Schuman Aviation Company, Ltd. v. United States of America
Filing
55
ORDER GRANTING SUMMARY JUDGMENT IN FAVOR OF THE UNITED STATES 40 ; 42 - Signed by CHIEF JUDGE SUSAN OKI MOLLWAY on 9/6/11. (emt, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
SCHUMAN AVIATION COMPANY LTD, )
dba MAKANI KAI HELICOPTERS,
)
)
)
Plaintiff and
Counterclaim
)
Defendant,
)
)
vs.
)
)
UNITED STATES OF AMERICA,
)
)
)
Defendant and
)
Counterclaim
)
Plaintiff.
_____________________________ )
CIVIL NO. 08-00289 SOM/BMK
ORDER GRANTING SUMMARY
JUDGMENT IN FAVOR OF THE
UNITED STATES
ORDER GRANTING SUMMARY JUDGMENT
IN FAVOR OF THE UNITED STATES
I.
INTRODUCTION.
Plaintiff Schuman Aviation Company Ltd, doing business
as Makani Kai Helicopters (“Schuman Aviation”), challenges the
Government’s imposition of the Air Transportation Excise Tax (the
“Air Transportation Tax”) on Schuman Aviation’s air tour
operations for the periods ending September 30, 2003, December
31, 2003, September 30, 2004, and December 31, 2004.
Schuman
Aviation argues that its air tours were exempt from the tax
because the tours were provided by small aircraft that did not
“operate on an established line,” as contemplated by the relevant
portion of the Internal Revenue Code.
The court now resolves the
parties’ dueling motions for summary judgment in favor of the
Government.
II.
FACTUAL AND PROCEDURAL BACKGROUND.
A.
Schuman Aviation’s Air Charter Business.
Schuman Aviation, which is owned by Gustav Richard
Schuman (“Richard Schuman”), provides various types of helicopter
charters in Hawaii through its d/b/a, Makani Kai Helicopters.
United States’ Concise Stmt. Mat’l Facts Supp. Mot. Summ. J.
(“Gov’t Facts”) No. 9;1 Decl. Jeremy Hendon (“Hendon Decl.”) Exh.
1
The court has reviewed the parties’ responses to each
other’s concise statement of facts in support of the dueling
motions for summary judgment. See ECF Nos. 47, 50. For facts
over which a dispute exists, this order reflects the relevant
evidence submitted by both sides. The court notes, however, that
Schuman Aviation failed to submit much of its evidence in
admissible form. Motions for summary judgment must be supported
by authenticated and otherwise admissible evidence. See Orr v.
Bank of America, NT & SA, 285 F.3d 764, 773 (9th Cir. 2002). The
court is aware that when only the form of what would otherwise be
admissible evidence is improper, the evidence may be considered.
See Fraser v. Goodale, 342 F.3d 1032, 1036 (9th Cir. 2003).
Here, however, the court has no basis for concluding that what
Schuman Aviation submits would be otherwise admissible. That is,
the authenticity of the materials is unclear. None of the
documents submitted as exhibits to Schuman Aviation’s Concise
Statement of Facts in support of its own motion for summary
judgment or in opposition to the Government’s motion for summary
judgment is supported by any declaration or affidavit. See ECF
Nos. 43, 50, 52. Furthermore, the majority of the exhibits are
not self-authenticating documents (including the various computer
printouts of depositions, which lack the reporter’s certification
and which include pages different from those in the Government’s
submitted portions). The court is not granting summary judgment
in Schuman Aviation’s favor for other reasons, but notes that,
even if it were inclined to do so, it would likely be unable to
consider much of this evidence. See, e.g., Orr, 285 F.3d at 77377 (holding that various depositions and other documents were
properly excluded from consideration on motion for summary
judgment because documents were not authenticated); Canada v.
Blain’s Helicopters, Inc., 831 F.2d 920, 925-26 (9th Cir. 1987)
(unauthenticated fuel invoices could not be considered on motion
for summary judgment, despite being highly probative).
2
14 (Depo. Gustav Richard Schuman (“R. Schuman Depo.”)) at 23-27;
id. Exh. 16 (Depo. Charles Anthony Lanza, III (“Lanza Depo.”)) at
17.
Schuman Aviation’s Air Carrier Certificate, issued by the
Federal Aviation Administration (“FAA”), authorizes Schuman
Aviation to conduct “on-demand” air transportation.
See Schuman
Aviation’s Concise Stmt. Facts (“Schuman Aviation Facts”) No. 1 &
Exh. 10.
In 2003 and 2004, Schuman Aviation offered, among other
services, four air tours: the Holoholo Tour, the Pali Makani
Tour, the Sacred Falls Ali’i Tour, and the Night Tour.
Gov’t
Fact No. 10; Hendon Decl. Exh. 7 (“Form 886A - Explanation of
Items”) at 1-2 (tour descriptions).
During the period at issue,
Schuman Aviation offered a night tour with dinner for a total
price of approximately $125.
Schuman Depo.) at 190-91.
Aviation employees.
Schuman Aviation Facts Exh. 4 (R.
These tours were designed by Schuman
Gov’t Fact No. 15.
Each tour flew over a
particular set of sights on the island of Oahu and had a set
duration.
See Form 886A - Explanation of Items at 1-2; Hendon
Decl. Exh. 14 (R. Schuman Depo.) at 77-78 (confirming that the
IRS descriptions of the tours were correct as to the sights
covered by the tours and their duration); id. Exh. 15 (Depo.
Diane Schuman (“D. Schuman Depo.”)) at 28-30 (same).
For
example, the Holoholo Tour lasted for 20 minutes and was
advertised as follows:
3
Let the magical island of Oahu embrace you as
you soar over Keehi Lagoon thru Honolulu
Harbor past the historical Aloha Tower, Aloha
Tower Market Place and downtown Honolulu.
Continuing on past Kewalo Basin, Ala Moana
Shopping Center, Magic Island, Ala Wai Yacht
Harbor (where Gilligan and the Minnow
departed for their three-hour tour), Hilton
Hawaiian Village, Sheraton Waikiki, Royal
Hawaiian Hotel, and the Moana Surfrider (the
oldest hotel built in 1901). Fly past
Diamond Head Crater (one of the worlds most
recognized landmarks) Punchbowl National
Cemetary, and Tripler Army Hospital. This
tour concludes at Pearl Harbor where you will
see the USS Arizona, USS Missouri, USS Utah,
and returning to Honolulu International
Airport.
Form 886A - Explanation of Items at 1-2.
These tours were sold through third-party vendors, such
as travel agencies, hotels, and concierge desks, as well as
through direct telephone and walk-up sales.
21; Schuman Aviation Facts No. 17.
prices.
See Gov’t Fact No.
The tours had advertised
See Form 886A - Explanation of Items at 1-2; Hendon
Decl. Exh. 14 (R. Schuman Depo.) at 78 (confirming that the IRS
descriptions of the tours were correct as to the prices); id.
Exh. 15 (D. Schuman Depo.) at 28-30 (same).
However, according
to Richard Schuman, passengers booking through a third party paid
whatever the vendor decided to charge.
Schuman Aviation Fact No.
18; Schuman Aviation Facts Exh. 4 (R. Schuman Depo.) at 97-98.
Schuman Aviation offered ground transportation to ferry
passengers from their hotels to the heliport, but charged the
4
same tour price whether the passengers were picked up or drove
themselves.
Schuman Aviation Facts Exh. 4 (R. Schuman Depo.) at
155-56.
Based on tour reservations, Schuman Aviation made a
work schedule for its pilots, typically giving pilots one day’s
advance notice.
Gov’t Fact No. 23.
According to Richard Schuman and Charles Lanza, Makani
Kai Helicopters Operations Manager, when it was possible to do
so, Schuman Aviation attempted to combine passenger bookings to
maximize the number of people on a helicopter, up to a maximum of
six passengers per air tour.
Hendon Decl. Exh. 14 (R. Schuman
Depo.) at 120-21; id. Exh. 16 (Lanza Depo.) at 12, 37, 39-41.
Schuman and Lanza testified that, when combining bookings,
Schuman Aviation offered customers “upgrades” to a longer air
tour.
Id. Exh. 14 (R. Schuman Depo.) at 120-21; id. Exh. 16
(Lanza Depo.) at 39-41.
The four tours departed from and returned to the same
location, Schuman Aviation’s heliport.
Gov’t Fact No. 16.
Schuman Aviation flew some combination of the four tours more
than 6.5 times per day on average during the tax periods at
issue, excluding Thanksgiving and Christmas.
Gov’t Fact No. 18.
The aircraft used by Schuman Aviation for its air tours each had
a maximum certified takeoff weight of less than 6,000 pounds.
Gov’t Fact No. 29.
5
Richard Schuman testified that portions of flight
routes are controlled by air traffic controllers, under the
purview of the FAA.
Schuman Aviation Concise Stmt. Facts Opp.
Gov’t Mot. Summ. J. (“Schuman Aviation Resp.”) Exh. 1 (R. Schuman
Depo.) at 86-89.
For example, according to Schuman, the Holoholo
Tour occurs entirely within an FAA-restricted area.
Id.
other words, “they tell us how to get in and get out.”
86.
In
Id. at
For air tours that operate partially outside of FAA
airspace, Schuman testified that any deviations from the standard
routes would primarily be caused by the weather.
Id. at 88.
Schuman testified that the pilot would have some flexibility to
travel to an area not on the listed tour at a passenger’s request
or if something special occurred (for example, if whales were
spotted offshore).
Id. at 88.
Schuman testified that the pilot
would try to accommodate a customer request but that the decision
was the pilot’s.
Id.
Schuman testified that fuel constraints
and other regulations regarding aircraft control forced the
pilots to stick to planned flight times, even if routes were
varied.
Id. at 92-94.
One of Schuman Aviation’s pilots testified that, if a
tour was in the air and a passenger asked to see something that
was not in the tour, the pilot could determine whether to
accommodate the passenger, depending on whether the request would
fit into the timeframe of the tour and was nearby in the routing.
6
Schuman Aviation Resp. Exh. 5 (Depo. Eiki Miyasato (“Miyasato
Depo.”)) at 85-86.
Additionally, Schuman Aviation notes that the
IRS, in its explanation of its reasons for assessing the Air
Transportation Tax, states that “the actual flight may be altered
due to safety considerations or reasonable customer requests.”
See Schuman Aviation Resp. Exh. 10 (Form 886A – Explanation of
Items) at 2.
In addition to the air tours, Schuman Aviation offered
chartered flights for photography, television and movie work,
construction, weddings, utility line inspections, and other
purposes.
24.
Schuman Aviation Resp. Exh. 4 (Lanza Depo.) at 17, 21-
For example, for utility charter flights Schuman Aviation
took technicians to the top of a ridge line, then picked up the
technicians when their work was completed.
flights were charged on an hourly basis.
Id. at 21.
These
Hendon Decl. Exh. 15
(D. Schuman Depo.) at 25-28; id. Exh. 16 (Lanza Depo.) at 25-29;
Schuman Aviation Resp. Exh. 5 (Miyasato Depo.) at 87-88.
Lanza
testified that the purchasers had exclusive use of the aircraft
for the amount of time they bought and chose where to go.
Decl. Exh. 16 (Lanza Depo.) at 25-26.
Hendon
For example, a customer
chartering a flight on a per-hour basis could choose to fly to
Maui.
Id. at 29.
7
B.
Tax Assessment.
On August 13, 2004, the IRS notified Schuman Aviation
that the IRS had audited Schuman Aviation and had determined that
the company owed the Air Transportation Tax for tax periods
ending on September 30, 2003, and December 31, 2003.
Explanation of Items; Schuman Aviation Fact No. 23.
Form 886A The IRS
assessed the Air Transportation Tax on the air tours Schuman
Aviation had conducted during those tax periods.
13.
Gov’t Fact No.
The IRS did not assess the tax on the other flights offered
by Schuman Aviation, which the IRS deemed to be “pure charter
flights.”
See id.
On September 10, 2004, Schuman Aviation responded to
the IRS’s preliminary assessment with a protest letter.
Schuman
Aviation Resp. Exh. 8.
On July 17, 2006, the IRS assessed Schuman Aviation the
Air Transportation Tax for the 2003 periods.
See Hendon Decl.
Exh. 1-2 (Certificate of Assessments, Payments, and Other
Specified Matters (“Certificate of Assessments”) for tax periods
ending September 30, 2003, and December 31, 2003).
The IRS
assessed taxes of $37,302 for the period ending September 30,
2003, and $32,243 for the period ending December 31, 2003.
Id.
Exhs. 1-2.
Schuman Aviation paid a small portion of the Air
Transportation Tax for the periods ending September 30, 2003, and
8
December 31, 2003.
Schuman Aviation Resp. Exh. 10.
It paid the
entire Air Transportation Tax for the periods ending September
30, 2004, and December 31, 2004.2
Hendon Decl. Exhs. 3-4
(Certificate of Assessments for tax periods ending September 30,
2004, and December 31, 2004); Decl. Clara Yee (“Yee Decl.”) ¶ 8,
ECF No. 40-29.
On August 21, 2006, the Government sent Schuman
Aviation Notices of Intent to Levy for the September 30, 2003,
and December 31, 2003, tax periods.
See Second Decl. Jeremy N.
Hendon (“Second Hendon Decl.”) Exh. 1; ECF No. 48-1.
These
Notices stated that the IRS was charging late payment penalties
pursuant to 26 U.S.C. § 6651(a)(2).
See id.
The Notices
described the penalty as 1/2 percent of unpaid tax, assessed for
each month or part month that Schuman Aviation failed to pay the
tax.
See id. at 2.
In November 2006, Schuman Aviation sought refunds of
the Air Transportation Taxes it had paid for the 2003 and 2004
time periods.
Schuman Aviation Facts Exhs. 1-2.
2007, its claims were denied.
On July 18,
Schuman Aviation Resp. Exh. 10.
The IRS assessed “failure to pay tax penalties” on
February 26, 2007, in the amount of $2,084.35; on February 25,
2008, in the amounts of $3,823.41 and $6,191.96; and on March 2,
2
The record does not indicate why only two quarters were
in issue each year.
9
2009, in the amounts of $2,071.01 and $2,025.80.
Id.
The
Certificates of Assessment reflect that the IRS issued a
“Statutory Notice of Balance Due” on each of those dates.
Id.
The current total balance due for the tax period ending
September 30, 2003, is approximately $57,079.85.
Exh. 1.
The current total balance due for the tax period ending
December 31, 2004, is approximately $57,734.31.
2.
Yee Decl. ¶ 5 &
Id. ¶ 6 & Exh.
These figures reflect the tax, accrued interest, and
penalties calculated through June 30, 2011.
According to a court complaint included in Schuman
Aviation’s submission to this court, in 1986 the IRS assessed the
Air Transportation Tax against a company called “Kenai Air of
Hawaii, Inc.”
Schuman Aviation Resp. Exh. 8 at 45.
Kenai Air
sought a refund in federal court, alleging that it operated
helicopters “which it charters for sightseeing, photography,
rescue and other non-scheduled flights” and complaining that it
was exempt from tax as a small aircraft operating on a
nonestablished line.
See id. Exh. 8 at 46, 49.
Schuman Aviation
also submitted a copy of the single-page judgment entered by the
clerk in favor of Kenai Air on September 23, 1987.
54.
Id. Exh. 8 at
Schuman Aviation argues here that it should be treated like
Kenai Air instead of being taxed.
Schuman Aviation has never
sought or obtained a private letter ruling from the IRS regarding
10
its liability to pay the Air Transportation Tax.
Gov’t Fact No.
30.
III.
LEGAL STANDARD.
Summary judgment shall be granted when “the movant
shows that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.”
R. Civ. P. 56(a).
Fed.
A moving party has both the initial burden of
production and the ultimate burden of persuasion on a motion for
summary judgment.
Nissan Fire & Marine Ins. Co. v. Fritz Cos.,
210 F.3d 1099, 1102 (9th Cir. 2000).
The burden initially falls on the moving party to
identify for the court “the portions of the materials on file
that it believes demonstrate the absence of any genuine issue of
material fact.”
T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors
Ass’n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp.
Catrett, 477 U.S. 317, 323 (1986)); accord Miller v. Glenn Miller
Prods., Inc., 454 F.3d 975, 987 (9th Cir. 2006).
“A fact is
material if it could affect the outcome of the suit under the
governing substantive law.”
Miller, 454 F.3d at 987.
When the
moving party bears the burden of proof at trial, that party must
satisfy its burden with respect to the motion for summary
judgment by coming forward with affirmative evidence that would
entitle it to a directed verdict if the evidence were to go
uncontroverted at trial.
Id. (quoting C.A.R. Transp. Brokerage
11
Co., Inc. v. Darden Restaurants, Inc., 213 F.3d 474, 480 (9th
Cir. 2000)).
By contrast, when the nonmoving party bears the
burden of proof on one or more issues at trial, the party moving
for summary judgment may satisfy its burden with respect to those
issues by pointing out to the court an absence of evidence from
the non-moving party.
Miller, 454 F.3d at 987.
When the moving party meets its initial burden on a
summary judgment motion, “[t]he burden then shifts to the
nonmoving party to establish, beyond the pleadings, that there is
a genuine issue for trial.”
Id.
The court must not weigh the
evidence or determine the truth of the matter but only determine
whether there is a genuine issue for trial.
See Balint v. Carson
City, Nev., 180 F.3d 1047, 1054 (9th Cir. 1999).
On a summary
judgment motion, “the nonmoving party’s evidence is to be
believed, and all justifiable inferences are to be drawn in that
party’s favor.”
Miller, 454 F.3d at 988 (quotations and brackets
omitted).
Summary judgment may also be appropriate when a mixed
question of fact and law involves undisputed underlying facts.
See EEOC v. UPS, 424 F.3d 1060, 1068 (9th Cir. 2005); Colacurcio
v. City of Kent, 163 F.3d 545, 549 (9th Cir. 1998).
12
IV.
ANALYSIS.
A.
Relevant Statutory Background.
Chapter 33 of the Internal Revenue Code (“IRC”) imposes
excise taxes on various facilities and services, including
transportation by air.
Subt. D, Ch. 33.
See 26 U.S.C. § 4261; see generally IRC
As relevant here, the IRC imposes a 7.5 percent
tax on any amount paid for taxable transportation, as well as a
tax of $3.00 per domestic segment of air transportation.
U.S.C. § 4261(a)-(b).
26
Other statutes exempt certain types of air
transportation from the tax, such as helicopters used in mining
or logging, air ambulances, air transportation for skydiving, and
seaplanes.
See id. § 4261(f)-(i).
The IRC also exempts from these transportation taxes
“[s]mall aircraft on nonestablished lines.”
Id. § 4281.
A
“small aircraft” is “an aircraft having a maximum certificated
takeoff weight of 6,000 pounds or less.”
Id.
The statute
provides that small aircraft are not subject to tax, “except when
such aircraft is operated on an established line.”3
3
Id.
Section 4281 was amended in 2005 to add the following
sentence, highly relevant to the current tax obligations of
Schuman Aviation: “For purposes of this section, an aircraft
shall not be considered as operated on an established line at any
time during which such aircraft is being operated on a flight the
sole purpose of which is sightseeing.” However, this portion of
the statute took effect on September 30, 2005, after the time
period at issue in this case. See Pub. L. 109-59, 119 Stat.
1144, 1953 (Aug. 10, 2005). Unless stated otherwise, all
citations to the Internal Revenue Code and Treasury regulations
are to provisions in effect in 2003 and 2004.
13
The IRS regulations pertaining to air transportation
excise taxes further specify:
The term “operated on an established line”
means operated with some degree of regularity
between definite points. It does not
necessarily mean that strict regularity of
schedule is maintained; that the full run is
always made; that a particular route is
followed; or that intermediate stops are
restricted. The term implies that the person
rendering the service maintains and exercises
control over the direction, route, time,
number of passengers carried, etc.
26 C.F.R. § 49.4263-5(c); cf. id. § 49.0-1 (stating that the
regulations in part 49 relate to IRC chapter 33 air
transportation taxes).
Section 49.4263-5 explains that the
exemption is designed to apply to “small aircraft of the type
sometimes referred to as ‘air taxis.’”
26 C.F.R. § 49.4263-5(a).
Other IRC provisions govern the means by which the tax
is to be collected and paid.
The taxes imposed by § 4261 “shall
be paid by the person making the payment subject to the tax.”
U.S.C. § 4261(d).
26
However, § 4291 imposes a duty on “every
person receiving any payment for facilities or services on which
a tax is imposed upon the payor thereof” to collect the tax from
the person making the payment.
See also 26 C.F.R. § 49.4291-1.
Moreover, if the tax “is not paid at the time payment for
transportation is made,” then the “tax shall be paid by the
carrier providing the initial segment of such transportation.”
26 U.S.C. § 4263(c).
14
There is no dispute in this case that Schuman Aviation
operated “small aircraft” as provided for under the statute.
Gov’t Fact No. 29.
See
However, the parties strenuously disagree
about whether the air tours “operated on an established line.”
B.
The Government Meets Its Initial Burden of Proving
that Tax Is Owed.
The Government bears the initial burden of proving that
federal taxes are owed.
(9th Cir. 1997).
See Palmer v. IRS, 116 F.3d 1309, 1312
“[D]eficiency determinations and assessments
for unpaid taxes are normally entitled to a presumption of
correctness so long as they are supported by a minimal factual
foundation.”
Id.; see also Oliver v. United States, 921 F.2d
916, 919-20 (9th Cir. 1990).
Generally, introducing a
Certificate of Assessment establishes a prima facie case that the
tax and the imposition of additions to the tax are correct.
Oliver, 921 F.2d at 919; Delaney v. Comm’r, 743 F.2d 670, 672
(9th Cir. 1984); but cf. Huff v. United States, 10 F.3d 1440,
1445-46 (9th Cir. 1993) (holding that Certificates of Assessment
did not establish that a tax was validly assessed when the
taxpayer never received copies and the Certificates failed to
list a date of assessment).
Unless the assessment is “without
rational foundation or is arbitrary,” the burden shifts to the
taxpayer to show that the determination is incorrect.
Oliver,
921 F.2d at 919-20; Palmer, 116 F.3d at 1312; see also Hughes v.
United States, 953 F.2d 531, 535, 540 (9th Cir. 1992).
15
“The
taxpayer bears the burden of showing that he or she meets every
condition of a tax exemption or deduction.”
Davis v. Comm’r, 394
F.3d 1294, 1298 n.2 (9th Cir. 2005).
The Government has submitted Certificates of Assessment
for the tax periods ending September 30, 2003, December 31, 2003,
September 30, 2004, and December 31, 2004.
Exhs. 1-4.
See Hendon Decl.
The Certificates of Assessments include tax penalties
for the periods ending September 30, 2003, and December 31, 2003.
See id. Exhs. 1-2.
There is no evidence that the Certificates of
Assessment are without rational foundation or are arbitrarily
assessed.
The court therefore finds that the Government has
established a prima facie case that Schuman Aviation owed the Air
Transportation Taxes and associated failure-to-pay penalties.
C.
Schuman Aviation Does Not Establish That Its Air
Tours Are Exempted From the Tax on the Ground That
They Involve Small Aircraft on Nonestablished
Lines.
The parties agree that, to determine whether Schuman
Aviation’s air tours were operated on an established line, the
court must apply the elements set forth in 26 C.F.R. § 49.42635(c).
See Schuman Aviation’s Mot. Summ. J. (“Schuman Aviation
Mot.”) 26, ECF No. 42; Gov’t Mot. Summ. J. (“Gov’t Mot.”) 12, ECF
No. 40.
Under that regulation, an aircraft is operated on an
established line if it is (1) operated with some degree of
regularity (2) between definite points, and (3) “the person
rendering the service maintains and exercises control over the
16
direction, route, time, number of passengers carried, etc.”
26 C.F.R. § 49.4263-5(c).
See
Unless all three elements exist, the
small aircraft is not operated on an established line and is
therefore exempt from the Air Transportation Tax.
See, e.g.,
Rev. Rul. 72-617, 1972-2 C.B. 580 (determining that a carrier did
not operate flights on an established line, even though the
flights were operated regularly between two cities, because the
carrier did not retain control over the flights as defined by
§ 49.4263-5(c)).
The regulation contemplates the application of the
exemption to “air taxis.”
See 26 C.F.R. § 49.4263-5(a) (“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 . . . .”).
The language
“operated on an established line” was taken from prior statutes
that imposed the same transportation tax on motor vehicle
transportation.
See H.R. Rep. No. 85-481, at 48-49 (1957),
reprinted in 1958-3 C.B. 372, 419-20.
In considering the small
aircraft exemption, one court has commented that the term “air
taxi” “suggests an airplane for hire, subject to the whims of a
particular customer.
Except to the hiring customer, its route is
wholly unpredictable and unreliable.”
Lake Mead Air, Inc. v.
United States, 991 F. Supp. 1209, 1212 (D. Nev. 1997).
parties appear to agree with this explanation.
17
The
See Schuman
Aviation Mot. 27-28 (quoting Lake Mead); Gov’t Mot. 15 (same).
Given this understanding, the court’s focus is on whether the
flights are properly considered pure charters, operating solely
and entirely based on the demands of passengers, or whether the
air tours are sufficiently prepackaged such that they may not be
considered true “charter” flights.
1.
Whether the Air Tours Were Operated Between
Definite Points.
The parties dispute whether the air tours were operated
between definite points.
Schuman Aviation asserts that its air
tours were not operated on an established line because the “plain
meaning” of the term “between definite points” requires the tours
to “have taken off and landed at two predetermined, identifiable
locations.”
Schuman Aviation Mot. 32.
Schuman Aviation argues
that because the tours are circular, both taking off from and
landing at the Schuman Aviation heliport, they do not satisfy
what Schuman Aviation terms the “Between Two Definite Points
Test.”
Id.
The Government argues that because the
transportation began and ended at Schuman Aviation’s heliport, it
was “between definite points.”
Gov’t Mot. 18 (quoting Temsco
Helicopters, Inc. v. United States, 409 Fed. Appx. 64, 66 (9th
Cir. 2010));4 see also Schuman Aviation Fact No. 14
4
In asserting its entitlement to summary judgment, the
Government relies in part on Temsco Helicopters, Inc. v. United
States, 409 Fed. Appx. 64 (9th Cir. 2010). See, e.g., Gov’t Mot.
12; United States’ Response to Schuman Aviation’s Mot. Summ. J.
18
(acknowledging that the tours departed from and returned to the
Schuman Aviation heliport).
The court concludes that the Government’s position is
correct.
Schuman Aviation, which bears the burden of
establishing its entitlement to the exemption, Davis, 394 F.3d at
1298 n.2, fails to explain why the plain meaning of the
regulation requires the transportation to be between two
different locations.
It is true that the word “between” can mean
“connecting spatially.”
ed. 2000).
American Heritage Dictionary 175 (4th
Cf. Schindler Elevator Corp. v. United States ex rel.
Kirk, ___ U.S. ___, 131 S. Ct. 1885, 1891 (2011) (when a term is
not defined in a statute, a court must look first to its ordinary
meaning); FCC v. AT & T Inc., ___ U.S. ___, 131 S. Ct. 1177,
1181–82 (2011) (relying on dictionary definitions of the term
“personal” to derive the term’s “ordinary meaning”).
But it does
not follow that a trip that begins and ends at the same point has
nothing “between” the beginning and end.
Schuman Aviation’s
(“Gov’t Opp.”) 6, 9, 12, 16, ECF No. 47. Temsco is not a
published opinion. In this circuit, the parties may cite the
case as persuasive (not controlling) authority for the court to
consider. 9th Cir. R. 36-3; see Animal Legal Def. Fund v.
Veneman, 490 F.3d 725, 733 (9th Cir. 2007) (en banc); see, e.g.,
United States v. Jaramillo-Ayala, 526 F. Supp. 2d 1094, 1103
(S.D. Cal. 2007) (examining unpublished Ninth Circuit decision
for “guidance” only). The court notes that, in keeping with a
memorandum disposition, Temsco contains little explanation of its
holdings. See 9th Cir. General Orders 4.3.a. (July 1, 2011).
Accordingly, to the extent the facts of Temsco are analogous to
the facts presented in this case, this court treats that case as
persuasive but not controlling.
19
tours had a beginning point and an ending point, with miles flown
between the beginning and the end.
Both the beginning and the
end were “definite points,” even if they were at the same
location.
Accord Lake Mead, 991 F. Supp. at 1213 (holding that
air tours that “started and ended at the same point without fail
. . . were between definite points”).
Indeed, Treasury Regulation § 49.4261-1, which bears
the heading “Imposition of tax; in general,” states, “If not
otherwise exempt, a payment for continuous transportation
beginning and ending at the same point is subject to the tax.”
See 26 C.F.R. § 49.4261-1(c).
Section 49.4261-1(c), of course, is not by itself
dispositive of the issue before the court.
Continuous
transportation is not subject to the tax if it is “otherwise
exempt.”
Section 49.4263-5 is one of those exemptions.
See 26
C.F.R. § 49.4263-5(a) (“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 . . . .”); cf. 26 C.F.R. §§ 49.4263-1 to 49.4263-4, 49.42636 (providing exemptions to the transportation tax for commutation
tickets, charges less than $.60, transportation furnished to the
Red Cross and similar organizations, transportation of members of
the armed forces, and certain transportation beginning before
November 16, 1962).
Therefore, the court must decide first
20
whether the continuous transportation is exempt under § 49.4263-5
(or one of the other exemptions), and, if it is not, then it is
subject to tax, even if the transportation is circular.
That is,
under § 49.4261-1(c), the transportation tax is not restricted to
trips between two different points, but that in no way makes all
continuous transportation taxable.
Schuman Aviation has the burden of establishing that
its tours fall within an exemption.
Neither the language of any
exemption nor any other authority cited by Schuman Aviation
provides that its tours were exempt simply because they were
circular.
In the absence of an applicable exemption, the court
concludes that the air tours were operated “between definite
points.”5
5
Normally, an agency’s interpretation of its regulation
is controlling unless the interpretation is “plainly erroneous or
inconsistent with the regulation.” Auer v. Robbins, 519 U.S.
452, 461 (1997). See, e.g., Polm Family Foundation, Inc. v.
United States, 644 F.3d 406, 409 (D.C. Cir. 2011) (according Auer
deference to IRS interpretation of a Treasury Regulation
regarding a tax exemption); but cf. Robinson Knife Mfg. Co. v.
Comm’r, 600 F.3d 121, 134 n.11 (2d Cir. 2010) (suggesting in
dicta that Auer deference may not apply to tax cases). The court
need not decide whether to defer to the IRS interpretation of
Treasury Regulation § 49.4263-5, including its interpretation of
the term “between definite points,” because the Government’s
briefing nowhere requests Auer deference. Had such deference
been sought, the court would have had to consider whether the
requirements of Auer had been met, including the requirement that
the IRS have maintained a consistent position with respect to its
interpretation of this regulation. Cf. Schuman Aviation Mot. 23
(arguing that the IRS previously interpreted § 49.4263-5
“favorably towards air tour operators”); Callaway v. Comm’r, 231
F.3d 106, 132-33 (2d Cir. 2000) (declining to defer to the IRS’s
litigating position because the IRS had adopted inconsistent
21
2.
Whether the Air Tours Were Operated With Some
Degree of Regularity.
Moreover, Schuman Aviation fails to demonstrate that
its air tours were not operated “with some degree of regularity.”
It acknowledges that each tour began at the heliport and ended at
the heliport.
There is no evidence in the record that Schuman
Aviation was open to beginning or ending a tour at any other
point.
Furthermore, Schuman Aviation averaged more than six
tours a day, all leaving from and returning to the same heliport,
during the time period at issue.
Nevertheless, Schuman Aviation argues that there can be
some degree of regularity only when the transporter operates on a
set schedule that is in no way determined by customer demand.
Schuman Aviation Mot. 27-28 (citing Lake Mead, 991 F. Supp. at
1212, Rev. Rul. 72-617, 1972-2 C.B. 580, IRS Tech. Adv. Mem.
8135017 (May 19, 1981), and IRS Tech. Adv. Mem. 7731042 (May 9,
1977)).6
Regardless of the daily average number of tours,
positions before, during, and after litigation with respect to
the meaning of the Treasury Regulation at issue). In any event,
the court’s agreement with the Government’s interpretation of the
various provisions of § 49.4263-5, including the meaning of
“between definite points,” while consistent with deference to the
IRS, does not result from any deference.
6
Thus, at the hearing on this matter, counsel for
Schuman Aviation maintained that an aircraft operating based on
an advertised schedule of a morning and afternoon tour each day,
running between a single starting point and one of three or four
destinations, would not be operating with “some degree of
regularity.”
22
Schuman Aviation argues, the air tours were not operated with
sufficient regularity because a tour was only held if there was
at least one scheduled passenger.
Under Schuman Aviation’s view, for an aircraft to be
operated with “some degree of regularity,” there would have to be
a strict schedule, set by the operator, that never varied based
on customer demand.
This cannot be the test.
The regulation
itself explains that “some degree of regularity . . . does not
necessarily mean that strict regularity of schedule is
maintained.”
26 C.F.R. § 49.4263-5(c).
Nor do Schuman
Aviation’s cited authorities support such a broad definition of
“some degree of regularity.”
In Lake Mead, the District of Nevada held that an air
tour company that operated regular scenic tours around the Grand
Canyon operated on an established line.
991 F. Supp. at 1213.
In considering the language of Treasury Regulation § 49.42635(a), the court interpreted the term “some degree of regularity”
to require that both the frequency of the flights and the control
over the flights not be wholly determined by the customer.
Although the air tour operator ran its tours only when there were
customer bookings, the court noted that the plaintiff “regularly
flew over the Grand Canyon,” both at the request of a particular
tour company and via bookings by other customers not related to
the tour company.
Id.
Moreover, noting that the air tour
23
operator declined to fly to the Grand Canyon’s south rim when
such a route was requested, the court determined that the
operator’s “flights were not completely contingent upon customer
demand.”
Id.
Therefore, the court held, the air tour operator
met the “some degree of regularity” requirement.
Id.
In Revenue Ruling 72-617, the IRS determined that an
aircraft operator that transported mail between two cities
pursuant to a contract with the Postal Service was exempt from
the tax on transportation of property by air because it was not
“operated on an established line.”
The Revenue Ruling held that,
because the contract gave the Postal Service control over the
direction, route, time, and cargo carried, it constituted a
charter.
Id.
Furthermore, because the carrier did not otherwise
serve the two cities regularly except for these charters, the
charters did not constitute an established line.
Id.7
Neither of these cases cited by Schuman Aviation stands
for the proposition that Schuman Aviation’s air tours were not
operated with some degree of regularity.
The air tour operator
in Lake Mead, like Schuman Aviation, ran its tours only when
7
The court’s analysis does not consider the two IRS
Technical Advice Memoranda cited by Schuman Aviation in this or
other portions of its motion, see Schuman Aviation Mot. 23, 27,
because the Internal Revenue Code does not permit a Technical
Advice Memorandum to be used or cited as precedent by a taxpayer
other than the taxpayer to whom the memorandum was issued. See
26 U.S.C. § 6110(k)(3); Lucky Stores, Inc. & Subsidiaries v.
Comm’r, 153 F.3d 964, 966 n.5 (9th Cir. 1998).
24
there was a passenger booking.
Nevertheless, the court
determined that the flights were operated regularly.
Supp. at 1213.
991 F.
And, unlike the mail carrier’s chartered flights
on behalf of the Postal Service, Schuman Aviation is not seeking
to exclude from the Air Transportation Tax a particular customer
or charter, without whose business it would not have conducted
the air tours at issue.
Rather, Schuman Aviation seeks to extend
the reasoning of Revenue Ruling 72-617 to exclude all of its air
tours, even though Schuman Aviation operated the tours several
times a day, on the premise that no regular schedule existed as
to any portion of its customer base.
This is unpersuasive.
In keeping with relevant
authority, this court looks at the actual practice of the
transporter to determine whether the transportation was operated
with some degree of regularity.
In Lake Mead, as discussed
above, the court held that the Grand Canyon tours ran
“regularly,” even though each tour itself was considered a
charter.
991 F. Supp. at 1213.
In Gray Line Co. v. Granquist,
237 F.2d 390 (9th Cir. 1956), the Ninth Circuit examined whether
a limousine service’s operations between downtown Portland and
the Portland airport were “operated on an established line” such
that the service was not exempt from a transportation tax under
the provisions of an analogous IRC statute exempting certain
ground transportation.
Id. at 393.
25
The Ninth Circuit held that
the car service’s operation of 800 trips over the month at issue
constituted sufficient regularity to fall under the definition of
“operated on an established line.”
Id. at 394; see also Rev.
Rul. 72-617 (acknowledging that the mail carrier’s flights for
the Postal Service, which flew six times per week, “meet the
regularity requirement of the regulations”).
But cf. Northstar
Trekking LLC v. United States, 637 F. Supp. 2d 676, 680-81 (D.
Alaska 2009) (because cruise lines were responsible for 90
percent of air tour operator’s business and “dictate[d] the
duration, destination, and general route of the flights,” air
tours of glaciers that “operated frequently during the summer
tourist season” were not “operated with some degree of
regularity”).
The court agrees that operating a substantial number of
flights does not, standing alone, establish that the flights are
operated regularly such that they constitute an established line.
A popular taxi service might make many trips on a given day.
What the regulation gives significance to is rather the degree of
regularity between definite points.
In this case, the air tours
departed and returned to the same heliport more than six times
each day during the relevant time period.
Even if the departure
times and return times were not exactly the same every day,
Schuman Aviation ran its tours with sufficient regularity that
prospective passengers could be assured that, barring unusual
26
circumstances, Schuman Aviation would fly multiple tours every
day.
The time variations appear to have usually been within a
number of hours, not a number of days or some other interval that
would have made it difficult for passengers to know if tours were
available.
Given the facts in the record, this court concludes
that Schuman Aviation’s tours were operated “with some degree of
regularity between definite points.”
See 26 C.F.R. § 49.4263-
5(c).
3.
Schuman Aviation’s Control.
The final element is the degree of control Schuman
Aviation exercised over the flights.
The record establishes that
Schuman Aviation’s control over the air tours was sufficient to
render its tours on an established line.
The regulation in issue provides that the aircraft is
operated on an established line only if “the person rendering the
service maintains and exercises control over the direction,
route, time, number of passengers carried, etc.”
§ 49.4263-5(c).
26 C.F.R.
Thus, in Revenue Ruling 72-617, the IRS
determined that in its contract with the Postal Service a carrier
relinquished its control over the direction of travel, the route,
the time of travel, and the cargo carried.
Because the customer,
rather than the carrier, retained control over all of these
aspects of travel, the flights were properly considered aircraft
charters.
Id.
By contrast, the Lake Mead court considered the
27
tour provider in that case to have “control” under § 49.4263-5(c)
when the airline could decline to fly a particular route
requested by a third-party tour provider.
991 F. Supp. at 1213.
See also Temsco, 409 Fed. Appx. at 67 (tour company satisfied the
control element because it decided “what tours to offer, when to
schedule flights, the route to take, and where to land,” as well
as “the maximum number of passengers allowed and whether to
cancel a flight for insufficient sales”).
Many of the facts present in Lake Mead and Temsco are
present here.
Most significant to the court is Schuman
Aviation’s control over the air tours’ route.
Passengers on the
air tours could not go wherever they pleased.
Instead, the air
tour routes were fixed by Schuman Aviation and were advertised as
including particular sights.
See Gov’t Fact Nos. 10, 14-15; Form
886A - Explanation of Items at 1-2 (describing Holoholo Tour,
Pali Makani Tour, Sacred Falls Ali’i Tour, and Night Tour);
Hendon Decl. Exh. 14 (R. Schuman Depo.) at 78 (confirming that
IRS descriptions of tours and prices were accurate); id. Exh. 15
(D. Schuman Depo.) at 28-29 (same).
It stands to reason that a
passenger booking the Holoholo Tour, which included, among other
sights, Diamond Head crater, would arrive for the tour expecting
that he or she would indeed see Diamond Head crater, as well as
each of the other predetermined sights offered for that tour by
Schuman Aviation.
28
The length of each trip was also predetermined by
Schuman Aviation, based on the particular air tour booked.
Form
886A - Explanation of Items at 1-2 (describing Holoholo Tour,
Pali Makani Tour, Sacred Falls Ali’i Tour, and Night Tour);
Hendon Decl. Exh. 14 (R. Schuman Depo.) at 78 (confirming that
IRS descriptions of tour durations were accurate); id. Exh. 15
(D. Schuman Depo.) at 28-29 (same).
Each pilot operated on a
work schedule that incorporated the tours booked for that day,
along with the tours’ preset durations.
See Gov’t Fact No. 23;
Hendon Decl. Exhs. 10-11.
The departure times were also subject to change by
Schuman Aviation.
To maximize the number of people occupying a
helicopter (up to six), Schuman Aviation combined tours, for
example by offering to upgrade passengers to longer tour times.
Hendon Decl. Exh. 14 (R. Schuman Depo.) at 120-21; id. Exh. 16
(Lanza Depo.) at 37, 39-41.
This suggests that Schuman Aviation
deliberately controlled the routes flown as a part of controlling
its costs.
Before the tour began, therefore, passenger control was
limited to selecting the flight from a list and working with
Schuman Aviation to set a mutually agreeable reservation time.
Furthermore, deposition testimony makes clear that, because of
fuel and other flying restrictions, passengers had little ability
to vary the route being flown once a helicopter was in the air.
29
See Schuman Aviation Resp. Exh. 1 (R. Schuman Depo.) at 87-89.
Schuman Aviation owner Richard Schuman testified that, for
portions of each flight (and indeed, for the entire Holoholo
tour), the FAA controlled the helicopters’ routing.
89.
Id. at 86-
Schuman also testified that, although the customers could
request variations, the pilots had total control over whether to
grant the requests, and the pilots were always required to adhere
to the flying time that had been agreed on ahead of time.
Id. at
88, 92-94.
Finally, unlike the Postal Service case, the present
case involves air tour passengers who bought seats on the
helicopter, not use of the entire aircraft.
617.
Cf. Rev. Rul. 72-
Air tour passengers did not have exclusive use of the
helicopter, and Schuman Aviation does not suggest that passengers
had any choice about which other passengers would take the
remaining open seats on their tour.
Indeed, as a point of
comparison, the court notes that the Government did not seek to
tax under § 4281 the other types of charters operated by Schuman
Aviation, such as flights for photography, television and movie
work, construction, weddings, and utility line inspections.
Gov’t Fact Nos. 9, 13; Schuman Resp. to Gov’t Fact No. 9.
See
In
those types of flights, the customers usually paid an hourly rate
for exclusive use of the helicopter.
The helicopter then took
the customers wherever they instructed, such as to the top of a
30
ridge line, or even to a neighbor island.
Hendon Decl. Exh. 15
(D. Schuman Depo.) at 25-28; id. Exh. 16 (Lanza Depo.) at 25-29;
Schuman Aviation Resp. Exh. 4 (Lanza Depo.) at 21; id. Exh. 5
(Miyasato Depo.) at 87-88.
Even if, like the air tours, these
“pure charter” flights left from the heliport and returned to the
heliport, the tours were in the hands of the passengers.
In
other words, unlike the air tours, these tours were designed by
passengers, not Schuman Aviation.
Cf. Rev. Rul. 72-617 (flights
between two cities considered “charters” because, inter alia,
Postal Service contracted for exclusive use of the aircraft
during specific times and determined the route flown).
Schuman Aviation’s control over the route, time, and
number of passengers renders the air tours controlled by Schuman
Aviation under § 49.4263-5(c).
D.
Schuman Aviation Was Obligated to Collect the Tax.
Schuman Aviation argues that, even if it was subject to
the Air Transportation Tax, it was not obligated to collect the
tax in most instances because the tax is owed only by the
passengers or by the third-party tour companies that actually
sold tours to the passengers.
Schuman Aviation Mot. 32-33.
This
argument relies on outdated cases and ignores the 1997 amendments
to the IRC that imposed secondary liability on air carriers.
26 U.S.C. § 4263(c); Lake Mead, 991 F. Supp. at 1217-18
(explaining that, in 1997, § 4263(c) was “modified to impose
31
See
secondary liability on air carriers”).8
As of 2003, 26 U.S.C.
§ 4263(c) provided:
Payment of tax.--Where any tax imposed by
section 4261 is not paid at the time payment
for transportation is made, then, under
regulations prescribed by the Secretary, to
the extent that such tax is not collected
under any other provision of this subchapter
such tax shall be paid by the carrier
providing the initial segment of such
transportation which begins or ends in the
United States.
As Schuman Aviation is, undeniably, the carrier, Schuman Aviation
was responsible for collecting the tax.
Accord Temsco, 409 Fed.
Appx. at 67 (“[Section] 4263(c) states a straightforward
requirement that, when the Transportation Tax is not collected,
the carrier for the first segment must pay it.”).
E.
Schuman Aviation Does Not Establish that the Tax
Calculation is Erroneous.
Schuman Aviation asserts that the Government’s tax
calculation is erroneous because the calculation includes taxes
on nontransportation services such as the hotel shuttle provided
by Schuman Aviation and meals during the Night Tour.
Schuman
Aviation Mot. 34 (citing 26 C.F.R. § 49.4261-2(c)); Schuman
Aviation Opp. 31-35.
However, the court lacks jurisdiction to
consider this defense because Schuman Aviation failed to
8
Although counsel for Schuman Aviation served as counsel
for Lake Mead Air in the Lake Mead case, Schuman Aviation here
ignores the Lake Mead court’s discussion of this exact issue.
See Schuman Aviation’s Opp. to Gov’t Mot. Summ. J. (“Schuman
Aviation Opp.”) 21 n.7, ECF No. 49.
32
previously raise it before the IRS.
Schuman Aviation in any
event presents no evidence that its records separated ground
transportation or meal services from transportation charges, or
that, in the absence of such separation, it could quantify any
nontransportation income that should not have been taxed.
1.
The Court Lacks Jurisdiction to Consider This
Defense.
The Government argues that Schuman Aviation has waived
this argument because it failed to raise the argument to the IRS
in its protest letter or claim for refund.
See 26 C.F.R.
§ 301.6402-2(b)(1) (requiring taxpayer applying for refund to
apprise the Commissioner, in detail, of the grounds upon which
the refund is requested); Quarty v. United States, 170 F.3d 961,
972 (9th Cir. 1999) (holding that compliance with the
notification requirements of 26 C.F.R. § 301.6402-2(b)(1) is a
prerequisite to a court’s subject matter jurisdiction over a
subsequent claim for a refund).
The regulatory requirement is
intended to prevent surprise and to give the IRS adequate notice
of the claim so that it can be investigated and resolved.
Boyd
v. United States, 762 F.2d 1369, 1371 (9th Cir. 1985).
Schuman Aviation responds by referring the court
generally to its 43-page protest letter to the IRS and to its
refund claims.
See Schuman Aviation Opp. 33 (asserting that
“[t]he Protest Letter set forth exactly the same arguments of
which the Government now complains lack of notice”); see Schuman
33
Aviation Opp. Exh. 8 (protest letter), ECF No. 50.
This is a
violation of Local Rules.
A party seeking or opposing summary judgment is
responsible for directing the court to the specific portions of
the record that support its argument.
LR56.1(c).
As Local Rule
56.1(f) states, “[T]he court shall have no independent duty to
search and consider any part of the court record not otherwise
referenced in the separate concise statements of the parties.”
In any event, at the hearing on these motions, counsel conceded
that he could not locate in the protest letter any mention of
Schuman Aviation’s argument that the tax assessed erroneously
included nontransportation amounts.
The court, therefore, lacks
jurisdiction to consider this argument.
2.
Quarty, 170 F.3d at 972.
Schuman Aviation Failed to Properly Separate
or Account for Transportation or Meals.
Quite apart from the lack of notice to the IRS about
alleged calculation errors, Schuman Aviation does not show that
it has a right to challenge any tax on a nontransportation item.
Although Treasury Regulation § 49.4261-2(c) permits exclusion of
“charges for non-transportation services” from the tax base, the
regulation also requires that, to be excludable, the charges must
be “separable and [] shown in the exact amounts thereof in the
records pertaining to the transportation charge.”
Schuman
Aviation points to nothing in the record establishing that it
separated such charges and showed the exact amount of the charges
34
in its records pertaining to transportation charges.
See Schuman
Aviation Mot. 34 (asserting, without citation, that “Makani Kai’s
gross air tour revenue includes non-transportation costs”); see
also Schuman Aviation Resp. No. 27 & Exh. 3 (D. Schuman Depo.) at
16 (stating only that Schuman Aviation employed an accountant to
reconcile its yearly costs).
Indeed, the evidence submitted by Schuman Aviation
suggests that the charges for meals and transportation were not
separated.
Schuman Aviation’s concise statement of facts says
that charges for ground transportation and meal services “were
included in the prices charged for the air tours.”
Aviation Fact No. 22.
Schuman
Schuman Aviation refers the court to the
deposition of Richard Schuman, who testified that Schuman
Aviation charged the same tour price whether the passengers were
picked up or drove themselves, and Schuman Aviation offered a
night tour that included dinner for a total price of
approximately $125.
Schuman Aviation Facts Exh. 4 (R. Schuman
Depo.) at 155-56, 190-91.
To the extent Schuman Aviation’s own
internal documentation reflects revenue attributed to meals, the
IRS did not include these revenues in its tax calculation.
See
Form 886A - Explanation of Items at 10 (proposed assessment);
Hendon Decl. Exh. 12 (chart of Schuman Aviation revenue items).
Thus, even assuming the issue were properly before this
court, the record would not support a ruling that the tax
35
calculations erroneously included nontransportation amounts, or
that there was a genuine issue of material fact with respect to
this issue.
F.
Schuman Aviation Owes Late Payment Penalties.
Schuman Aviation contests the assessment of penalties
against it for the periods ending September 30, 2003, and
December 31, 2003.
Schuman Aviation Mot. 34-38.
The court finds
no impropriety in the assessment.
1.
Schuman Aviation Had Notice of the Assessment
of Penalties.
Schuman Aviation argues that it received no notice that
the Government was assessing penalties against it until the
Government filed its Answer and Counterclaim.
Mot. 35.
Schuman Aviation
According to Schuman Aviation, the Government’s failure
to include the penalties in its Preliminary Assessment of Claim
for Refund violated Schuman Aviation’s right to due process, as
well as 26 U.S.C. § 6751(a), part of the Taxpayer Bill of Rights.
Schuman Aviation Mot. 35.
However, Schuman Aviation provides neither evidence
that the Government’s answer provided the first notice of
penalties, nor citation to any law indicating that the failure to
provide notice of penalties prohibits the Government from ever
collecting penalties.
Cf. Gov’t Opp. 23-24 (arguing that
§ 6751(a) does not provide a remedy to Schuman Aviation even if
the Government neglected to provide Schuman Aviation notice of
36
the assessment of penalties).
disregards this argument.
Lacking evidence or law, the court
Miller, 454 F.3d at 987.
By contrast, the Government submits evidence that it
provided notice to Schuman Aviation that the Government was
assessing penalties.
First, on August 21, 2006, the Government
sent Schuman Aviation Notices of Intent to Levy for the tax
periods ending September 30, 2003, and December 31, 2003.
Second Hendon Decl. Exh. 1.
See
These Notices identified the
penalties as late payment penalties, assessed pursuant to 26
U.S.C. § 6651(a)(2).
See id.
The Notices described the penalty
as 1/2 percent of unpaid tax, assessed for each month or partial
month that Schuman Aviation had failed to pay the tax.
at 2.
See id.
Schuman Aviation itself produced these documents to the
Government during discovery in this litigation.
Id. ¶ 3.
Second, the Certificates of Assessment indicate that
the IRS assessed failure-to-pay penalties on February 26, 2007,
February 25, 2008, and March 2, 2009, and that the IRS issued to
Schuman Aviation statutory notices of balances due on those
dates.
Hendon Decl. Exhs. 1-2.
The evidence before the court
creates no genuine issue of material fact as to whether Schuman
Aviation received notice of the late payment penalties assessed.
37
2.
Schuman Aviation Does Not Establish that Its
Failure to Pay Was Due to Reasonable Cause
Rather than Willful Neglect (26 U.S.C.
§§ 6651(a)(2), 6672).
Schuman Aviation argues that the Government may not
lawfully assess penalties against Schuman Aviation under either
26 U.S.C. § 6651(a)(2) or 26 U.S.C. § 6672 because Schuman
Aviation had reasonable cause for its failure to pay the Air
Transportation Tax.
Schuman Aviation Mot. 35-38.
The Government asserts that it is not assessing
penalties under § 6672.
Gov’t Opp. 26.
penalties only under § 6651(a)(2).
Instead, it is assessing
Paragraph (2) of subsection
6651(a) provides that the penalty shall be imposed upon the
taxpayer’s failure to timely pay tax, “unless it is shown that
such failure is due to reasonable cause and not due to willful
neglect.”
The Treasury Regulations interpret “reasonable cause”
under 26 U.S.C. § 6651 to mean that the taxpayer “exercised
ordinary business care and prudence in providing for payment of
his tax liability and was nevertheless either unable to pay the
tax or would suffer an undue hardship . . . if he paid on the due
date.”
26 C.F.R. § 301.6651-1(c)(1).
It is Schuman Aviation’s
burden to establish that its failure to pay the penalty was “due
to reasonable cause and not due to willful neglect.”
See, e.g.,
Synergy Staffing, Inc. v. IRS, 323 F.3d 1157, 1160 (9th Cir.
38
2003) (holding that taxpayer failed to carry its burden of
establishing reasonable cause).
Schuman Aviation argues that it had a genuine, goodfaith belief that its air tours were not taxable transportation
because it had paid a different type of tax, the Aviation Fuel
Excise Tax, on its tours since the company’s inception without
objection from the IRS.
Schuman Aviation Mot. 36-37.
Schuman
Aviation’s Concise Statement of Facts states that it paid
Aviation Fuel Excise Tax rather than the Air Transportation
Excise tax for the disputed 2003 and 2004 periods.
Aviation Fact No. 21 & Exh. 3.
See Schuman
However, Schuman Aviation fails
to support this argument with any evidence.
Schuman Aviation
also contends that it believed the flights were not taxable based
on “informed judgment, legal research and the advice of counsel.”
Schuman Aviation Mot. 36-37.
Although there is some support in
the caselaw for the proposition that it is reasonable for a
taxpayer to rely on counsel’s advice regarding matters of tax
law, see, e.g., Baccei v. United States, 632 F.3d 1140, 1149 n.3
(9th Cir. 2011), Schuman Aviation is not entitled to the benefit
of such a defense because it offers no evidence to support its
assertions that it actually obtained such advice before the IRS
notified it that taxes were owed.
By contrast, the Government points to deposition
statements made by Richard Schuman suggesting that he consulted
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with his attorneys regarding the propriety of paying the Air
Transportation Tax only after he had been contacted by the IRS
agents regarding the 2003 time periods, long after the tax itself
was due.
See Gov’t Fact No. 28; Hendon Decl. Exh. 14 (R. Schuman
Depo.) at 212, 233-35.
On a motion for summary judgment, the
court is unable to rule in Schuman Aviation’s favor on issues for
which Schuman Aviation bears the burden of proof based solely on
argument by Schuman Aviation’s counsel.
See Miller, 454 F.3d at
987; Fed. R. Civ. P. 56(c)(1).
Nor is Schuman Aviation entitled to rely on the
favorable judgment obtained by a different taxpayer, Kenai Air,
in 1987.
Aside from merely attaching the complaint and the
single-page judgment entered in the case, Schuman Aviation Resp.
Exh. 8 at 45-54, Schuman Aviation submits no evidence of the
basis of the judgment in favor of Kenai Air.
Nor does Schuman
Aviation offer admissible evidence indicating that Schuman
Aviation believed itself to be similarly situated to Kenai Air.
In short, Schuman Aviation fails to establish that it failed to
pay the Air Transportation Tax based on reasonable cause rather
than willful neglect.
3.
Schuman Aviation Is Not Entitled to Avoid
Retroactive Application of the Air
Transportation Tax.
Schuman Aviation argues briefly in its Reply that it is
“entitled” to have the Air Transportation Tax applied
40
prospectively, rather than retroactively.
See Schuman Aviation
Reply Supp. Mot. Summ. J. 19-20, ECF No. 52.
Schuman Aviation
cites 26 U.S.C. § 7805(b)(8), which gives the Secretary of the
Treasury discretion to apply its tax determinations
prospectively, and argues that the Government’s interpretation of
Treasury Regulation § 49.4263-5 represents an extension of
existing law that the court should prevent the IRS from applying
retroactively.
Schuman Aviation has not established that it is
entitled to relief under § 7805(b).
First, having not
established that it included this claim in its claim for refund,
Schuman Aviation is barred from raising it before this court.
See Quarty, 170 F.3d at 972.
Moreover, even if Schuman Aviation
did raise this claim, § 7805(b)(8), by its plain language, merely
gives the IRS discretion to waive retroactive application of its
rulings.
Schuman Aviation cites no law suggesting that this
court may order the IRS to exercise its discretion to apply an
otherwise valid tax law on only a prospective basis when Schuman
Aviation failed to obtain from the IRS any statement supporting
Schuman Aviation’s reading of 26 U.S.C. § 4281 or 26 U.S.C.
§ 49.4263-5.
See Gov’t Fact No. 30; Fl. Power & Light Co. v.
United States, 375 F.3d 1119, 1125 (Fed. Cir. 2004) (holding that
taxpayer was not entitled to have tax law applied only
prospectively when taxpayer had not obtained a private letter
41
ruling from the IRS that supported the taxpayer’s alternative
understanding).
V.
CONCLUSION.
Although the court is not unsympathetic to Schuman
Aviation’s contention that it operated for several years without
having been subject to the Air Transportation Tax and that
another air tour company previously received a favorable court
judgment after the IRS sought to assess the Air Transportation
Tax, the record establishes that Schuman Aviation’s air tours
operated “on an established line” under the governing Treasury
Regulation.
Schuman Aviation is, therefore, subject to the Air
Transportation Tax for the periods ending September 30, 2003,
December 31, 2003, September 30, 2004, and December 31, 2004.
Moreover, Schuman Aviation has failed to establish that it is
entitled to a refund based on any of its asserted defenses.
Schuman Aviation’s motion for summary is therefore DENIED.
Government’s motion for summary judgment is GRANTED.
The
Schuman
Aviation owes the outstanding taxes, penalties, and accrued
interest assessed in the Government’s Certificates of Assessment
for the periods ending September 30, 2003, and December 31, 2003.
Schuman Aviation is not entitled to a refund of Air
Transportation Tax paid for the periods ending September 30,
2004, or December 31, 2004.
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IT IS SO ORDERED.
DATED: Honolulu, Hawaii, September 6, 2011.
/s/ Susan Oki Mollway
Susan Oki Mollway
Chief United States District Judge
Schuman Aviation Company Ltd dba Makani Kai Helicopters v. United States; Civil No.
08-00289 SOM/BMK; ORDER GRANTING SUMMARY JUDGMENT IN FAVOR OF THE UNITED STATES.
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