The taxpayers "provide aircraft management and aviation support services to aircraft owners and leaseholders (with whole and/or fractional interests in the aircrafts)." I think the question in terms of the substantive application of the law is whether the taxpayers' role in providing ownership or leasing and all related services to fractional owners/leaseholders is serving in an analogous role to airline companies who must collect the tax from their customers (who, after all, can viewed as leasing the space on the plane for the time of the trip).
In a prior case, Executive Jet Aviation, Inc. v. United States, 125 F.3d 1463 (Fed. Cir. 1998), here, the Court held "the occupied hourly fees that fractional management companies received from fractional owners were subject to the tax imposed by section 4261(a)." The taxpayers in NetJets apparently try to differentiate that case on the basis that the Executive Jet decision was premised on the arrangement not being "a bona fide economic arrangement."
Subsequently, the IRS promulgated regulations that, according to the taxpayers, make such arrangements bona fide when agreements of the type that the taxpayers used with their customers.
Notwithstanding the alleged distinction of the Executive Jet Aviation decision, the IRS asserted the tax against the taxpayers.
The litigation and the discovery disputes ensued.
The basic rule of discovery is that it be relevant to a legitimate dispute in the case. To determine that, the Court reviewed the relief the taxpayers sought as follows:
(1) Plaintiffs do not provide "taxable transportation" under 26 U.S.C. §4261, and thus the payments Plaintiffs receive from aircraft owners are not subject to the section 4261 excise tax;
(2) The IRS failed to provide clear guidance to Plaintiffs that they were required to collect and remit the section 4261 excise tax on the monthly management and fuel variable surcharge fees they received from aircraft owners;
(3) The IRS violated its duty to treat similar taxpayers in a consistent manner because it has assessed the section 4261 excise tax against certain of the fees that Plaintiffs charge fractional aircraft owners while not assessing the tax against those same fees with respect to certain of Plaintiffs' competitors; and
(4) The IRS is legally bound by a Technical Advice Memorandum ("TAM") it issued to Plaintiffs' predecessor, Executive Jet Aviation, in 1992, which provides that only the occupied hourly fees paid by fractional aircraft owners, and not monthly management or fuel variable surcharge fees, constitute payments for "taxable transportation" under 26 U.S.C. §4261. Under applicable Treasury regulations, as well as the IRS's own internal guidelines, the IRS is bound by the 1992 TAM until such time as the IRS issues Plaintiffs another TAM modifying or replacing the one from 1992. The IRS has never issued such a subsequent TAM, and thus its assessment of the section 4261 tax against Plaintiffs' monthly management and fuel variable surcharge fees, in violation of Treasury regulations and IRS guidelines, was unlawful.
