee of an aircraft under a disqualified lease, as defined 
in proposed Sec.  49.4261-10(b)(4).
    Regarding leases that qualify a person as an aircraft owner under 
proposed Sec.  49.4261-10(b)(3)(i), a commenter noted that while many 
aircraft leases are in writing and contain provisions that make it 
clear that the arrangement constitutes a lease, that is not the case 
for all aircraft leasing arrangements. The commenter further noted that 
courts have found that the basic attributes of a lease are ``the right 
to possess, use, and control the aircraft'' (citing Petit Jean Air 
Service, Inc v. U.S., 74-1 U.S.T.C.

[[Page 4992]]

16, 135 (E.D. Ark. 1974)). To this end, the commenter suggested that 
the final regulations add to the end of Sec.  49.4261-10(b)(3)(i) the 
sentence ``An arrangement (whether written, oral, or implied) that 
transfers the right to possess, use, and control an aircraft to an 
individual or entity qualifies as a lease for the purposes of 
determining whether that individual or entity meets the definition of 
aircraft owner.''
    The Treasury Department and the IRS note that the suggested ``right 
to possess, use, and control an aircraft'' language from the commenter 
is nearly identical to the possession, command, and control test 
created through existing published guidance. As described in the 
preamble to the proposed regulations, possession, command, and control 
is a facts-and-circumstances analytical framework that is used to 
determine whether a person is providing taxable transportation to 
another person in cases where each of the parties contribute some, but 
not all, of the elements necessary for complete air transportation 
services. The possession, command, and control test has caused 
confusion and uncertainty in the air transportation excise tax area for 
decades; in fact, it is partly for that reason--and disagreements 
between the IRS and taxpayers over the application of the possession, 
command, and control test to aircraft management services 
arrangements--that section 4261(e)(5) was added to the Code. See, e.g., 
Conference Report at 535. As explained in the preamble to the proposed 
regulations, section 4261(e)(5) directly addresses a situation that, 
but for section 4261(e)(5), would be analyzed using the possession, 
command, and control test. The preamble to the proposed regulations 
further explained that in situations to which the aircraft management 
services exemption applies, the possession, command, and control test 
is not relevant.
    As a result, the Treasury Department and the IRS decline to 
introduce into the final regulations a test that is similar to a test 
that has been the source of confusion, uncertainty, disagreement, and 
difficulties in administration. Therefore, the final regulations do not 
adopt the language the commenter proposed to be added to the end of 
Sec.  49.4261-10(b)(3)(i) and do not provide a special definition of 
the term ``lease'' solely for purposes of the aircraft management 
services exemption.
ii. Owner Trusts
    A commenter requested clarification regarding whether trustees and 
beneficiaries of ``owner trusts'' qualify as aircraft owners for 
purposes of the aircraft management services exemption. The commenter 
described an owner trust as an ownership structure used for the limited 
purpose of registering an aircraft in the U.S. with the Federal 
Aviation Administration (FAA). The structure, which is sanctioned by 
the FAA, is commonly used by non-U.S. persons to satisfy the U.S. 
citizenship requirements applicable to registering an aircraft with the 
FAA. Most owner trusts are established using one of a small number of 
U.S.-based aviation trust companies--which are not related to the trust 
beneficiary--as trustee. The trustee holds legal title to the aircraft 
and satisfies the U.S. citizenship requirement for purposes of 
registering the aircraft with the FAA, thereby permitting registration 
in the U.S. of an aircraft that would otherwise be ineligible for such 
registration.
    The commenter stated that an owner trust agreement works in 
conjunction with an operating agreement that, generally, is separate 
from, but closely related to, the trust agreement. The operating 
agreement may contain explicit lease language or may instead use the 
term ``license to use'' and provides that the beneficiary holds the 
exclusive right to lease or license and to possess, use, and operate 
the aircraft (typically requiring a nominal rent or license payment to 
the trustee, or in some cases, no payment at all). Regardless of how 
the transfer of control is described in the operating agreement, the 
result is that the beneficiary holds the exclusive right to lease or 
license the aircraft, and to possess, use, and operate the aircraft. An 
operating agreement will usually require that the beneficiary retain 
the crew and maintain the aircraft per FAA guidance and manufacturer's 
recommendations. The commenter stated that the relationship created 
through the operating agreement is consistent with the trustee's status 
as a holder of only bare legal title, sometimes referred to as 
``nominal title,'' to the aircraft.
    In addition, the commenter explained that the beneficiary of an 
owner trust holds many of the attributes of aircraft ownership, other 
than legal title. The attributes of aircraft ownership that the 
beneficiary possesses include: The right to any income generated by--
and obligation to pay all expenses associated with--the aircraft; the 
upside benefit or downside risk as to the aircraft's value; bearing the 
risk of loss; being considered the owner of the aircraft for Federal 
income tax purposes; and discretion as to when to sell the aircraft. 
The commenter noted that since both the trustee and the beneficiary of 
an owner trust are owners of interests in the aircraft, payments for 
aircraft management services from either party should be eligible for 
the aircraft management services exemption. The commenter further noted 
that regardless of whether the operating agreement is written in terms 
of a lease or a license, the arrangement is not a disqualified lease 
(as that term was defined in proposed Sec.  49.4261-10(b)(4)).
    For purposes of section 4261(e)(5), such an operating agreement 
between the trustee and the beneficiary of an owner trust is treated as 
a lease, regardless of whether the document expressly refers to the 
arrangement as a lease. Therefore, under the terms of the operating 
agreement, the beneficiary of an owner trust is the lessee of the 
aircraft held in trust. Both section 4261(e)(5)(C) and proposed Sec.  
49.4261-10(b)(3) recognize lessees, other than lessees under a 
disqualified lease, as an aircraft owner.
    Based on the foregoing, the final regulations include a definition 
of ``owner trust.'' The final regulations also clarify that the 
beneficiary of an owner trust is an ``aircraft owner'' so long as the 
lease is not a disqualified lease.
iii. Affiliated Groups, Disregarded Entities, and Other Close 
Relationships
    As discussed in the preamble to the proposed regulations, the 
proposed regulations applied the principle of statutory interpretation 
that, as matters of legislative grace, exemptions to tax should be 
narrowly construed. Therefore, the proposed regulations defined 
``aircraft owner'' as an individual or entity that leases (other than 
under a disqualified lease) or owns (that is, holds title to or 
substantial incidents of ownership in) an aircraft managed by an 
aircraft management services provider. The proposed regulations did not 
include in the definition of ``aircraft owner'' persons that are 
related to the aircraft owner (for example, another member of the same 
affiliated group (as defined in section 4282 of the Code)), but are not 
the aircraft owner itself. As a result, under the proposed regulations, 
the aircraft management services exemption applied only to payments for 
aircraft management services that are made by the actual aircraft owner 
or lessee.
    A commenter disagreed with the assertion in the preamble to the 
proposed regulations that treating payments from parties who are 
directly related to an aircraft owner as though they were from the 
aircraft owner, and thus exempt from air transportation excise tax, 
``would effectively expand

[[Page 4993]]

the exemption [provided in section 4261(e)(5)] in a manner not 
authorized by Congress.'' The commenter claimed that this assertion is 
at odds with other Code provisions and implies an unduly narrow and 
formalistic interpretation of the statute that is inconsistent with the 
flexible approach otherwise evinced in the proposed regulations. The 
commenter further claimed that the assertion has no basis in the 
legislative history, but rather the legislative history implies that at 
least some related-party payments of aircraft management fees should be 
excluded from air transportation excise tax under section 4261(e)(5).
    The commenter noted that while the statute and legislative history 
are relatively silent about who or what the term ``aircraft owner'' 
includes, the legislative history enumerates several examples of what 
the term does not include. Specifically, the legislative history states 
that the term ``aircraft owner'' does not include ownership of stock in 
a commercial airline or participation in a fractional aircraft 
ownership program. The commenter stated that the legislative history 
expresses Congress's concern about the use of the aircraft management 
services exemption to circumvent the ordinary application of air 
transportation excise tax as contemplated in other Code provisions. By 
negative inference, the commenter reasoned, Congress did not express 
any similar concerns if the aircraft management services exemption 
applied to payments made by a party related to the aircraft owner. The 
commenter asserted that the narrow interpretation of ``aircraft owner'' 
in the proposed regulations does nothing to further Congress's goal of 
preventing arrangements designed to circumvent the ordinary application 
of air transportation excise tax.
    The commenter asserted that when an affiliated corporation in a 
corporate group pays for aircraft management services on behalf of an 
aircraft owning corporate entity within the group, there is no 
avoidance of air transportation excise tax. Further, the commenter 
asserted that there is statutory precedent for ignoring the distinction 
among corporate entities in the air transportation excise tax area; 
specifically, the commenter pointed to the affiliated group exemption 
provided in section 4282 of the Code. Under section 4282(a), if one 
member of an affiliated group is the owner or lessee of an aircraft, 
and such aircraft is not available for hire by persons who are not 
members of such group, air transportation excise tax does not apply to 
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. Citing the legislative 
history to section 4282 (see S. Rep. No. 91-706 at 17-18, 1970-1 C.B. 
386), the commenter asserted that section 4282 captures Congress's 
general approach to related-party payments in the area of air 
transportation excise tax; that is, Congress decided to ignore nominal 
ownership of an aircraft by one member of an affiliated group and 
instead looked to the true economic ownership of the aircraft by the 
group. The commenter asserted that the final regulations should do the 
same and ignore the formalities of nominal ownership of an aircraft and 
apply the aircraft management services exemption to payments by any 
party that is the true economic owner of the aircraft.
    The commenter requested that the Treasury Department and the IRS 
consider expanding the definition of ``aircraft owner'' to include 
disregarded entities, members of an affiliated group, and family 
members. The commenter also noted that it is not uncommon for an 
individual to operate an aircraft but place title to the aircraft in a 
single member limited liability company (SMLLC) and that such 
arrangement is, in effect, a constructive lease, but that state law 
concepts of constructive leases will result in needless and complex 
controversy.
    Another commenter similarly requested that the Treasury Department 
and the IRS consider expanding the definition of ``aircraft owner'' to 
include the single member of a SMLLC that holds title to an aircraft. 
The commenter reasoned that if the member pays an aircraft management 
services provider for aircraft management services on behalf of the 
SMLLC, it is economically indistinguishable from a case in which the 
individual first transfers funds into the SMLLC and then the SMLLC pays 
the aircraft management services provider. In either situation, the 
commenter asserted, there is no circumvention of air transportation 
excise tax; the only difference is who writes the check paying the 
aircraft management services provider.
    The Treasury Department and the IRS continue to have the concerns 
described in the preamble to the proposed regulations. Specifically, 
the Treasury Department and the IRS are concerned that extending the 
aircraft management services exemption to payments made by certain 
related parties--as suggested by the commenters--would effectively 
ignore the requirement that payments be made by the ``aircraft owner.'' 
Such an interpretation would be inconsistent with a plain reading of 
the statute and would violate a fundamental principle of statutory 
construction--that effect must be given, if possible, to every word 
Congress uses in the statute. See U.S. v. Menasche, 348 U.S. 528, 538-
539 (1955).
    Further, as described in the preamble to the proposed regulations, 
a fundamental aspect of administering the Federal excise tax laws is 
respecting each entity as an entity separate from its owner. See Sec.  
1.1361-4(a)(8) of the Income Tax Regulations and Sec.  301.7701-
2(c)(2)(v) of the Procedure and Administration Regulations. This 
longstanding treatment of a wholly-owned entity as an entity separate 
from its owner for Federal excise tax purposes applies even though the 
entity may not be viewed as separate from its owner for Federal income 
tax purposes. Consistent with this longstanding treatment, final Sec.  
40.0-1(d) of the Excise Tax Procedural Regulations makes it clear that 
each business unit that is required to have a separate Employer 
Identification Number is treated as a separate person. The Treasury 
Department and the IRS decline to create what would effectively be an 
exception to the way certain entities are treated for Federal excise 
tax purposes because this would create unnecessary confusion among 
taxpayers and IRS examiners. For example, it would not be appropriate 
to respect an entity for fuel excise tax liability and reporting 
purposes but then disregard the same entity for purposes of the 
aircraft management services exemption even though a transaction may 
involve the same aircraft.
    Based on the foregoing, the final regulations do not generally 
incorporate the commenters' request to expand the definition of 
``aircraft owner'' to include disregarded entities, members of an 
affiliated group, or family members of the owner. Instead, the final 
regulations clarify that amounts paid for aircraft management services 
by a party related to the aircraft owner (including members of an 
affiliated group, members of a limited liability company, disregarded 
entities, and family members) are not amounts paid by the aircraft 
owner solely by virtue of the relationship between the aircraft owner 
and the related party. The final regulations further clarify that if 
one related party leases an aircraft to another related party, amounts 
paid by the lessee to an aircraft management services provider for 
aircraft management services related to the leased aircraft qualify for 
the aircraft management services exemption,

[[Page 4994]]

provided the lease is not a disqualified lease and all other 
requirements of section 4261(e)(5) are satisfied.
v. Principal-Agent
    Proposed Sec.  49.4261-10(a)(1) provided, in relevant part, that 
the aircraft management services exemption does not apply to amounts 
paid to an aircraft management services provider on behalf of an 
aircraft owner (other than in a principal-agent scenario in which the 
aircraft owner is the principal).
    A commenter requested that the final regulations clarify what 
relationships qualify as a ``principal-agent scenario'' for purposes of 
qualifying payments for the aircraft management services exemption. The 
commenter noted that all entities, depending on the type of entity 
formation, have one or more officers, directors, managers, members or 
partners that may be in a principal-agent relationship with an aircraft 
owner. Therefore, the commenter suggested that the final regulations 
clarify that for purposes of Sec.  49.4261-10(a)(1), officers and 
directors of corporations, managers and members of limited liability 
companies (LLCs), and partners of a partnership are deemed agents when 
such corporations, LLCs, or partnerships are the aircraft owner. 
Alternatively, the commenter suggested that the final regulations 
clarify that the agency laws of the individual fifty states should be 
recognized for purposes of determining whether a principal-agent 
relationship exists between an aircraft owner and another person.
    As a general matter, for Federal tax purposes, state agency law 
applies in determining whether a principal-agent relationship exists. 
Likewise, in the context of the aircraft management services exemption, 
state law applies in determining whether the relationship between the 
aircraft owner and another person is a principal-agent relationship. 
Therefore, the final regulations adopt the principal-agent language 
from the proposed regulations as written. The Treasury Department and 
the IRS will consider providing additional guidance on this issue and 
invite comments regarding whether a principal-agent rule that relates 
specifically to the aircraft management services exemption is 
necessary. Any comments that favor additional guidance should include 
suggestions for how a more detailed principal-agent rule should be 
structured. Unless and until the Treasury Department and the IRS 
provide additional guidance, state agency law applies in determining 
whether a principal-agent relationship exists between the aircraft 
owner and another person.
vi. Evidence That Payments Are Made by the Aircraft Owner
    Regarding proposed Sec.  49.4261-10(a)(3), a commenter requested 
that the final regulations clarify what facts or evidence are 
sufficient to show that the aircraft owner is the party making the 
payments to the aircraft management services provider so that those 
payments qualify for the aircraft management services exemption. The 
commenter suggested that the final regulations provide that 
``reasonable documentation'' from the aircraft owner stating that 
payments for aircraft management services originate from a source 
covered by the aircraft management services exemption will satisfy the 
aircraft management services provider's obligation to determine whether 
a payment comes from a permissible source and constitutes adequate 
documentation thereof. The commenter believes that including this rule 
in the final regulations will improve administrability for both 
aircraft management services providers and the IRS.
    The task of verifying the source of every payment received by an 
aircraft management services provider for services related to an 
aircraft owner's aircraft is a burdensome one for aircraft management 
services providers. Verification is important because if a payment is 
received from someone other than the aircraft owner (as that term is 
defined in the final regulations), the aircraft management services 
exemption does not apply and the aircraft management services provider 
must collect any applicable air transportation tax on the amount paid. 
If the aircraft management services provider fails to do so, section 
4263(c) applies. See also Sec.  49.4261-1(b)(2).
    The Treasury Department and the IRS recognize that in the context 
of the aircraft management services exemption, it is important for 
aircraft management services providers to understand their obligations 
with regard to verifying that payments are made by aircraft owners and 
that failure to verify may trigger the application of section 4263(c). 
However, because section 4263(c) has broad implications for all members 
of the air transportation industry, issues related to section 4263(c) 
require additional study and input from a broader cross-section of 
stakeholders in the air transportation industry. Accordingly, these 
issues should be addressed in a separate published guidance project.
vii. Substantial Incidents of Ownership
    Proposed Sec.  49.4261-10(b)(3)(i) provided, in relevant part, that 
the term ``aircraft owner'' means an individual or entity that leases 
or owns (that is, holds title to or substantial incidents of ownership 
in) an aircraft managed by an aircraft management services provider, 
commonly referred to as a ``managed aircraft.'' The Treasury Department 
and IRS did not receive comments specifically relating to the 
``substantial incidents of ownership'' language. However, the 
``substantial incidents of ownership'' language is problematic because, 
among other things, it creates an opportunity for abuse by providing a 
mechanism by which parties can circumvent the disqualified lease rule 
in section 4261(e)(5)(C). For example, parties that wish to enter into 
an aircraft lease for 31 days or less could structure the transaction 
as a transfer of substantial incidents of ownership in the aircraft for 
a period of 31 days or less. By doing so, the parties could avoid 
creating a disqualified lease while still availing themselves of the 
exemption in section 4261(e)(5). Congress clearly did not intend for 
the aircraft management services exemption to apply in such situations 
as evidenced by the disqualified lease language in section 
4261(e)(5)(C). Because of these concerns, the final regulations clarify 
that the phrase ``substantial incidents of ownership'' in Sec.  
49.4261-10(b)(3)(i) does not apply to an interest with a duration of 31 
days or less.
viii. Other Changes Related to the Definition of Aircraft Owner
    As stated earlier, proposed Sec.  49.4261-10(b)(3)(i) defined 
``aircraft owner'', in relevant part, in terms of ``an individual or 
entity.'' Final Sec.  49.4261-10(b)(3)(i) replaces the phrase 
``individual or entity'' with the word ``person.'' This change improves 
the precision of the aircraft owner definition because the Code 
provides a generally applicable definition of ``person'' in section 
7701(a)(1). This change also makes Sec.  49.4261-10(b)(3)(i) easier to 
read.

b. Fractional Ownership Aircraft and Other Arrangements

    Proposed Sec.  49.4261-10(b)(3)(ii) provided that a participant in 
a fractional aircraft ownership program, as defined in section 
4043(c)(2) of the Code, does not qualify as an aircraft owner of the 
program's managed aircraft if the amount paid for such person's 
participation is exempt from air transportation excise tax by reason of 
section 4261(j). Proposed Sec.  49.4261-10(b)(3)(ii), referred to 
herein as the

[[Page 4995]]

``other arrangements anti-abuse rule,'' further provided that a 
participant in a business arrangement that seeks to circumvent the 
surtax imposed by section 4043 by operating outside of subpart K of 14 
CFR part 91, and that allows an aircraft owner the right to use any of 
a fleet of aircraft (through an aircraft interchange agreement, through 
holding nominal shares in a fleet of aircraft, or any other similar 
arrangement), is not an aircraft owner with respect to any of the 
aircraft owned or leased as part of that business arrangement.
    A commenter observed that the other arrangements anti-abuse rule 
appears to be aimed at persons who create a structure providing access 
to a fleet of aircraft that fails to meet the definition of 
``fractional ownership aircraft program'' in section 4043 in an effort 
to avoid the fuel surtax imposed by section 4043, while retaining the 
right to claim the aircraft management services exemption to also avoid 
paying air transportation excise tax. The commenter further observed 
that the phrase ``seeking to circumvent the surtax imposed by section 
4043'' in the other arrangements anti-abuse rule indicates that for the 
rule to apply, the primary intent in creating the arrangement must be 
to avoid the section 4043 surtax. Thus, the commenter noted, if there 
is a legitimate non-tax business purpose for creating the structure, 
the other arrangements anti-abuse rule should not apply, and the 
aircraft management services exemption should apply to amounts paid for 
aircraft management services relating to the aircraft in the structure. 
The commenter also observed that the phrase ``right to use any of a 
fleet of aircraft (through an aircraft interchange agreement, through 
holding nominal shares in a fleet of aircraft, or any other similar 
arrangement)'' in the proposed rule appears to apply to structures that 
are akin to fractional programs, but do not meet the definition of a 
fractional program in section 4043(c)(2).
    Based on the foregoing observations, the commenter disagreed with 
several aspects of the other arrangements anti-abuse rule. First, the 
commenter disagreed with the proposed rule as unclear regarding how it 
would apply to structures that provide access to a fleet of aircraft 
that exist for reasons unrelated to the applicability of the fuel 
surtax imposed by section 4043. The commenter further disagreed with 
the proposed rule for failing to define the point at which a structure 
becomes enough like a fractional ownership aircraft program for the 
rule to apply. Finally, the commenter disagreed with the proposed rule 
because the commenter believes that it can be misinterpreted to include 
various legitimate structures in which aircraft management services are 
provided, including (a) instances where a substitute aircraft is 
provided from the aircraft management services provider's charter fleet 
(which is addressed in proposed Sec.  49.4261-10(c)); (b) leasing 
structures where a lessor is providing an insured and maintained 
aircraft but no pilots (which would not have previously been subject to 
the tax under the possession, command and control test); and (c) the 
routine use of interchange agreements between aircraft owners.
    The Treasury Department and the IRS share the concerns of the 
commenter that the proposed other arrangements anti-abuse rule may 
capture aircraft ownership structures and leasing arrangements that are 
legitimate and not created for purposes of circumventing the fuel 
surtax imposed by section 4043. The Treasury Department and the IRS are 
further concerned that the other arrangements anti-abuse rule would 
create too much taxpayer uncertainty and confusion, which would be 
compounded by the similarly worded rule in proposed Sec.  49.4261-10(i) 
(see later discussion of this rule). As a result, the final regulations 
in Sec.  49.4261-10(b)(3)(ii) do not include the other arrangements 
anti-abuse rule. Therefore, the final regulations in Sec.  49.4261-
10(b)(3)(ii) merely clarify and confirm that a participant in a 
fractional ownership aircraft program is not an aircraft owner for 
purposes of the exemption in section 4261(e)(5) if the amount paid for 
such person's participation is exempt from the tax imposed by section 
4261 by reason of section 4261(j).

c. Definition of Disqualified Lease

    Proposed Sec.  49.4261-10(b)(4) provided that the term 
``disqualified lease'' has the meaning given to it by section 
4261(e)(5)(C)(ii). Proposed Sec.  49.4261-10(b)(4), referred to herein 
as the ``disqualified lease anti-abuse rule,'' further provided that a 
disqualified lease also includes any arrangement that seeks to 
circumvent the rule in section 4261(e)(5)(C)(ii) by providing a lease 
term that is greater than 31 days but does not provide the lessee with 
exclusive and uninterrupted access and use of the leased aircraft, as 
identified by the aircraft's airframe serial number and tail number. In 
addition, proposed Sec.  49.4261-10(b)(4) provided that the fact that a 
lease permits the lessee to use the aircraft for for-hire flights, as 
defined in Sec.  49.4261-10(b)(5), when the lessee is otherwise not 
using the aircraft does not, because of this fact alone, cause a lease 
with a term that is greater than 31 days to be a disqualified lease.
    A commenter disagreed with the disqualified lease anti-abuse rule 
as a general matter, because, in the commenter's opinion, it 
significantly expands the definition of ``disqualified lease'' beyond 
the definition provided in the statute, ensnaring common non-abusive 
situations that should not be subject to the rule, and frustrating the 
intended purpose of the statute. The commenter also disagreed with 
several specific aspects of the disqualified lease anti-abuse rule. 
First, the commenter disagreed with the disqualified lease anti-abuse 
rule for not including language limiting its application to only a 
lease of an aircraft from a person providing aircraft management 
services for such aircraft.
    Second, the commenter disagreed with the requirement in the 
disqualified lease anti-abuse rule that the lease should provide the 
lessee with exclusive and uninterrupted access and use of the leased 
aircraft as overly broad. The commenter stated that the problem with 
this aspect of the disqualified lease anti-abuse rule is that many 
aircraft are leased on a non-exclusive basis for valid business 
purposes, such as liability protection, state sales and use tax 
compliance, and FAA regulatory requirements.
    Third, the commenter disagreed with the disqualified lease anti-
abuse rule as improperly subjecting entity-based co-ownership 
structures to air transportation excise tax. To illustrate this 
concern, the commenter offered as an example a situation in which two 
pilots form a limited liability company to purchase an aircraft. For 
FAA regulatory compliance reasons, the LLC enters into non-exclusive 
aircraft dry leases with each of the pilots who will operate the 
aircraft. Since neither lessee in such an arrangement would have 
exclusive and uninterrupted use of the aircraft, the proposed 
disqualified lease anti-abuse rule would cause those otherwise 
qualified leases to be disqualified leases.
    Fourth, the commenter observed that the ``for hire'' language in 
the disqualified lease anti-abuse rule allows a lessee to use the 
leased aircraft to provide ``for hire'' flights. The commenter 
disagreed with this aspect of the rule, stating that an aircraft must 
typically be leased to an on-demand air taxi operator to conduct such 
for-hire flights. Therefore, the commenter continued, an aircraft owner 
may lease its aircraft without a crew on a non-exclusive basis directly 
to an on-

[[Page 4996]]

demand air taxi operator in addition to leasing its aircraft without a 
crew pursuant to a separate non-exclusive lease to a related party for 
reasons unrelated to air transportation excise tax; in such a case, the 
aircraft will be leased to each lessee on a non-exclusive basis. The 
commenter concluded that, based on the language of the disqualified 
lease anti-abuse rule, these facts could cause the non-exclusive leases 
to be disqualified leases.
    Finally, the commenter disagreed with the disqualified lease anti-
abuse rule because the commenter believes that it is possible that an 
aircraft owner that provides limited services relating to the aircraft 
could be deemed an aircraft management services provider based on the 
broad definitions of the terms ``aircraft management services'' and 
``aircraft management services provider.'' The commenter explained that 
most business aircraft owners provide at least some services, such as 
insurance, hangarage, or maintenance, when they lease their aircraft 
for valid business reasons such as liability protection planning, 
maintenance consistency, insurance requirements, and state sales and 
use tax compliance.
    To illustrate the commenter's concern, the commenter offered the 
example of an entity that purchases an aircraft and enters into two 
non-exclusive leases to its parent company and to a sister company with 
a term greater than 31 days. The lessor may obtain the hangar and the 
insurance for the aircraft since there is typically one hangar and one 
insurance policy covering the aircraft even if there is more than one 
non-exclusive aircraft lessee. Applying the proposed disqualified lease 
anti-abuse rule to this situation, the commenter concluded that the 
lessor could be viewed as an aircraft management services provider and 
the arrangement would be subject to the disqualified lease anti-abuse 
rule. The commenter further concluded that this scenario would 
inappropriately broaden the scope of the disqualified lease anti-abuse 
rule since the statutory language was not meant to apply the 
disqualified lease provision to lessors that provide only partial or 
limited services.
    The commenter suggested that final Sec.  49.4261-10(b)(4) remove 
the disqualified lease anti-abuse rule in its entirety so that the 
regulatory definition of ``disqualified lease'' merely restates the 
statutory definition of the term.
    The Treasury Department and the IRS share the concerns of the 
commenter, particularly that the disqualified lease anti-abuse rule may 
capture common, legitimate leasing arrangements. Therefore, the final 
regulations remove the disqualified lease anti-abuse language from the 
definition of ``disqualified lease'' in Sec.  49.4261-10(b)(4). As a 
result, the final version of Sec.  49.4261-10(b)(4) simply defines 
``disqualified lease'' by reference to its statutory definition in 
section 4261(e)(5)(C)(ii).

d. Definition of Private Aviation

    Proposed Sec.  49.4261-10(a)(2) limited the aircraft management 
services exemption to aircraft management services related to aircraft 
used in private aviation. Proposed Sec.  49.4261-10(b)(6) defined the 
term ``private aviation'' as the use of an aircraft for civilian 
flights except scheduled passenger service. A commenter observed that 
the apparent intent of proposed Sec.  49.4261-10(a)(2), when read in 
combination with the definition of ``private aviation'' in proposed 
Sec.  49.4261-10(b)(6), is to prevent the aircraft management services 
exemption from applying to amounts paid for aircraft management 
services related to scheduled commercial airline aircraft and flights. 
The commenter also observed that proposed Sec.  49.4261-10(d) makes 
clear that the aircraft management services exemption is available for 
aircraft and flights operated under the charter services rules of part 
135 of the FAA regulations (14 CFR part 135). The commenter suggested 
that the final regulations clarify that ``scheduled passenger service'' 
refers to flights conducted by airlines that sell tickets on an 
individual seat basis to the general public. The commenter also 
suggested that the final regulations further clarify that the term 
``private aviation'' includes charter flights operated under part 135 
of the FAA regulations.
    The Treasury Department and the IRS agree with the commenter that 
the final regulations should clarify the types of flight operations 
permitted under the private aviation rule in Sec.  49.4261-10(a)(2). 
Therefore, the final regulations incorporate the commenter's suggested 
changes to the definition of private aviation provided in Sec.  
49.4261-10(b)(8). Specifically, the final regulations clarify that 
``scheduled passenger service'' refers to flights for which tickets are 
sold on an individual seat basis to the general public. In addition, 
the definition of private aviation is modified to explicitly include 
operations conducted under part 135 of the FAA regulations.

e. Section 4261(e)(5)(D)

    Section 4261(e)(5)(D) provides that in the case of amounts paid to 
any person which (but for section 4261(e)(5)) are subject to air 
transportation excise tax, a portion of which consists of amounts 
described in section 4261(e)(5)(A), section 4261(e)(5) ``shall apply on 
a pro rata basis only to the portion which consists of amounts 
described in'' section 4261(e)(5)(A). The Conference Report provides 
that in the event that a monthly payment made to an aircraft management 
company is allocated in part to exempt services and flights on the 
aircraft owner's aircraft, and in part to flights on aircraft other 
than that of the aircraft owner, air transportation excise tax must be 
collected on that portion of the payment attributable to flights on 
aircraft not owned by the aircraft owner.
    Proposed Sec.  49.4261-10(c)(1), which generally tracked the pro 
rata allocation language in the Conference Report, provided that if an 
aircraft management services provider provides flight services to an 
aircraft owner on a substitute aircraft during a calendar quarter, air 
transportation excise tax applies to that portion of the amounts paid 
by the aircraft owner to the aircraft management services provider, 
determined on a pro rata basis, that are related to the flight services 
provided on the substitute aircraft. Stated differently, the proposed 
regulations provided that when an aircraft owner is provided flights on 
a substitute aircraft by an aircraft management services provider (for 
example, when the aircraft owner's aircraft is unavailable due to 
maintenance), a portion of the amounts paid by the aircraft owner to 
the aircraft management services provider is subject to air 
transportation excise tax.
    Proposed Sec.  49.4261-10(c)(2) proposed a method, based on the 
ratio of flight hours provided on a substitute aircraft compared to the 
total flight hours provided to the aircraft owner on the aircraft 
owner's aircraft and on substitute aircraft during a calendar quarter, 
for calculating the taxable portion of the amount paid to the aircraft 
management services provider.
    A commenter objected to proposed Sec.  49.4261-10(c) as 
unnecessary; the commenter reasoned that--assuming flights provided on 
a substitute aircraft are treated as charter flights provided by the 
aircraft management services provider to the aircraft owner and subject 
to air transportation excise tax--there is no need for a special 
calculation to determine the amount paid for such flights. Similarly, 
again assuming flights provided on a substitute aircraft are treated as 
charter flights provided by the aircraft management services provider 
to the aircraft owner and subject to air transportation excise tax, 
multiple commenters objected to proposed Sec.  49.4261-10(c) because it 
could result

[[Page 4997]]

in air transportation excise tax being applied to the same air 
transportation twice--once on the amount paid for the charter on the 
substitute aircraft and then again on a portion of the amount paid for 
aircraft management services to the aircraft management services 
provider providing the substitute aircraft.
    One commenter offered several comments regarding the allocation 
methodology in proposed Sec.  49.4261-10(c)(2). First, the commenter 
disagreed with the proposed allocation methodology because it may 
result in air transportation excise tax being imposed on amounts paid 
for non-transportation items. Second, the commenter disagreed with the 
proposed allocation methodology because it may result in the 
application of air transportation excise tax to an amount 
disproportionate to the fair market value of the transportation 
services actually provided on the substitute aircraft. Third, the 
commenter disagreed with the proposed allocation methodology because it 
promotes a loss of revenue to aircraft management services providers. 
The commenter explained that to avoid having to pay air transportation 
excise tax on an allocated portion of the amount paid for aircraft 
management services, the aircraft owner need only hire the replacement 
aircraft from an operator different than the one that provides aircraft 
management services to the aircraft owner. Thus, the commenter asserted 
that the proposed rule incentivizes aircraft owner behavior that will 
result in lost revenue to the aircraft management services provider. 
Fourth, the commenter disagreed with the proposed allocation 
methodology as increasing taxpayer uncertainty because the amount of 
air transportation excise tax that results from the method will not be 
known at the time an aircraft management services provider would 
invoice an aircraft owner for services provided on a substitute 
aircraft.
    A third commenter disagreed with the allocation methodology in 
proposed Sec.  49.4261-10(c) because the calculation, in the 
commenter's view, will ordinarily produce nonsensical results since the 
cost profile of a substitute aircraft will likely be different from the 
cost profile for the aircraft owner's aircraft. The commenter asserted 
that averaging the costs of two aircraft with different cost profiles 
will produce an arbitrary result with no rational relationship to a 
reasonable, fair market charter rate for flights on the substitute 
aircraft. The commenter further asserted that the allocation 
methodology calculation will be further skewed if the aircraft owner-
taxpayer owns multiple aircraft with varying flight hours from one 
quarter to the next, buys or sells aircraft during the quarter, or pays 
multiple aircraft management services providers rather than a single 
aircraft management services provider.
    All three commenters suggested that the final regulations either 
completely remove Sec.  49.4261-10(c), as drafted in the proposed 
regulations, or that the final regulations adopt a different approach 
than the proposed allocation methodology. All three commenters also 
suggested that in situations where a substitute aircraft is provided to 
an aircraft owner, air transportation excise tax should be calculated 
based on the amount paid by the aircraft owner for the substitute 
aircraft (that is, in a manner similar to how air transportation excise 
tax is calculated on amounts paid for charter flights). A commenter 
also suggested that if an aircraft owner pays less than fair market 
value for the use of the substitute aircraft, then air transportation 
excise tax should be calculated on the fair market value rather than 
the actual amount paid for the substitute aircraft.
    In the alternative, if the proposed allocation methodology is 
incorporated into the final regulations, a commenter suggested that the 
final regulations provide that when an aircraft owner pays for a 
substitute aircraft, then the aircraft owner will receive a credit for 
any air transportation excise tax that it paid in relation to hiring a 
substitute aircraft against the amount of tax calculated under the 
allocation methodology. Another commenter suggested that if the 
proposed allocation methodology is incorporated into the final 
regulations, then the final regulations provide that an aircraft owner 
may elect to pay air transportation excise tax on the fair market value 
of the flight provided on the substitute aircraft rather than pay the 
air transportation excise tax calculated using the proposed 
methodology.
    The comments prompted the Treasury Department and the IRS to 
reevaluate the approach taken in the proposed regulations with regard 
to section 4261(e)(5)(D). Based on this reevaluation, the Treasury 
Department and the IRS reached two conclusions.
    First, section 4261(e)(5)(D) has broader applicability than just 
the provision of substitute aircraft as evidenced by the plain language 
of that provision.
    Second, the allocation methodology in the proposed regulation is 
problematic. Specifically, the Treasury Department and the IRS share 
the concerns expressed by the commenters, particularly with regard to 
the potential for double taxation and uncertainty under the proposed 
rule.
    For these reasons, the final regulations adopt the general approach 
suggested by the commenters. Specifically, final Sec.  49.4261-10(c)(1) 
restates section 4261(e)(5)(D) as a generally applicable rule. Final 
Sec.  49.4261-10(c)(1) further provides that the tax base for the 
portion that is subject to the tax imposed by section 4261(a) is the 
amount paid for such flights or services, provided the amount paid is 
separable and shown in exact amounts in the records pertaining to the 
charge. This rule is consistent with commenter suggestions and also 
reflects the general approach in the air transportation excise tax area 
that the section 4261(a) tax is imposed on the actual amount paid for 
taxable transportation. The separability element of the rule is 
consistent with the rule in Sec.  49.4261-2(c) regarding situations in 
which a payment covers charges for transportation and nontransportation 
services. If the portion of the amount paid that is subject to the tax 
imposed by section 4261(a) is not separable and is not shown in exact 
amounts in the records pertaining to the charge, the tax base is the 
fair market value of the flights or services; however, the tax base 
does not exceed the total amount paid (that is, the sum of the portion 
that is subject to the tax imposed by section 4261(a) and the portion 
that consists of amounts described in section 4261(e)(5)(A)). For 
clarity, the final regulations also include a definition of ``fair 
market value'' that applies to allocations. The definition of ``fair 
market value'' is consistent with commenter suggestions.
    In addition, final Sec.  49.4261-10(c)(2) treats the provision of a 
flight on a substitute aircraft to the aircraft owner by an aircraft 
management services provider as an aircraft charter, with the aircraft 
owner as the charterer. The final regulations further provide that the 
allocation rule in final Sec.  49.4261-10(c)(1) applies in determining 
the tax base.
    The final regulations also provide guidance for situations in which 
a substitute aircraft is used to provide a for-hire flight. In that 
instance, the final regulations instruct taxpayers and collectors to 
follow the aircraft charter rules in Sec.  49.4261-7(h)(2).
    The final regulations update the first example and add a second 
example in Sec.  49.4261-10(h) to illustrate these rules.

f. Aircraft Available for Hire

    Proposed Sec.  49.4261-10(e)(1) provided that whether an aircraft 
owner permits

[[Page 4998]]

an aircraft management services provider or other person to use its 
aircraft to provide for-hire flights (for example, when the aircraft is 
not being used by the aircraft owner or when the aircraft is being 
moved in deadhead service) does not affect the application of the 
aircraft management services exemption. Proposed Sec.  49.4261-10(e)(1) 
further provided that an amount paid for for-hire flights on the 
aircraft owner's aircraft does not qualify for the aircraft management 
services exemption. Therefore, under proposed Sec.  49.4261-10(e)(1), 
an amount paid for a for-hire flight on an aircraft owner's aircraft is 
subject to air transportation excise tax unless the amount paid is 
otherwise exempt from air transportation excise tax other than by 
reason of the aircraft management services exemption.
    A commenter expressed concern that the wording of proposed Sec.  
49.4261-10(e)(1) may cause confusion and result in the misapplication 
of air transportation excise tax to amounts paid that should qualify 
for the aircraft management services exemption. Specifically, the 
commenter's concern relates to the second and third sentences of 
proposed Sec.  49.4261-10(e)(1), which explain that amounts paid for 
for-hire flights are subject to air transportation excise tax. The 
commenter observed that under section 4261(e)(5), amounts paid by an 
aircraft owner for flights on the aircraft owner's aircraft are exempt 
from air transportation excise tax. The commenter further observed that 
under proposed Sec.  49.4261-10(d), operating an aircraft owner's 
aircraft under part 135 of the FAA regulations does not affect the 
application of the aircraft management services exemption. The 
commenter's concern is that aircraft operations conducted under part 
135 of the FAA regulations could arguably be considered for-hire 
flights; however, proposed Sec.  49.4261-10(e)(1) does not provide a 
carve-out for part 135 flights paid for by the aircraft owner. 
Therefore, in order to clarify that amounts paid by an aircraft owner 
for flights operated under part 135 are not subject to air 
transportation excise tax, the commenter suggested that the final 
regulations incorporate a carve-out by modifying the second sentence of 
proposed Sec.  49.4261-10(e)(1) to read: ``However, an amount paid for 
for-hire flights on the aircraft owner's aircraft, except payments made 
by such aircraft owner, does not qualify for the section 4261(e)(5) 
exemption.'' (emphasis added to denote new wording).
    The Treasury Department and the IRS agree with the commenter. As a 
result, final Sec.  49.4261-10(e) incorporates the commenter's 
suggested change.

g. Coordination With Fuel Tax Provisions

    Proposed Sec.  49.4261-10(g) provided that taxable fuel (as defined 
in section 4083(a)) or any liquid taxable under section 4041(c) that is 
used as fuel on a flight for which amounts paid are exempt from air 
transportation excise tax by reason of the aircraft management services 
exemption is not fuel used in commercial aviation, as that term is 
defined in section 4083(b). Thus, under the proposed rule, if the 
aircraft management services exemption applies to amounts paid in 
relation to a flight, then the higher noncommercial fuel tax rate (as 
compared to the commercial fuel tax rate) automatically applies to fuel 
used during such flight.
    A commenter stated that proposed Sec.  49.4261-10(g) is 
inconsistent with the air transportation excise tax-fuel tax statutory 
scheme and contrary to Congressional intent with regard to that scheme. 
The commenter asserted that if Congress had intended that all flights 
qualifying for the aircraft management services exemption be treated as 
non-commercial flights for fuel tax purposes, Congress could have 
adopted a corresponding code section to that effect as it did with 
other exemptions to air transportation excise tax. Specifically, the 
commenter pointed to the exemptions to air transportation excise tax 
provided in sections 4261(h) (skydiving), 4261(i) (seaplanes), 4281 
(small aircraft on nonestablished lines), and 4282 (affiliated group 
members), each of which section 4083(b) explicitly excludes from the 
definition of ``commercial aviation'' for purposes of determining 
applicable fuel tax rates. By not providing a similar, explicit 
definitional exclusion in section 4083(b) (or other Code section) for 
the aircraft management services exemption, the commenter asserted, 
Congress left the determination of which fuel tax rate--commercial or 
non-commercial--applies to a particular flight to the application of 
the general definition of ``commercial aviation'' in section 4083(b). 
Therefore, the commenter suggested that the final regulations provide 
that if the aircraft management services exemption applies to amounts 
paid for a flight, the determination of whether fuel used during the 
flight is subject to commercial or non-commercial fuel tax rates is 
made simply through an application of the definition of commercial 
aviation provided in section 4083(b).
    The Treasury Department and the IRS agree with the commenter that 
proposed Sec.  49.4261-10(g) is inconsistent with the air 
transportation excise tax-fuel excise tax statutory scheme. As a 
result, the final regulations do not adopt the rule in proposed Sec.  
49.4261-10(g). The rule in proposed Sec.  49.4261-10(e)(2) relating to 
fuel used in for-hire flights is similarly inconsistent with the air 
transportation excise tax-fuel excise tax statutory scheme. Therefore, 
the final regulations also do not adopt the rule proposed in Sec.  
49.4261-10(e)(2). Because final Sec.  49.4261-10 does not provide fuel 
excise tax guidance related to the exemption in section 4261(e)(5), 
persons affected by the aircraft management services exemption should 
continue to follow current statutory, regulatory, and administrative 
guidance related to the rates of tax for aviation fuel.

h. Coordination With Fractional Ownership Aircraft Exemption; Anti-
Abuse Rule

    Proposed Sec.  49.4261-10(i) provided, in relevant part, that the 
aircraft management services exemption does not apply to any amount 
paid for aircraft management services by a participant in any 
transaction or arrangement, or through other means, that seeks to 
circumvent the surtax imposed by section 4043. A commenter expressed 
concern that confusion could result from the phrasing of the first 
sentence of proposed Sec.  49.4261-10(i) because it is essentially 
identical to the phrasing of the second sentence of proposed Sec.  
49.4261-10(b)(3)(ii) (excluding fractional aircraft ownership programs 
and similar arrangements from the definition of ``aircraft owner''). 
The commenter suggested that the first sentence in the final version of 
Sec.  49.4261-10(i) simply cross-reference Sec.  49.4261-10(b)(3)(ii), 
rather than repeating the similar language. Specifically, the commenter 
suggested the following language for the first sentence of final Sec.  
49.4261-10(i): ``The aircraft management services exemption does not 
apply to any amount paid for aircraft management services by a 
participant in the type of business arrangement described in [Sec.  
49.4261-10(b)(3)(ii)] that does not qualify the participant as an 
aircraft owner.''
    The Treasury Department and the IRS believe that the rule in 
proposed Sec.  49.4261-10(i) is problematic for the same reasons as the 
other arrangements anti-abuse rule in proposed Sec.  49.4261-
10(b)(3)(ii) (discussed earlier); specifically, it may capture aircraft 
ownership structures that are legitimate and not created for purposes 
of circumventing the fuel surtax imposed by section 4043. The Treasury 
Department and the IRS further believe

[[Page 4999]]

that, like the other arrangements anti-abuse rule in proposed Sec.  
49.4261-10(b)(3)(ii), the rule in proposed Sec.  49.4261-10(i) would 
have created taxpayer uncertainty and confusion. Because the final 
regulations in Sec.  49.4261-10(b)(3)(ii) clarify that a participant in 
a fractional ownership aircraft program is not an aircraft owner for 
purposes of the exemption in section 4261(e)(5), an additional 
coordination rule is redundant. As a result, the final regulations do 
not adopt proposed Sec.  49.4261-10(i).

i. Adequate Records

    Proposed Sec.  49.4261-10(a)(3) stated that in order to qualify for 
the aircraft management services exemption, an aircraft owner and 
aircraft management services provider must maintain adequate records to 
show that the amounts paid by the aircraft owner to the aircraft 
management services provider relate to aircraft management services for 
the aircraft owner's aircraft or for flights on the aircraft owner's 
aircraft.
    A commenter requested that the final regulations provide guidance 
on the types of records required to satisfy this requirement. The 
Treasury Department and the IRS agree. Accordingly, the final 
regulations add language to Sec.  49.4261-10(a)(3) stating that such 
records may include the agreement, if any, between the aircraft owner 
and the aircraft management services provider, evidence of aircraft 
ownership, evidence that amounts paid for aircraft management services 
came from the aircraft owner, the aircraft management services 
provider's fee schedule, and documents to support any allocations 
required under the pro rata allocation rule.

j. Examples

    Proposed Sec.  49.4261-10(j) included two examples illustrating 
certain aspects of the rules in proposed Sec.  49.4261-10. Proposed 
Sec.  49.4261-10(j)(1) (Example 1) illustrated the substitute aircraft 
allocation methodology in proposed Sec.  49.4261-10(c)(1) and (2). 
Proposed Sec.  49.4261-10(j)(1)(i) (presenting the facts of Example 1) 
stated, in relevant part, that:
    A commenter stated that it interpreted proposed Sec.  49.4261-
10(j)(1)(i) (presenting the facts of Example 1) as saying that if a 
company hires an aircraft management company to provide only pilot 
services to the aircraft owner, then--but for the aircraft management 
services exemption--air transportation excise tax would apply to the 
amounts paid by the aircraft owner to the aircraft management services 
provider. Based on its interpretation, the commenter expressed its 
opinion that the example presents an extreme position with regard to 
the application of air transportation excise tax to an aircraft owner-
aircraft management services provider relationship. The commenter 
further stated that the second sentence in proposed Sec.  49.4261-
10(j)(1)(i) may cause confusion regarding the application of the 
possession, command, and control test in cases that are not governed by 
section 4261(e)(5). In addition, the commenter stated that the second 
sentence in proposed Sec.  49.4261-10(j)(1)(i) is irrelevant to the 
rest of the example, thereby compounding the other problems that the 
commenter mentioned. The commenter suggested that the final regulations 
remove the second sentence from Sec.  49.4261-10(j)(1)(i).
    As noted earlier, the final regulations include a revised pro rata 
allocation rule. The final regulations also revise the first example 
(including deletion of the second sentence) and add a second example to 
illustrate the revised pro rata allocation rule. In addition, the final 
regulations revise the third example (proposed Sec.  49.4261-10(j)(2)) 
to remove the fuel references in light of the decision not to adopt 
proposed Sec.  49.4261-10(e)(2) and (g) in the final regulations.

III. Generally Applicable Air Transportation Excise Tax Rules and 
Aircraft Charter Rules

a. Payment and Collection Obligations

    Proposed Sec.  49.4261-1(b)(1) restated, in general terms, 
statutory provisions and existing regulations related to the duties and 
obligations of a person that makes a payment subject to the taxes 
imposed by section 4261 (that is, the taxpayer) and a person that 
receives such payments (that is, the collector). The duties and 
obligations include those imposed on the collector to collect the 
applicable tax from the taxpayer, to report the tax on Form 720, 
Quarterly Federal Excise Tax Return, and to remit the tax to the IRS. 
The duties and obligations enumerated in the proposed regulations also 
include the requirement that the collector make semimonthly deposits of 
the taxes imposed by section 4261.
    Proposed Sec.  49.4261-1(b)(2) restated the rule in section 
4263(c), which provides that if any tax imposed by section 4261 is not 
paid at the time payment for transportation is made, then, to the 
extent the tax is not collected under any other provision of subchapter 
C of chapter 33 of the Code, the tax must be paid by the carrier 
providing the initial segment of transportation that begins or ends in 
the United States.
    Regarding proposed Sec.  49.4261-1(b)(1), a commenter expressed 
concern that current published guidance (primarily in the form of 
revenue rulings) does not adequately address the duties and obligations 
of charter brokers with regard to collecting and reporting air 
transportation excise tax. The commenter described a charter broker as 
an intermediary that charters aircraft from a certificated air carrier 
(who actually provides the flight services), and that may act as an 
agent of the air carrier, an agent of the passengers, or as a principal 
in the chartering transaction. The commenter stated that the lack of 
guidance related to charter brokers has created considerable confusion 
in the charter broker industry. Further, the commenter stated that the 
need for clear and precise guidance is compounded by the aircraft 
charter rules provided in proposed Sec.  49.4261-7(h) (discussed later) 
and section 4263(c), which imposes liability on the air carrier 
providing the initial segment of transportation that begins or ends in 
the U.S. in cases where any tax imposed by section 4261 is not paid at 
the time the payment for transportation is made. Therefore, the 
commenter requested that the final regulations provide guidance 
regarding the circumstances in which a charter broker (rather than an 
air carrier) is obligated to collect air transportation excise tax and 
file Forms 720. The commenter suggested that such guidance should be 
consistent with the approaches taken in Rev. Rul. 68-256, 1968-1 C.B. 
489; Rev. Rul. 75-296, 1975-2 C.B. 440; and Rev. Rul. 2006-52, 2006-2 
C.B. 761.
    Regarding proposed Sec.  49.4261-1(b)(2), a commenter stated that 
the obligation placed on the air carrier to pay the tax imposed by 
section 4261 if the party responsible for collecting it fails to do so 
creates confusion and unfair liability exposure for the air carrier. 
Further, the commenter stated, as an example, that an IRS examiner 
could assert tax liability on the air carrier for uncollected tax when 
the air carrier has no means to determine whether another responsible 
party, such as a charter broker, had collected and paid over the tax. 
To alleviate these concerns, the commenter suggested that the final 
regulations provide that if an air carrier documents that it informed 
the charter broker of its obligation to collect the taxes imposed by 
section 4261 and file Forms 720 (see the discussion of proposed Sec.  
49.4261-7(h) later), then the air carrier will not be liable for 
uncollected tax under section 4263(c).

[[Page 5000]]

The commenter also suggested that the final regulations provide that if 
the IRS asserts liability on an air carrier under section 4263(c) 
(irrespective of whether the air carrier can show that it informed the 
charter broker of its obligations to collect and report) during an 
examination, then the air carrier should be entitled to obtain 
information from the IRS on whether the tax was paid by the charter 
broker or any other party.
    The Treasury Department and the IRS understand and share the 
commenters' concerns related to uncertainty and the possibility of 
surprise that may result from another party's IRS examination because 
of the rules in section 4263(c) and proposed Sec.  49.4261-1(b)(2). 
Because the interactions between section 4263(c) and other air 
transportation excise tax rules are complex and have broad implications 
for other members of the air transportation industry, the Treasury 
Department and the IRS believe that these issues require additional 
study and input from a broader cross-section of the air transportation 
industry. Further, the Treasury Department and the IRS believe that 
section 4263(c) issues should be addressed in a separate published 
guidance project that could also potentially consider the interplay 
between section 4263(c) and the existing regulatory rules in Sec.  
49.4261-7(h) and Sec.  49.4291-1.
    However, because, as mentioned earlier, proposed Sec.  49.4261-
1(b)(1) merely restated currently applicable statutory and regulatory 
rules, the final regulations adopt proposed Sec.  49.4261-1(b)(1) 
without change. In addition, the final regulations do not adopt the 
second sentence of proposed Sec.  49.4261-1(b)(2) so that the final 
regulations simply track the language of section 4263(c), as currently 
written, without further comment. The Treasury Department and the IRS 
believe it is necessary to finalize these rules because the existing 
regulations related to section 4263(c) reflect prior law, which has 
created widespread confusion among taxpayers and collectors in the air 
transportation area.

b. Aircraft Charters

    Proposed Sec.  49.4261-7(h), which generally restated existing 
rules in Sec.  49.4261-7(h), provided rules related to the application 
of the taxes imposed by section 4261 to situations in which a person 
provides air transportation services on an aircraft that was chartered 
from--and operated by--another party, commonly referred to as a ``wet 
lease.'' Proposed Sec.  49.4261-7(h)(2) provided that the charterer of 
an aircraft who sells transportation to other persons must collect and 
account for the tax with respect to all amounts paid to the charterer 
by such other persons. The proposed rule further provided that, in such 
a case, no tax will be due on the amount paid by the charterer for the 
charter of the aircraft but that it is the duty of the owner of the 
aircraft to advise the charterer of the charterer's obligation for 
collecting, accounting for, and paying over the tax to the IRS. This 
requirement is intended to ensure the parties communicate with each 
other regarding air transportation excise tax and prevent 
misunderstandings about which party is responsible for collecting tax 
under the arrangement.
    Two commenters requested clarification regarding the duty of the 
``owner of the aircraft to advise the charterer of the charterer's 
obligations for collecting, accounting for, and paying over the tax'' 
to the IRS imposed under the proposed rule. A commenter stated that in 
the air charter industry, the air carrier does not typically own the 
aircraft used to provide charter flights. Because the proposed rule 
imposes on the aircraft owner the duty to advise the charterer of its 
obligations, the commenter stated that confusion about which party must 
advise the charterer may result from the phrasing of the proposed rule. 
The commenter suggested the proposed rule use the phrase ``air 
carrier'' rather than ``owner of the aircraft.''
    A commenter also requested clarification about how and when the 
duty to advise the charterer of its obligations with regard to air 
transportation excise tax must be satisfied. Specifically, the 
commenter asked whether the duty to advise applies separately to each 
specific charter flight, or whether the duty may be satisfied as part 
of a long-term underlying agreement between the aircraft owner and the 
charterer such as a lease agreement for the aircraft owner's aircraft 
entered into by the aircraft owner and the charterer. The commenter 
also requested clarification regarding whether the duty to advise the 
charterer of its obligations with regard to air transportation excise 
tax creates an obligation on the part of the aircraft owner to collect 
the tax if the charterer fails to do so.
    The Treasury Department and the IRS understand and share the 
commenters' concern that, because the owner of a chartered aircraft may 
not be the party that operates the aircraft, the phrasing of the 
proposed rule may cause confusion. In addition, the Treasury Department 
and the IRS understand the need for clarification regarding the duty of 
the aircraft owner to advise the charterer of its collection 
obligations. However, because these rules are complex and have broad 
applicability to the air transportation industry, additional study and 
stakeholder input is required. Accordingly, a separate published 
guidance project is necessary to address: (a) the possible shifting of 
the duty to advise the charterer about its obligations for collecting, 
accounting for, and paying over the tax to the IRS to the air carrier 
operating the chartered aircraft instead of the owner of the chartered 
aircraft; (b) whether the duty to advise applies separately to each 
specific charter flight, or whether the duty may be satisfied as part 
of a long-term agreement between the aircraft owner and the charterer; 
and (c) whether the duty to advise the charterer of its obligations 
with regard to air transportation excise tax creates an obligation on 
the part of the aircraft owner to collect the tax if the charterer 
fails to do so.
    Because proposed Sec.  49.4261-7(h) merely restated currently 
applicable rules, the final regulations adopt proposed Sec.  49.4261-
7(h) without change. Until additional guidance is issued, Sec.  
49.4261-7(h), as finalized, and other existing published guidance 
apply.

Effect on Other Documents

    Revenue Ruling 67-414 (1967-2 C.B. 382), Revenue Ruling 72-309 
(1972-1 C.B. 348), and Revenue Ruling 2002-34 (2002-1 C.B. 1150) are 
obsoleted on January 19, 2021.

Applicability Dates

    For dates of applicability, see Sec. Sec.  40.0-1(e), 49.4261-1(g), 
49.4261-2(d), 49.4261-3(e), 49.4261-7(k), 49.4261-9(c), 49.4261-10(i), 
49.4262-1(f), 49.4262-2(e), 49.4262-3(e), 49.4281-1(e), 49.4263-1(b), 
49.4263-3(b), 49.4271-1(g), and 49.4721-2.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that this final rule will not have a significant 
economic impact on a substantial number of small entities. Although the 
rule may affect a substantial number of small entities, the economic 
impact of the regulations is not likely to be significant. Data are not 
readily available about the number of

[[Page 5001]]

taxpayers affected, but the number is likely to be substantial for both 
large and small entities because the rule may affect entities that 
serve as holding companies for aircraft that do not have many revenues 
or employees. The economic impact of these regulations is not likely to 
be significant, however, because these final regulations primarily 
clarify the application of the aircraft management services exception 
added to the Code by the TCJA. These final regulations will assist 
taxpayers in understanding the rules to qualify for the exemption under 
section 4261(e)(5) and make it easier for taxpayers to comply and IRS 
examiners to administer the exemption. Accordingly, the Secretary of 
the Treasury's delegate certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
Notwithstanding this certification, the Treasury Department and the IRS 
welcome comments on the impact of these regulations on small entities.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for the Office of Advocacy of the Small Business Administration for 
comment on its impact on small business. No comments were received from 
the Chief Counsel for the Office of Advocacy of the Small Business 
Administration.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 
cited in this document are published in the Internal Revenue Bulletin 
and are available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at http://www.irs.gov.

Drafting Information

    The principal author of these regulations is Michael H. Beker, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects

26 CFR Part 40

    Excise taxes, Reporting and recordkeeping requirements.

26 CFR Part 49

    Excise taxes, Reporting and recordkeeping requirements, Telephone, 
Transportation.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 40 and 49 are amended as follows:

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

0
 Paragraph 1. The authority citation for part 40 is amended by removing 
the entry for Sec.  40.6071(a)-3 to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section 40.0-1 is amended by redesignating paragraph (d) as 
paragraph (e), adding a new paragraph (d), and revising newly 
redesignated paragraph (e) to read as follows:


Sec.  40.0-1  Introduction.

* * * * *
    (d) Person. For purposes of this part, each business unit that has, 
or is required to have, a separate employer identification number is 
treated as a separate person. Thus, business units (for example, a 
parent corporation and a subsidiary corporation, a partner and the 
partner's partnership, or the various members of a consolidated group), 
each of which has, or is required to have, a different employer 
identification number, are separate persons.
    (e) Applicability date--(1) Paragraphs (a), (b), and (c) of this 
section. Paragraphs (a), (b), and (c) of this section apply to returns 
for periods beginning after March 31, 2013. For rules that apply before 
that date, see 26 CFR part 40, revised as of April 1, 2012.
    (2) Paragraph (d) of this section. Paragraph (d) of this section 
applies to returns for periods beginning on or after January 19, 2021. 
For rules that apply before that date, see 26 CFR part 40, revised as 
of April 1, 2020.


Sec.  40.6071(a)-3   [Removed]

0
Par. 3. Section 40.6071(a)-3 is removed.

PART 49--FACILITIES AND SERVICES EXCISE TAX REGULATIONS

0
Par. 4. The authority citation for part 49 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805. * * *


0
Par. 5. Section 49.4261-1 is revised to read as follows:


Sec.  49.4261-1  Imposition of tax; in general.

    (a) In general. Section 4261 of the Internal Revenue Code (Code) 
imposes three separate taxes on amounts paid for certain transportation 
of persons by air. Tax attaches at the time of payment for any 
transportation taxable under section 4261. The applicability of each 
section 4261 tax is generally determined on a flight-by-flight basis.
    (1) Percentage tax. Section 4261(a) imposes a 7.5 percent tax on 
the amount paid for the taxable transportation of any person. See 
section 4262(a) of the Code and Sec.  49.4262-1(a) for the definition 
of the term taxable transportation.
    (2) Domestic segment tax. Section 4261(b)(1) imposes a $3 tax 
(indexed annually for inflation pursuant to section 4261(e)(4)) on the 
amount paid for each domestic segment of taxable transportation. See 
section 4261(b)(2) for the definition of the term domestic segment. The 
domestic segment tax does not apply to a domestic segment beginning or 
ending at an airport that is a rural airport for the calendar year in 
which the segment begins or ends (as the case may be). See section 
4261(e)(1)(B) for the definition of the term rural airport.
    (3) International travel facilities tax. Section 4261(c) imposes a 
$12 tax (indexed annually for inflation pursuant to section 4261(e)(4)) 
on any amount paid (whether within or without the United States) for 
any transportation by air that begins or ends in the United States. The 
international travel facilities tax does not apply to any 
transportation that is entirely taxable under section 4261(a) 
(determined without regard to sections 4281 and 4282). See section 
4261(c)(2). A special rule applies to Alaska and Hawaii flights. See 
section 4261(c)(3).
    (b) Payment and collection obligations--(1) In general. The taxes 
imposed by section 4261 are collected taxes. In general, the person 
making the payment subject to tax is the taxpayer. See section 4261(d). 
The person receiving the payment is the collector (also commonly 
referred to as the collecting agent). See section 4291 of the Code. The 
collector must collect the applicable tax from the taxpayer, report the 
tax on Form 720, Quarterly Federal Excise Tax Return, and remit the tax 
to the Internal Revenue Service. See sections 4291, 6011, and 7501 of 
the Code. See Sec.  40.6011(a)-1 of this chapter and Sec.  49.4291-1. 
The collector must also make semimonthly deposits of the taxes imposed 
by section 4261. See section 6302(e) of the Code. See Sec. Sec.  40.0-
1(c), 40.6302(c)-1, and 40.6302(c)-3 of this chapter. See section 
4263(a) and (c) of the Code for special rules relating to the payment 
and collection of tax.
    (2) Failure to collect tax. If any tax imposed by section 4261 is 
not paid at the time payment for transportation is made, then, to the 
extent the tax is not collected under any other provision of subchapter 
C of chapter 33 of the Code,

[[Page 5002]]

the tax must be paid by the carrier providing the initial segment of 
transportation that begins or ends in the United States. See section 
4263(c). See section 6672 of the Code for rules relating to the 
application of the trust fund recovery penalty.
    (c) Type of aircraft. The taxes imposed by section 4261 generally 
apply regardless of the type of aircraft on which the transportation is 
provided, provided all of the other conditions for liability are 
present and no specific statutory exemption applies. See paragraph (f) 
of this section for a list of statutory exemptions from tax. Amounts 
paid for the transportation of persons by air cushion vehicles, also 
known as hovercraft, are not subject to the taxes imposed by section 
4261.
    (d) Purpose of transportation. The purpose of the transportation 
(for example, business or pleasure) is not a factor in determining 
taxability under section 4261.
    (e) Routes. Amounts paid for transportation may be taxable even if 
the transportation is not between two definite points. Unless otherwise 
exempt, a payment for continuous transportation that begins and ends at 
the same point is subject to tax. See section 4281 of the Code and 
Sec.  49.4281-1 for the exemption for small aircraft on nonestablished 
lines.
    (f) Exemptions from tax; cross-references--(1) Aircraft management 
services. For the exemption for certain aircraft management services, 
see section 4261(e)(5) of the Code and Sec.  49.4261-10.
    (2) Hard minerals, oil, and gas. For the exemption for certain uses 
related to the exploration, development, or removal of hard minerals, 
oil, or gas, see section 4261(f)(1).
    (3) Trees and logging operations. For the exemption for certain 
uses related to trees and logging operations, see section 4261(f)(2).
    (4) Air ambulances. For the exemption for air ambulances providing 
certain emergency medical transportation, see section 4261(g).
    (5) Skydiving. For the exemption for certain skydiving uses, see 
section 4261(h).
    (6) Seaplanes. For the exemption for certain seaplane segments, see 
section 4261(i).
    (7) Fractionally-owned aircraft. For the exemption for certain 
aircraft in fractional ownership aircraft programs, see section 
4261(j).
    (8) Small aircraft on nonestablished lines. For the exemption for 
certain small aircraft on nonestablished lines, see section 4281 of the 
Code and Sec.  49.4281-1.
    (9) Affiliated groups. For the exemption for certain transportation 
of members of an affiliated group, see section 4282.
    (10) United States and territories. For exemptions authorized by 
the Secretary of the Treasury or his delegate for the exclusive use of 
the United States, see section 4293.
    (g) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply before that date, see 26 
CFR part 49, revised as of April 1, 2020.

0
Par. 6. Section 49.4261-2 is amended by:
0
1. Revising paragraphs (a) and (b).
0
2. Adding paragraph (d).
    The revisions and addition read as follows:


Sec.  49.4261-2  Application of tax.

    (a) Tax on total amount paid. The tax imposed by section 4261(a) of 
the Internal Revenue Code (Code) is measured by the total amount paid 
for taxable transportation, whether paid in cash or in kind.
    (b) Tax on transportation of each person. The taxes imposed by 
section 4261(b) and (c) of the Code are head taxes and, therefore, 
apply on a per-passenger basis. The taxes apply to each passenger for 
whom an amount is paid, regardless of whether the payment is made as a 
single lump sum or is made individually for each passenger. In the case 
of charter flights for which a fixed amount is paid, the section 
4261(b) and (c) taxes are computed by multiplying the applicable rate 
of tax by the number of passengers transported on the aircraft.
* * * * *
    (d) Applicability date. Paragraphs (a) and (b) of this section 
apply to amounts paid on and after January 19, 2021. For rules that 
apply before that date, see 26 CFR part 49, revised as of April 1, 
2020.

0
Par. 7. Section 49.4261-3 is amended by:
0
1. Removing ``Sec.  49.4262(c)-1'' wherever it appears and adding 
``Sec.  49.4262-3'' in its place.
0
2. In the first sentence of paragraph (a), removing ``The tax imposed 
by section 4261(a)'' and adding ``The taxes imposed by section 4261(a) 
and (b) of the Internal Revenue Code (Code)'' in its place.
0
3. In the second sentence of paragraph (a), adding ``under section 
4261(a) and (b)'' at the end of the sentence.
0
4. Revising paragraphs (b) and (c).
0
5. In paragraph (d), removing ``section 4262(b) and Sec.  49.4262(b)-
1'' and adding ``section 4262(b) of the Code and Sec.  49.4262-2'' in 
its place.
0
6. Adding paragraph (e).
    The revisions and additions read as follows:


Sec.  49.4261-3  Payments made within the United States.

* * * * *
    (b) Other transportation. In the case of transportation, other than 
that described in paragraph (a) of this section, for which payment is 
made in the United States, the taxes imposed by section 4261(a) and (b) 
apply with respect to the amount paid for that portion of such 
transportation by air which is directly or indirectly from one port or 
station in the United States to another port or station in the United 
States, but only if such portion is not a part of uninterrupted 
international air transportation within the meaning of section 
4262(c)(3) of the Code and Sec.  49.4262-3(c). Transportation that:
    (1) Begins in the United States or the 225-mile zone and ends 
outside such area,
    (2) Begins outside the United States or the 225-mile zone and ends 
inside such area, or
    (3) Begins outside the United States and ends outside such area, is 
taxable only with respect to the portion of the transportation by air 
which is directly or indirectly from one port or station in the United 
States to another port or station in the United States, but only if 
such portion is not a part of ``uninterrupted international air 
transportation'' within the meaning of section 4262(c)(3) and Sec.  
49.4262-3(c). Thus, on a trip by air from Chicago to London, England, 
with a stopover at New York, for which payment is made in the United 
States, if the portion from Chicago to New York is not a part of 
``uninterrupted international air transportation'' within the meaning 
of section 4262(c)(3) and Sec.  49.4262-3(c), the taxes would apply to 
the part of the payment which is applicable to the transportation from 
Chicago to New York. However, if the portion from Chicago to New York 
is a part of ``uninterrupted international air transportation'' within 
the meaning of section 4262(c)(3) and Sec.  49.4262-3(c), the taxes 
would not apply.
    (c) Method of computing tax on taxable portion. Where a payment is 
made for transportation which is partially taxable under paragraph (b) 
of this section, the tax imposed by section 4261(a) may be computed on 
that proportion of the total amount paid which the mileage of the 
taxable portion of the transportation bears to the mileage of the 
entire trip.
* * * * *
    (e) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply

[[Page 5003]]

before that date, see 26 CFR part 49, revised as of April 1, 2020.


Sec.  49.4261-4  [Amended]

0
 Par. 8. Section 49.4261-4 is amended by:
0
1. In paragraph (a), removing the first ``4261(a)'' and adding ``4261 
of the Internal Revenue Code (Code)'' in its place.
0
2. In paragraph (a), removing ``section 4261(a) (see section 4264(d))'' 
and adding ``section 4261 (see section 4263(d) of the Code)'' in its 
place.
0
3. In paragraph (b), removing ``Sec.  49.4262(c)-1'' and adding ``Sec.  
49.4262-3'' in its place.
0
4. In the first sentence of paragraph (d), removing ``Sec.  49.4262(c)-
1'' and adding ``Sec.  49.4262-3'' in its place.
0
5. In the first sentence of paragraph (d), removing ``six-hour'' and 
adding ``12-hour'' in its place.


Sec.  49.4261-5  [Amended]

0
Par. 9. Section 49.4261-5 is amended as follows:
0
1. In paragraph (a), removing ``4261(b)'' wherever it appears and 
adding ``4261(a) and (b)'' in its place.
0
2. In paragraph (c), removing ``Sec.  49.4262(b)-1'' and adding ``Sec.  
49.4262-2'' in its place.

0
Par. 10. Section 49.4261-7 is amended by:
0
1. In the introductory paragraph, removing ``4263, 4292, 4293, or 
4294'' and adding ``4261, 4281, 4282, or 4293 of the Internal Revenue 
Code,'' in its place.
0
2. Removing and reserving paragraphs (b), (d), (e), and (g).
0
3. Revising paragraph (h).
0
4. In paragraph (i), removing ``paragraph (c) of Sec.  49.4261-2 and 
paragraph (f)(4) of Sec.  49.4261-8'' and adding ``Sec. Sec.  49.4261-
2(c) and 49.4261-8(f)(4)'' in its place.
0
5. Adding paragraph (k).
    The revision and addition read as follows:


Sec.  49.4261-7  Examples of payments subject to tax.

* * * * *
    (h) Aircraft charters--(1) When no charge is made by the charterer 
of an aircraft to the persons transported, the amount paid by the 
charterer for the charter of the aircraft is subject to tax.
    (2) The charterer of an aircraft who sells transportation to other 
persons must collect and account for the tax with respect to all 
amounts paid to the charterer by such other persons. In such case, no 
tax will be due on the amount paid by the charterer for the charter of 
the aircraft but it shall be the duty of the owner of the aircraft to 
advise the charterer of the charterer's obligation for collecting, 
accounting for, and paying over the tax to the Internal Revenue 
Service.
* * * * *
    (k) Applicability date. Paragraph (h) of this section applies to 
amounts paid on and after January 19, 2021. For rules that apply before 
that date, see 26 CFR part 49, revised as of April 1, 2020.


Sec.  49.4261-8  [Amended]

0
Par. 11. Section 49.4261-8 is amended as follows:
0
1. In the introductory paragraph, removing ``4263, 4292, 4293, or 
4294'' and adding ``4261, 4281, 4282, or 4293 of the Internal Revenue 
Code'' in its place.
0
2. Paragraphs (f)(2), (3), and (5) are removed and reserved.

0
 Par. 12. Section 49.4261-9 is revised to read as follows:


Sec.  49.4261-9  Mileage awards.

    (a) Tax imposed. Any amount paid (and the value of any other 
benefit provided) to an air carrier (or any related person) for the 
right to provide mileage awards for or other reductions in the cost of 
any transportation of persons by air is an amount paid for taxable 
transportation and is therefore subject to the tax imposed by section 
4261(a) of the Internal Revenue Code. See section 4261(e)(3)(A).
    (b) [Reserved]
    (c) Applicability date. This section applies to amounts paid on and 
after January 19, 2021.

0
Par. 13. Section 49.4261-10 is revised to read as follows:


Sec.  49.4261-10   Aircraft management services.

    (a) In general--(1) Overview. This section prescribes rules 
relating to the exemption under section 4261(e)(5) of the Internal 
Revenue Code (Code) for amounts paid (in cash or in kind) by an 
aircraft owner to an aircraft management services provider for certain 
aircraft management services (aircraft management services exemption). 
Pursuant to section 4261(e)(5), the tax imposed by section 4261 of the 
Code does not apply to amounts paid by an aircraft owner to an aircraft 
management services provider for aircraft management services related 
to maintenance and support of the aircraft owner's aircraft; or related 
to flights on the aircraft owner's aircraft (flight services). The 
aircraft management services exemption applies to amounts paid by an 
aircraft owner to an aircraft management services provider for flight 
services on the aircraft owner's aircraft, even if the aircraft owner 
is not on the flight. The aircraft management services exemption does 
not apply to amounts paid to an aircraft management services provider 
by another person on behalf of an aircraft owner (other than in a 
principal-agent scenario in which the aircraft owner is the principal). 
In addition, amounts paid for aircraft management services by a party 
related to the aircraft owner are not amounts paid by the aircraft 
owner solely by virtue of the relationship between the aircraft owner 
and the related party. However, if an aircraft owner leases an aircraft 
to another person, including a related party, amounts paid by the 
lessee to an aircraft management services provider for aircraft 
management services related to the leased aircraft qualify for the 
aircraft management services exemption, provided the lease is not a 
disqualified lease and all other requirements of section 4261(e)(5) are 
satisfied. For example, amounts paid for aircraft management services 
by one member of an affiliated group (as that term is defined in 
section 4282 of the Code) for flights on an aircraft owned by another 
member of the affiliated group are not amounts paid by the aircraft 
owner unless the member owning the aircraft leases the aircraft to the 
member of the affiliated group that pays for the aircraft management 
services. See paragraph (b) of this section for definitions of terms 
used in this section.
    (2) Private aviation. The aircraft management services exemption is 
limited to aircraft management services related to aircraft used in 
private aviation.
    (3) Adequate records required. In order to qualify for the aircraft 
management services exemption, an aircraft owner and aircraft 
management services provider must maintain adequate records to show 
that the amounts paid by the aircraft owner to the aircraft management 
services provider relate to aircraft management services specifically 
for the aircraft owner's aircraft or for flights on the aircraft 
owner's aircraft and to support any allocations required under 
paragraph (c) under of this section. Such records may include the 
agreement, if any, between the aircraft owner and the aircraft 
management services provider, evidence of aircraft ownership, evidence 
that amounts paid for aircraft management services came from the 
aircraft owner, and the aircraft management services provider's fee 
schedule.
    (b) Definitions. This paragraph provides definitions applicable to 
this section.

[[Page 5004]]

    (1) Aircraft management services. The term aircraft management 
services means--
    (i) Statutory services. The services listed in section 
4261(e)(5)(B)(i)-(v); and
    (ii) Other services. Any service (including, but not limited to, 
purchasing fuel, purchasing aircraft parts, and arranging for the 
fueling of an aircraft owner's aircraft) provided directly or 
indirectly to an aircraft owner in order to provide air transportation 
to the aircraft owner on the aircraft owner's aircraft at a level and 
quality of service required under the agreement between the aircraft 
owner and the aircraft management services provider.
    (2) Aircraft management services provider. The term aircraft 
management services provider means a person that provides aircraft 
management services to an aircraft owner.
    (3) Aircraft owner--(i) In general. Except as otherwise provided in 
this section, the term aircraft owner means a person that owns an 
aircraft managed by an aircraft management services provider (commonly 
referred to as a managed aircraft), or a person that leases a managed 
aircraft (lessee) pursuant to a lease that is not a disqualified lease. 
A person owns a managed aircraft if the person holds legal title to the 
aircraft, or if the person holds substantial incidents of ownership in 
the aircraft for a period of more than 31 days. A lessee includes the 
beneficiary of an owner trust that holds legal title to the managed 
aircraft.
    (ii) Persons not included in the definition of aircraft owner. A 
lessee of an aircraft under a disqualified lease cannot be an aircraft 
owner with respect to the aircraft leased pursuant to the disqualified 
lease. A person that owns stock in a commercial airline does not 
qualify as an aircraft owner of that commercial airline's aircraft. A 
participant in a fractional aircraft ownership program, as defined in 
section 4043(c)(2) of the Code, does not qualify as an aircraft owner 
of the program's managed aircraft if the amount paid for such person's 
participation is exempt from the tax imposed by section 4261 reason of 
section 4261(j).
    (4) Disqualified lease. The term disqualified lease has the meaning 
given to it by section 4261(e)(5)(C)(ii).
    (5) Fair market value. The term fair market value means the value 
of comparable flights or services provided with respect to a comparable 
aircraft as of the date such flights or services are provided. The 
aircraft management services provider's published fee schedule in 
effect on the date(s) the flights or services are provided may be used 
as evidence of fair market value.
    (6) For-hire flight. The term for-hire flight means the use of an 
aircraft to transport passengers for compensation that is paid in cash 
or in kind. The term includes, but is not limited to, charter flights, 
air taxi flights, and sightseeing flights (commonly referred to as 
flightseeing flights).
    (7) Owner trust. The term owner trust means an arrangement in which 
legal title of an aircraft is held in the name of the trustee of the 
trust for the limited purpose of registering the aircraft in the United 
States with the Federal Aviation Administration pursuant to the 
registration requirements in 49 U.S.C. 40102(a) and 44102(a), and 14 
CFR part 47.
    (8) Private aviation. The term private aviation means the use of an 
aircraft for civilian flights, except scheduled passenger service for 
which tickets (or substitutes equivalent to tickets) are sold on a 
seat-by-seat basis to the general public. The term includes, but is not 
limited to, civilian flights operated under Part 135 (14 CFR part 135) 
of the Federal Aviation Regulations prescribed by the Federal Aviation 
Administration (FARs).
    (9) Substitute aircraft. The term substitute aircraft means an 
aircraft, other than the aircraft owner's aircraft, that is provided by 
an aircraft management services provider to the aircraft owner when the 
aircraft owner's aircraft is not available, regardless of the reason 
for the unavailability.
    (c) Pro rata allocation--(1) In general. Except as provided in 
paragraph (c)(2)(iii) of this section, when an amount paid to an 
aircraft management services provider includes a portion that is 
subject to the tax imposed by section 4261 and a portion that consists 
of amounts described in section 4261(e)(5)(A), the exception in section 
4261(e)(5) applies on a pro rata basis only to the portion that 
consists of amounts described in section 4261(e)(5)(A). See section 
4261(e)(5)(D). In such case, the tax base for the portion that is 
subject to the tax imposed by section 4261(a) is the amount paid for 
the flights or services, provided the amount paid is separable and 
shown in exact amounts in the records pertaining to the charge. If the 
portion of the amount paid that is subject to the tax imposed by 
section 4261(a) is not separable, the tax base is the fair market value 
of the flights or services. However, the tax base determined in the 
previous sentence may not exceed the total amount paid (that is, the 
sum of the portion that is subject to the tax imposed by section 
4261(a) and the portion that consists of amounts described in section 
4261(e)(5)(A)).
    (2) Substitute aircraft--(i) Flight treated as a charter. If an 
aircraft management services provider provides a flight to an aircraft 
owner on a substitute aircraft, the flight is treated as a charter 
flight provided by the aircraft management services provider to the 
aircraft owner, regardless of whether the aircraft owner is on the 
flight, and the aircraft owner is treated as the charterer of such 
flight. If the flight constitutes taxable transportation, as defined in 
section 4262 of the Code, the tax imposed by section 4261(a) applies, 
unless the flight is exempt from such tax by reason of an exemption 
other than the aircraft management services exemption. See section 
4261(b) and (c) for other taxes that may apply to flights provided by 
an aircraft management services provider to an aircraft owner on 
substitute aircraft.
    (ii) General rule for flights provided on substitute aircraft. In 
cases where an aircraft management services provider provides a flight 
to an aircraft owner on a substitute aircraft and an allocation is 
required, the rule in paragraph (c)(1) of this section applies in 
determining the tax base. In all other cases, the tax base and the tax 
imposed by section 4261(a) thereon must be determined in accordance 
with the rules of Sec.  49.4261-7(h)(1), unless the flight is otherwise 
exempt from such tax by reason of an exemption other than the aircraft 
management services exemption.
    (iii) Special rule for for-hire flights provided on substitute 
aircraft. In cases where a substitute aircraft is used to provide a 
for-hire flight and an amount is paid for the flight by someone other 
than the aircraft owner, the tax base and the tax imposed by section 
4261(a) thereon must be determined in accordance with the rules in 
Sec.  49.4261-7(h)(2), unless the flight is otherwise exempt from such 
tax by reason of an exemption other than the aircraft management 
services exemption.
    (d) Choice of flight rules. Whether a flight on an aircraft owner's 
aircraft operates pursuant to the rules under FARs Part 91 (14 CFR part 
91) or pursuant to the rules under FARs Part 135 does not affect the 
application of section 4261(e)(5).
    (e) Aircraft available for hire. Whether an aircraft owner permits 
an aircraft management services provider or other person to use its 
aircraft to provide for-hire flights (for example, when the aircraft is 
not being used by the aircraft owner or when the aircraft is being 
moved in deadhead service) does not affect the application of section 
4261(e)(5). However, an amount paid for

[[Page 5005]]

for-hire flights on the aircraft owner's aircraft, except payments made 
by the aircraft owner, does not qualify for the aircraft management 
services exemption under section 4261(e)(5). Therefore, an amount paid 
by someone other than the aircraft owner for a for-hire flight on the 
aircraft owner's aircraft is subject to the tax imposed by section 4261 
unless the flight is otherwise exempt from such tax by reason of an 
exemption other than the aircraft management services exemption. See 
Sec.  49.4261-7(h) for rules relating to the application of the tax 
imposed by section 4261 on amounts paid for certain charter flights.
    (f) Billing methods. Except as otherwise provided in this section, 
the method an aircraft management services provider bills, invoices, or 
otherwise charges an aircraft owner for aircraft management services, 
whether by specific itemization of costs, flat monthly or hourly fee, 
or otherwise, does not affect the application of section 4261(e)(5).
    (g) Multiple aircraft management services providers not 
disqualifying. Whether an aircraft owner pays amounts to more than one 
aircraft management services provider for aircraft management services 
does not affect the application of section 4261(e)(5).
    (h) Examples. The following examples illustrate the provisions of 
this section.
    (1) Example 1--(i) Facts. During the first quarter of 2021, an 
aircraft owner pays a $3,000 monthly management fee to an aircraft 
management services provider for services related to operating the 
aircraft owner's aircraft. The aircraft owner used its own aircraft for 
all but one of the flights the owner took during the period. On the one 
occasion that the aircraft owner's aircraft was unavailable when the 
aircraft owner wanted to fly, the aircraft management services provider 
used a substitute aircraft to transport the aircraft owner. The flight 
was within the continental United States and the aircraft owner 
received no compensation for the transportation of other passengers on 
the flight. The aircraft owner paid $1,000 for the flight on the 
substitute aircraft. The aircraft management services provider included 
the $1,000 charge for the substitute aircraft as a separate line item 
on the monthly management fee invoice.
    (ii) Analysis. The tax imposed by section 4261(a) applies to 
services that do not qualify for the section 4261(e)(5) exemption; in 
this case, the flight provided on the substitute aircraft. The flight 
provided on the substitute aircraft is treated as a charter flight for 
purposes of the tax imposed by section 4261(a), and the owner is 
treated as the charterer of the flight. The amount paid by the aircraft 
owner for the flight on the substitute aircraft is the section 4261(a) 
tax base. The monthly invoice from the aircraft management services 
provider to the aircraft owner included a line item in the amount of 
$1,000 for the charter flight. Because $1,000 is the actual amount paid 
for the flight, this amount is the section 4261(a) tax base. The tax 
imposed by section 4261(b) also applies to the flight on a per-
passenger basis. See Sec.  49.4261-2(b) for rules regarding the 
application of the tax imposed by section 4261(b).
    (2) Example 2--(i) Facts. Same facts as in paragraph (h)(1) of this 
section (Example 1), except the invoice does not show the amount paid 
for the flight on the substitute aircraft and that amount is not 
otherwise separable from the monthly management fee. The fair market 
value of the flight on the substitute aircraft is $1,000.
    (ii) Analysis. The tax imposed by section 4261(a) applies to the 
flight provided on the substitute aircraft. The amount paid for the 
flight on the substitute aircraft is not otherwise separable from the 
monthly management fee. Because $1,000 is the fair market value of the 
flight, and such amount does not exceed the $3,000 monthly management 
fee paid by the aircraft owner, this amount is the section 4261(a) tax 
base. The tax imposed by section 4261(b) also applies to the flight on 
a per-passenger basis. See Sec.  49.4261-2(b) for rules regarding the 
application of the tax imposed by section 4261(b).
    (3) Example 3--(i) Facts. An aircraft owner pays a monthly 
management fee to an aircraft management services provider for aircraft 
management services related to the aircraft owner's aircraft. When the 
aircraft is not being used by the owner, the owner sometimes permits a 
charter company to use the aircraft to provide charter flights. At 
other times when the aircraft is not being used by the owner, the owner 
permits a tour operator to use the aircraft for flightseeing tours. All 
charter and flightseeing flights on the aircraft constitute taxable 
transportation, as that term is defined in section 4262, and no 
exemptions (other than section 4261(e)(5)) apply. No charter or 
flightseeing flights are provided on a substitute aircraft. The 
aircraft's maximum certificated takeoff weight is 7,000 pounds.
    (ii) Analysis. Amounts paid by the aircraft owner to the aircraft 
management services provider for aircraft management services related 
to the aircraft owner's aircraft are exempt under section 4261(e)(5). 
Amounts paid by the charterer or passengers for the charter flights are 
subject to tax under section 4261(a) and (b). See Sec.  49.4261-7(h) 
for rules relating to the application of the tax imposed by section 
4261 on amounts paid for charter flights. See Sec.  49.4261-2(b) for 
rules regarding the application of the tax imposed by section 4261(b). 
Amounts paid by flightseeing customers for flightseeing tours are also 
subject to tax under section 4261(a) and (b). If a payment for a 
flightseeing tour includes charges for nontransportation services, the 
charges for the nontransportation services may be excluded in computing 
the tax payable provided the payments are separable and provided in 
exact amounts. See Sec.  49.4261-2(c).
    (i) Applicability date. This section applies to amounts paid on and 
after January 19, 2021.


Sec.  49.4262(a)-1  [Redesignated]

0
Par. 14. Section 49.4262(a)-1 is redesignated as Sec.  49.4262-1.

0
Par. 15. Newly redesignated Sec.  49.4262-1 is amended by:
0
1. In paragraph (a) introductory text, removing ``section 4262(b) (see 
Sec.  49.4262(b)-1)'' and adding ``section 4262(b) of the Internal 
Revenue Code (Code) (see Sec.  49.4262-2)'' in its place.
0
2. In the first sentence of paragraph (a)(1), removing 
``Transportation'' and adding ``Transportation by air'' in its place.
0
3. In the first sentence of paragraph (a)(1), removing ``(the ``225-
mile zone'')'' and adding ``(225-mile zone)'' in its place.
0
4. Revising paragraph (a)(2).
0
5. In paragraph (b), removing ``subparagraphs (1) and (5) of this 
paragraph'' and adding ``paragraph (b)(1) and (5) of this section'' in 
its place.
0
6. In paragraph (b), removing ``subject to the tax'' and adding 
``subject to the taxes imposed by section 4261(a) and (b)'' in its 
place.
0
7. Revising paragraph (b)(2).
0
8. Removing and reserving paragraph (c).
0
9. Revising introductory paragraph (d); designating Example (1) as 
paragraph (d)(1) and revising newly designated paragraph (d)(1).
0
10. In paragraph (d):
0
a. Designating Example (2) as paragraph (d)(2) and removing and 
reserving newly designated paragraph (d)(2).
0
b. Designating Example (3) as paragraph (d)(3) and removing ``6 hours'' 
wherever it appears and adding ``12 hours'' in its place and also 
removing ``subject to tax'' wherever it appears and adding ``subject to 
the taxes

[[Page 5006]]

imposed by section 4261(a) and (b)'' in its place.
0
c. Designating Example (4) as paragraph (d)(4), and removing ``six 
hours'' wherever it appears and adding ``12 hours'' in its place and 
also removing ``subject to tax'' wherever it appears and adding 
``subject to the taxes imposed by section 4261(a) and (b)'' in its 
place.
0
11. Revising paragraph (e).
0
12. Adding paragraph (f).
    The revisions and addition read as follows:


Sec.  49.4262-1   Taxable transportation.

    (a) * * *
    (2) In the case of any other transportation by air, that portion of 
such transportation that is directly or indirectly from one port or 
station in the United States to another port or station in the United 
States, but only if such transportation is not part of uninterrupted 
international air transportation within the meaning of section 
4262(c)(3) of the Code and Sec.  49.4262-3(c). Transportation from one 
port or station in the United States occurs whenever a carrier, after 
leaving any port or station in the United States, makes a regularly 
scheduled stop at another port or station in the United States 
irrespective of whether stopovers are permitted or whether passengers 
disembark.
* * * * *
    (b) * * *
    (2) New York to Vancouver, Canada, with a stop at Toronto, Canada;
* * * * *
    (d) Examples. The following examples illustrate the application of 
section 4262(a)(2) and the taxes imposed by section 4261(a) and (b) of 
the Code:
    (1) Example (1). A purchases in New York a ticket for air 
transportation from New York to Nassau, Bahamas, with a scheduled 
stopover of 14 hours in Miami. The part of the transportation from New 
York to Miami is taxable transportation as defined in section 4262(a) 
because such transportation is from one station in the United States to 
another station in the United States and the trip is not uninterrupted 
international air transportation (because the scheduled stopover 
interval in Miami is greater than 12 hours). Therefore, the amount paid 
for the transportation from New York to Miami is subject to the taxes 
imposed by section 4261(a) and (b).
* * * * *
    (e) Examples of transportation that is not taxable transportation. 
The following examples illustrate transportation that is not taxable 
transportation:
    (1) New York to Trinidad with no intervening stops;
    (2) Minneapolis to Edmonton, Canada, with a stop at Winnipeg, 
Canada;
    (3) Los Angeles to Mexico City, Mexico, with stops at Tijuana and 
Guadalajara, Mexico;
    (4) New York to Whitehorse, Yukon Territory, Canada, by air with a 
scheduled stopover in Chicago of five hours. Amounts paid for the 
transportation referred to in examples set forth in paragraphs (e)(1), 
(2), and (3) of this section are not subject to the tax regardless of 
where payment is made, since none of the trips:
    (i) Begin in the United States or in the 225-mile zone and end in 
the United States or in the 225-mile zone, nor
    (ii) Contain a portion of transportation which is directly or 
indirectly from one port or station in the United States to another 
port or station in the United States. The amount paid within the United 
States for the transportation referred to in the example set forth in 
paragraph (4) of this section is not subject to tax since the entire 
trip (including the domestic portion thereof) is uninterrupted 
international air transportation within the meaning of section 
4262(c)(3) and Sec.  49.4262-3(c). In the event the transportation is 
paid for outside the United States, no tax is due since the 
transportation does not begin and end in the United States.
* * * * *
    (f) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply before that date, see 26 
CFR part 49, revised as of April 1, 2020.


Sec.  49.4262(b)-1  [Redesignated]

0
Par. 16. Section 49.4262(b)-1 is redesignated as Sec.  49.4262-2.

0
Par. 17. Newly redesignated Sec.  49.4262-2 is amended as follows:
0
1. In paragraph (a), ``section 4262(b)'' is removed and ``section 
4262(b) of the Internal Revenue Code'' is added in its place.
0
2. In paragraph (b)(2), Example (2) is removed and reserved.
0
3. Revise paragraph (d).
0
4. Add paragraph (e).
    The revisions and additions read as follows:


Sec.  49.4262-2  Exclusion of certain travel.

* * * * *
    (d) Example. The application of paragraph (c) of this section may 
be illustrated by the following example: A purchases in San Francisco a 
ticket for transportation by air to Honolulu, Hawaii. The portion of 
the transportation which is outside the continental United States and 
is outside Hawaii is excluded from taxable transportation. The tax 
applies to that part of the payment made by A which is applicable to 
the portion of the transportation between the airport in San Francisco 
and the three-mile limit off the coast of California (a distance of 15 
miles) and between the three-mile limit off the coast of Hawaii and the 
airport in Honolulu (a distance of 5 miles). The part of the payment 
made by A which is applicable to the taxable portion of his 
transportation and the tax due thereon are computed in accordance with 
paragraph (c)(1) as follows:

                        Table 1 to Paragraph (d)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Mileage of entire trip (San Francisco airport to                   2,400
 Honolulu airport) (miles)..............................
Mileage in continental United States (miles)............              15
Mileage in Hawaii (miles)...............................               5
                                                         ---------------
                                                                      20
Fare from San Francisco to Honolulu.....................         $168.00
Payment for taxable portion (20/2400 x $168)............           $1.40
Tax due (7.5% (rate in effect on date of payment) x                $0.11
 $1.40).................................................
------------------------------------------------------------------------

    (All distances and fares assumed for purposes of this example. This 
example addresses only the computation of the tax imposed by section 
4261(a). It does not address the computation of any other tax imposed 
by section 4261 that may apply to these facts.)
    (e) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply

[[Page 5007]]

before that date, see 26 CFR part 49, revised as of April 1, 2020.


Sec.  49.4262(c)-1  [Redesignated]

0
Par. 18. Section 49.4262(c)-1 is redesignated as Sec.  49.4262-3.

0
Par. 19. Newly redesignated Sec.  49.4262-3 is amended as follows:
0
1. In the first sentence of paragraph (a), removing ``includes only the 
48 States existing on July 25, 1956 (the date of the enactment of the 
Act of July 25, 1956 (Pub. L. 796, 84th Cong., 70 Stat. 644)) and the 
District of Columbia'' and adding ``means the District of Columbia and 
the States other than Alaska and Hawaii'' in its place.
0
2. In paragraph (a), the last sentence is removed.
0
3. In paragraph (c), removing ``six hours'' wherever it appears and 
adding ``12 hours'' in its place.
0
4. In paragraph (c), removing ``6 hours'' wherever it appears and add 
``12 hours'' in its place.
0
5. In paragraph (c), removing ``six-hour'' wherever it appears and 
adding ``12-hour'' in its place.
0
6. In paragraph (c)(2), removing ``paragraph (a)(2) of Sec.  
49.4264(c)-1'' and adding ``Sec.  49.4263-3(a)(2)'' in its place.
0
7. Adding paragraphs (d) and (e).
    The additions read as follows:


Sec.  49.4262-3  Definitions.

* * * * *
    (d) Transportation. For purposes of the regulations in this 
subpart, the term transportation includes layover or waiting time and 
movement of the aircraft in deadhead service.
    (e) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply before that date, see 26 
CFR part 49, revised as of April 1, 2020.


Sec.  49.4263-5  [Redesignated]

0
 Par. 20. Section 49.4263-5 is redesignated as Sec.  49.4281-1.

0
Par. 21. Newly redesignated Sec.  49.4281-1 is amended by:
0
1. Revising paragraphs (a) and (b).
0
2. In paragraph (c), adding a sentence at the end of the paragraph.
0
3. Adding paragraphs (d) and (e).
    The revisions and additions read as follows:


Sec.  49.4281-1  Small aircraft on nonestablished lines.

    (a) In general. Amounts paid for the transportation of persons on a 
small aircraft of the type sometimes referred to as air taxis shall be 
exempt from the tax imposed under section 4261 of the Internal Revenue 
Code provided the aircraft has a maximum certificated takeoff weight of 
6,000 pounds or less determined as provided in paragraph (b) of this 
section. The exemption does not apply, however, when the aircraft is 
operated on an established line or when the aircraft is a jet aircraft.
    (b) Maximum certificated takeoff weight. The term maximum 
certificated takeoff weight means the maximum certificated takeoff 
weight shown in the type certificate or airworthiness certificate 
issued by the Federal Aviation Administration.
    (c) * * * An aircraft is not considered as operated on an 
established line at any time during which the aircraft is being 
operated on a flight the sole purpose of which is sightseeing.
    (d) Jet aircraft. For purposes of this section, the term jet 
aircraft does not include any aircraft which is a rotorcraft (such as a 
helicopter) or propeller aircraft.
    (e) Applicability date. This section applies to amounts paid on and 
January 19, 2021. For rules that apply before that date, see 26 CFR 
part 49, revised as of April 1, 2020.


Sec.  49.4264(a)-1   [Redesignated]

0
 Par. 22. Section 49.4264(a)-1 is redesignated as Sec.  49.4263-1.

0
Par. 23. Newly redesignated Sec.  49.4263-1 is revised to read as 
follows:


Sec.  49.4263-1   Duty to collect the tax; payments made outside the 
United States.

    (a) Duty to collect tax. Where payment upon which tax is imposed by 
section 4261 of the Internal Revenue Code is made outside the United 
States for a prepaid order, exchange order, or similar order, the 
person furnishing the initial transportation pursuant to such order 
must collect the applicable tax. See section 4291 and the regulations 
under section 4291 for cases where persons receiving payment must 
collect the tax. See section 6672 for rules relating to the application 
of the trust fund recovery penalty.
    (b) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply before that date, see 26 
CFR part 49, revised as of April 1, 2020.


Sec.  49.4264(b)-1  [Redesignated]

0
Par. 24. Section 49.4264(b)-1 is redesignated as Sec.  49.4263-2.


Sec.  49.4263-2   [Amended]

0
Par. 25. Newly redesignated Sec.  49.4263-2 is amended as follows:
0
1. In the first sentence of paragraph (a), removing ``4264(b)'' and 
adding ``4263(b) of the Internal Revenue Code (Code)'' in its place.
0
2. In the last sentence of paragraph (a), removing ``office of the 
district director for the district in which the person making the 
report is located,'' and adding ``Commissioner'' in its place.
0
3. In paragraph (b), adding ``of the Code'' at the end of the 
paragraph.
0
4. In paragraph (c), removing ``Illustration.'' and adding ``Example.'' 
in its place.
0
5. In the last sentence of paragraph (c), removing ``office of the 
district director of internal revenue for the district in which the 
carrier is located,'' and adding in its place ``Commissioner''.


Sec.  49.4264(c)-1  [Redesignated]

0
 Par. 26. Section 49.4264(c)-1 is redesignated as Sec.  49.4263-3.

0
Par. 27. Newly redesignated Sec.  49.4263-3 is amended by:
0
1. Revising paragraph (a).
0
2. In paragraph (b), removing the second sentence.
0
3. In paragraph (b), removing ``4264'' wherever it appears and adding 
``4263'' in its place.
0
4. In paragraph (b), adding ``of the Code'' after ``4291'' in the first 
sentence.
0
5. Removing and reserving paragraph (c).
0
6. Adding paragraph (d).
    The revisions and additions read as follows:


Sec.  49.4263-3   Special rule for the payment of tax.

    (a) In general. For the rules applicable under section 4263(c) of 
the Internal Revenue Code, see Sec.  49.4261-1(b)(2).
* * * * *
    (d) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply before that date, see 26 
CFR part 49, revised as of April 1, 2020.


Sec.  49.4264(d)-1   [Redesignated]

0
 Par. 28. Section 49.4264(d)-1 is redesignated as Sec.  49.4263-4.


Sec.  49.4263-4  [Amended]

0
 Par. 29. Newly redesignated Sec.  49.4263-4 is amended by removing 
``4264(d)'' and adding ``4263(d)'' in its place.


Sec.  49.4264(e)-1  [Redesignated]

0
 Par. 30. Section 49.4264(e)-1 is redesignated as Sec.  49.4263-5.


Sec.  49.4264(f)-1  [Redesignated]

0
 Par. 31. Section 49.4264(f)-1 is redesignated as Sec.  49.4263-6.


Sec.  49.4263-6  [Amended]

0
Par. 32. Newly redesignated Sec.  49.4263-6 is amended by removing and 
reserving paragraph (b).

[[Page 5008]]


0
Par. 33. Section 49.4271-1 is amended by revising paragraphs (a) and 
(b) and adding paragraph (g) to read as follows:


Sec.  49.4271-1  Tax on transportation of property by air.

    (a) Purpose of this section. Section 4271 of the Internal Revenue 
Code (Code) imposes a 6.25 percent tax on amounts paid within or 
without the United States for the taxable transportation of property 
(as defined in section 4272 of the Code). This section sets forth rules 
as to the general applicability of the tax. This section also sets 
forth rules authorized by section 4272(b)(2) which exempt from tax 
payments for the transportation of property by air in the course of 
exportation (including shipment to a possession of the United States) 
by continuous movement, and in due course so exported.
    (b) Imposition of tax--(1) The tax imposed by section 4271 applies 
only to amounts paid to persons engaged in the business of transporting 
property by air for hire.
    (2) The tax imposed by section 4271 does not apply to amounts paid 
for the transportation of property by air if such transportation is 
furnished on an aircraft having a maximum certificated takeoff weight 
(as defined in section 4281(b) of the Code) of 6,000 pounds or less, 
unless such aircraft is operated on an established line or when such 
aircraft is a jet aircraft. The tax imposed by section 4271 also does 
not apply to any payment made by one member of an affiliated group (as 
defined in section 4282(b) of the Code) to another member of such group 
for services furnished in connection with the use of an aircraft if 
such aircraft is owned or leased by a member of the affiliated group 
and is not available for hire by persons who are not members of such 
group.
* * * * *
    (g) Applicability date. This section applies to amounts paid on and 
after January 19, 2021. For rules that apply before that date, see 26 
CFR part 49, revised as of April 1, 2020.

0
Par. 34. Section 49.4271-2 is added to read as follows:


Sec.  49.4271-2  Aircraft management services.

    For rules regarding the exemption for certain amounts paid by 
aircraft owners for aircraft management services, see Sec.  49.4261-10. 
This section applies to amounts paid on and after January 19, 2021. For 
rules that apply before that date, see 26 CFR part 49, revised as of 
April 1, 2020.


Sec.  49.4282-1  [Reserved]

0
Par. 35. Add and reserve Sec.  49.4282-1.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: January 10, 2021.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-00706 Filed 1-14-21; 4:15 pm]
BILLING CODE 4830-01-P