Bombardier Aerospace Corporation v. United States of America

Filing 78

MEMORANDUM OPINION AND ORDER denying without prejudice as moot 38 MOTION to Exclude Expert Testimony of Gary M. Arber filed by United States of America; granting 39 MOTION for Summary Judgment filed by United States of America; denying 42 MOT ION for Summary Judgment filed by Bombardier Aerospace Corporation; granting 74 MOTION for Leave to File Appendix filed by Bombardier Aerospace Corporation; and vacating May 4, 2015 trial docket setting. The court directs the United States of America to present a draft form of judgment for review by Bombardier Aerospace Corporation's counsel for proper form and for the court's consideration for entry. (Ordered by Judge Sidney A Fitzwater on 3/20/2015) (Judge Sidney A Fitzwater)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
BOMBARDIER AEROSPACE
CORPORATION,
Plaintiff-counterdefendant,
VS.
UNITED STATES OF AMERICA,
Defendant-counterplaintiff.

§
§
§
§
§
§
§
§
§
§

Civil Action No. 3:12-CV-1586-D

MEMORANDUM OPINION
AND ORDER
This litigation between a provider of fractional aircraft management services and the
United States of America (the “government”) presents issues that affect whether federal
excise taxes (“FET”) are owed on certain fees paid to the provider. On the parties’ crossmotions for summary judgment, and for the reasons that follow, the court holds that the
provider lacks standing to challenge the collection of FET on certain fees, and that the
Internal Revenue Service (“IRS”) is entitled to collect FET on the remaining fees at issue.
I
Because there are some background facts that are better set out in the context of the
parties’ arguments rather than in an introduction, the court defers discussing them.1 The
1

Because both parties move for summary judgment, the court will recount the
evidence that is undisputed, and, when necessary to set out evidence that is contested, will
do so favorably to the party who is the summary judgment nonmovant in the context of that
evidence. See, e.g., GoForIt Entm’t, LLC v. DigiMedia.com L.P., 750 F.Supp.2d 712, 718
n.4 (N.D. Tex. 2010) (Fitzwater, C.J.) (quoting AMX Corp. v. Pilote Films, 2007 WL
1695120, at *1 n.2 (N.D. Tex. June 5, 2007) (Fitzwater, J.)).

following introduces the nature of the litigation, the parties’ claims and counterclaims, the
grounds on which the parties seek summary judgment, and the procedural history of the
summary judgment motions.
This is a suit by plaintiff-counterdefendant Bombardier Aerospace Corporation
(“BAC”) under 26 U.S.C. §§ 6511(a) and (b) and 6415 to recover and abate FET assessed
by the IRS under § 4261 of the Internal Revenue Code, 26 U.S.C. § 4261 (Supp. 2014),
which imposes a tax on “taxable transportation.” E.g., 26 U.S.C. § 4261(a). The government
as counterplaintiff asserts a counterclaim for unpaid FET, penalties, accrued, unassessed
interest, and statutory additions.
BAC provides management services to aircraft owners and leaseholders of fractional
interests in aircraft (collectively, “Aircraft Owners”) through its Flexjet program.2 During
the tax periods in question—successive quarters beginning January 1, 2006 and ending
December 31, 2007 (the “Tax Periods”)—the Aircraft Owners paid to BAC three types of
fees that are pertinent to BAC’s claims in this lawsuit: monthly management fees (“MMF”),
variable rate fees (“VRF”), and fuel surcharge fees (“FSF”). MMF are fixed charges that
cover costs associated with ownership of the aircraft, such as insurance, inspection, crew
salaries, crew training, aircraft hangaring, and scheduling costs.

MMF are incurred

regardless of whether an aircraft is being flown. If an Aircraft Owner chooses not to fly
during a billing period, it is billed for MMF, which relates to fixed costs of ownership. VRF

2

Although this memorandum opinion and order addresses past practices and prior tax
years, the court will use the present tense except where the context otherwise requires.
-2-

are charged for each hour of flight time. These fees cover the direct operational costs
associated with flying the aircraft (such as fuel, oil, lubricants, flight planning, and weather
and communications services). FSF are fees that cover the additional costs of fuel that are
not included in either MMF or VRF.
During the Tax Periods, BAC paid FET on VRF and FSF collected from the Aircraft
Owners, but not on MMF. Prior to the Tax Periods, the IRS conceded in two audits of Form
720 FET Returns that FET were not owed on MMF. BAC relied on these concessions when
refraining from collecting and remitting FET on MMF for the Tax Periods. Despite these
concessions, the IRS audited BAC for the Tax Periods and assessed FET on MMF. BAC
asserts that nothing changed factually between the prior periods (which covered 11 years)
and the Tax Periods that would have warranted such disparate treatment. When BAC and
the IRS were unable to resolve their dispute administratively, BAC paid a divisible portion
of the FET assessment on MMF for each Tax Period and filed this lawsuit.
BAC sues the government on two claims:3 it seeks in part to recover the FET assessed
and paid for the Tax Periods on VRF and FSF. It alleges that, when filing Form 720 FET

3

In its summary judgment motion, BAC refers to these two claims. See P. Mot.
Summ. J. 1 (“This case is comprised of two issues.”). In its complaint, BAC alleges four
claims: first, for a refund of FET reported on Forms 720 for the Tax Periods and paid on VRF
and FSF that BAC charged to Aircraft Owners; second, for a refund of FET assessed by the
IRS on MMF pursuant to an IRS excise tax examination; third, to recover FET for the Tax
Periods on MMF that were overpaid by BAC, and abate FET that were assessed by the IRS
in violation of the government’s Duty of Clarity; and, fourth, to recover FET for the Tax
Periods on MMF that were overpaid by BAC, and abate FET that were assessed by the IRS
and that the government is estopped from recovering.
-3-

Returns, and as a result of illegal assessments made by the IRS pursuant to an excise tax
examination, it erroneously overpaid FET for the Tax Periods on VRF and FSF. BAC also
sues for a refund of FET paid on MMF, and to otherwise abate the assessment of FET on
MMF. BAC alleges that the IRS has illegally assessed FET on MMF for the Tax Periods.
The government counterclaims to recover unpaid FET for tax years 2006 and 2007,
plus penalties, accrued, unassessed interest, and statutory additions.
In simple terms, 26 U.S.C. § 4261(a) imposes a tax on “taxable transportation.” E.g.,
26 U.S.C. § 4261(a). “Taxable transportation” means certain transportation by air. E.g., 26
U.S.C. § 4262(a). Generally, the tax “shall be paid by the person making the payment
subject to the tax,” 26 U.S.C. § 4261(d), and “every person receiving any payment for . . .
services on which a tax is imposed . . . shall collect the amount of the tax from the person
making such payment,” 26 U.S.C. § 4291. If, however, the tax is not paid at the time
payment for transportation is made, then, to the extent that the tax is not otherwise collected,
it must be paid by the carrier providing the initial segment of such transportation that begins
or ends in the United States. 26 U.S.C. § 4263(c).4
BAC and the government both move for summary judgment. The government
maintains that BAC lacks standing to bring this refund action with respect to the FET that
it collected from the Aircraft Owners in its Flexjet program for VRF, FSF, and some MMF;
that BAC provided “taxable transportation” to the Aircraft Owners in its Flexjet program

4

If FET are not owed, a fuel tax still applies. Only FET are at issue in this litigation.
-4-

during 2006 and 2007; that the VRF, FSF, MMF, and lease payments BAC collected from
the Aircraft Owners in its Flexjet program were payments for “taxable transportation”; and
that BAC is liable for the additional FET assessed for the calendar quarters in tax years 2006
and 2007, as asserted in the government’s counterclaim.
BAC contends that it is entitled to summary judgment because FET cannot legally be
imposed on flights conducted by fractional aircraft owners who utilize BAC’s management
services, and because BAC’s obligation to collect and remit FET on MMF was vague and
speculative and violated Central Illinois Public Service Co. v. United States, 435 U.S. 21
(1978).
After the court heard oral argument on the motions, the United States District Court
for the Southern District of Ohio decided NetJets Large Aircraft, Inc. v. United States, ___
F.Supp.3d ___, 2015 WL 313939 (S.D. Ohio Jan. 26, 2015). NetJets addresses several of
the issues presented in the instant case, and it is related to another case—Executive Jet
Aviation v. United States, 125 F.3d 1463 (Fed. Cir. 1997)—that is discussed extensively in
the briefing. The court directed the parties to submit supplemental briefs stating their
positions regarding whether this court should follow NetJets, and, if so, how NetJets affects
the disposition of the parties’ summary judgment motions. The supplemental briefs and
responses have been filed,5 and the parties’ cross-motions for summary judgment are ripe for
decision.

5

BAC has also filed a motion for leave to file supplemental appendix. The court
grants the motion and deems BAC’s third supplement to appendix to be filed today.
-5-

II
Each party’s summary judgment burden depends on whether it is addressing a claim
or defense for which it will have the burden of proof at trial. To be entitled to summary
judgment on a claim on which the nonmovant will bear the burden of proof at trial, the
moving party can meet its summary judgment obligation by pointing the court to the absence
of admissible evidence to support the nonmovant’s claim. See Celotex Corp. v. Catrett, 477
U.S. 317, 325 (1986). Once the moving party does so, the nonmovant must go beyond its
pleadings and designate specific facts showing there is a genuine issue for trial. See id. at
324; Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc) (per curiam).
An issue is genuine if the evidence is such that a reasonable jury could return a verdict in the
nonmovant’s favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The
nonmovant’s failure to produce proof as to any essential element of a claim renders all other
facts immaterial. See Trugreen Landcare, L.L.C. v. Scott, 512 F.Supp.2d 613, 623 (N.D.
Tex. 2007) (Fitzwater, J.). Summary judgment is mandatory if the nonmovant fails to meet
this burden. Little, 37 F.3d at 1076.
To be entitled to summary judgment on a claim or defense on which the party moving
for summary judgment will have the burden of proof at trial, the party “must establish
‘beyond peradventure all of the essential elements of the claim or defense.’” Bank One, Tex.,
N.A. v. Prudential Ins. Co. of Am., 878 F. Supp. 943, 962 (N.D. Tex. 1995) (Fitzwater, J.)
(quoting Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986)). This means that the
moving party must demonstrate that there are no genuine and material fact disputes and that
-6-

the party is entitled to summary judgment as a matter of law. See Martin v. Alamo Cmty.
Coll. Dist., 353 F.3d 409, 412 (5th Cir. 2003). “The court has noted that the ‘beyond
peradventure’ standard is ‘heavy.’” Carolina Cas. Ins. Co. v. Sowell, 603 F.Supp.2d 914,
923-24 (N.D. Tex. 2009) (Fitzwater, C.J.) (quoting Cont’l Cas. Co. v. St. Paul Fire & Marine
Ins. Co., 2007 WL 2403656, at *10 (N.D. Tex. Aug. 23, 2007) (Fitzwater, J.)).
There are special presumptions and proof burdens that apply in tax cases, and the
court discusses them below.
III
The court turns first to BAC’s claim for FET that it collected and paid on VRF and
FSF charged to Aircraft Owners. The government challenges BAC’s standing to recover on
this claim.6

6

The government does not challenge BAC’s standing with respect to the FET that
BAC paid on MMF. See D. 4/29/14 Br. 7 n.2 (“BAC’s refund claim with respect to the small
amount of excise taxes it paid with respect to the [MMF] is not covered by the provisions of
section 6415 of the Code, in that BAC did not collect those amounts from the owners and
lessees, but, rather, paid them itself.”); D. 2/10/15 Br. 2 n.2. (“In the present case the plaintiff
has sued for a refund of excise taxes it collected from the aircraft owners and lessees, who
paid them with respect to the [VRC] and [FSF]. However, included in plaintiff’s complaint
are refund claims for a small amount of tax that plaintiff itself paid with respect to taxes on
the [MMF] it received from its customers. Those claims are obviously not subject to the
Government’s standing argument, as plaintiff did bear the economic burden of those small
tax amounts.”); Tr. Oral Arg. 10 (stating the government’s position that BAC has standing
to sue regarding the “several thousand dollars that they paid out of their pocket with respect
to the [MMF],” but that BAC lacks standing to sue concerning the $17 million that it
collected without paying FET). Although the government challenges BAC’s standing with
respect to part of its MMF-based claims, the fact that BAC has standing as to at least another
part is sufficient to permit the court to address the merits of the MMF-based claims.
-7-

A
The government contends that an entity that collects taxes imposed by § 4261 lacks
standing to seek a refund unless it establishes that it has repaid the amount of the taxes to the
person from whom it collected them, or it has obtained the person’s consent to the allowance
of the refund. The government therefore maintains that BAC (the tax collector) cannot
establish that it has prudential standing7 because it cannot show that it repaid the FET that

7

At oral argument, the government stated that it is probably relying on prudential (as
opposed to constitutional) standing. See Tr. Oral Arg. 4 (“It would probably be prudential
standing, Your Honor.”). Although the court questions whether the government is relying
on prudential standing—rather than simply contending that BAC has not met the
requirements for bringing suit under 26 U.S.C. § 6415(a)—the court will use the term
“standing” because it is used in the cases and by the parties.
Conceptually, however, prudential standing “embodies ‘judicially self-imposed limits
on the exercise of federal jurisdiction.’” Cibolo Waste, Inc. v. City of San Antonio, 718 F.3d
469, 474 (5th Cir. 2013) (quoting Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 11
(2004)). The doctrine asks
whether a plaintiff’s grievance arguably falls within the zone of
interests protected by the statutory provision invoked in the suit,
whether the complaint raises abstract questions or a generalized
grievance more properly addressed by the legislative branch,
and whether the plaintiff is asserting his or her own legal rights
and interests rather than the legal rights and interests of third
parties.
Ass’n of Cmty. Orgs. for Reform Now v. Fowler, 178 F.3d 350, 363 (5th Cir. 1999). The
government is not asking the court to enforce—nor is the court relying on—judicially selfimposed limits. Instead, the court is considering whether BAC has satisfied the requirements
of § 6415(a) that it has repaid the amount of the tax to the person from whom BAC collected
it, or has obtained the consent of the person to the allowance of the credit or refund. The
question presented is simply whether BAC has a cause of action under the statute. This has
occasionally been referred to as “statutory standing,” which is arguably a more accurate label
than “prudential standing,” because it places the focus of the inquiry on the statute itself. See
Lexmark Int’l, Inc. v. Static Control Components, Inc., ___ U.S. ___, 134 S.Ct. 1377, 1387
-8-

it collected from the Aircraft Owners (the taxpayers) for VRF and FSF. It posits that,
although BAC alleges in its complaint that it will receive consents from the Aircraft Owners
to the allowance of the refunds before the refunds are issued, BAC cannot show that it
received these consents. The government therefore contends that the court must dismiss
BAC’s claim for a refund of FET paid on VRF and FSF.8
BAC responds that the government’s standing argument is “frivolous” in light of the
Federal Circuit’s decision in Chicago Milwaukee Corp. v. United States, 40 F.3d 373 (Fed.
Cir. 1994), which BAC maintains is factually indistinguishable. P. 5/20/14 Br. 2-3.
According to BAC, Chicago Milwaukee held that a tax collector seeking a refund of the
employee portion of employment tax was not required to certify employee repayment or
consent before filing a refund claim because the law did not specify when the collector had
to provide the consents of the underlying taxpayers; the consent requirement was not
jurisdictional because it played no part in fairly apprising the IRS or the courts of the ground
on which the refund was sought; requiring the tax collector to compensate 8,000 former

n.4 (2014). But even the term “statutory standing” is somewhat of a misnomer, because the
concept is not jurisdictional, and “does not implicate . . . the court’s statutory or
constitutional power to adjudicate the case.” Id.; see also CGM, LLC v. BellSouth
Telecomms., Inc., 664 F.3d 46, 52 (4th Cir. 2011) (“[S]tatutory standing . . . is perhaps best
understood as not even standing at all.”). Rather, the inquiry presents a straightforward
question of statutory interpretation: whether BAC has met the requirements for bringing suit
under § 6415(a).
8

The government acknowledges that 26 U.S.C. § 6415(a) does not bar a refund, and
a claimant can recover a refund, where the claimant shows that it did not collect the tax and
has itself borne the economic burden of the tax.
-9-

employees or secure their consent before filing a refund claim imposed a harsh burden
without good reason; and the court of appeals had jurisdiction to consider the merits of the
tax collector’s refund claim before requiring compliance with the consent requirement, that
is, the tax collector could demonstrate compliance with the consent requirement after the
district court determined the merits of the collector’s refund claim.
BAC also posits that, in Revenue Ruling 2009-39 (which BAC acknowledges is
neither legal precedent nor entitled to deference by the courts), the IRS favorably cited
Chicago Milwaukee and adopted its holding as IRS administrative policy, and that the IRS
never challenged BAC’s standing or raised this argument while administratively auditing
BAC. It maintains that this strongly suggests that the IRS does not support the standing
argument now being raised by the U.S. Department of Justice. BAC argues that the court
should reject the government’s standing challenge, which it contends directly contradicts the
IRS’s own public announcements.
B
The court holds that BAC lacks standing to recover FET that it collected and paid on
VRF and FSF charged to Aircraft Owners, because it has failed to establish that it either
repaid the amount of the FET on VRF and FSF that it collected or that it obtained the
consents of the Aircraft Owners.
26 U.S.C. § 6415(a) provides:
Credit or refund of any overpayment of tax imposed by section
4251, 4261, or 4271 may be allowed to the person who collected
the tax and paid it to the Secretary [of the Treasury] if such
- 10 -

person establishes, under such regulations as the Secretary may
prescribe, that he has repaid the amount of such tax to the person
from whom he collected it, or obtains the consent of such person
to the allowance of such credit or refund.
Under the law of this circuit, “[i]f it is determined that Plaintiff has not borne the economic
burden—it is admitted that he did not make the refund fund or obtain consents required by
26 U.S.C. § 6415—that ends the suit, since Plaintiff would then have no standing to sue and
the Court would not reach the merits.” McGowan v. United States, 222 F. Supp. 329, 330
(S.D. Fla. 1962) (citing Fifth Circuit cases),9 aff’d, 323 F.2d 655 (5th Cir. 1963).10 It is
undisputed that BAC has neither repaid the amount of the FET on VRF and FSF to the
Aircraft Owners from whom BAC collected them, nor has it obtained consents of the Aircraft
Owners.
BAC’s reliance on Chicago Milwaukee is misplaced. First, it is not the law of the
Fifth Circuit. Second, the decision does not address the requirements of 26 U.S.C. § 6415.
Although there are similarities between § 6415 and the provision of the Internal Revenue

9

The district court in McGowan found on remand following the Fifth Circuit’s reversal
in McGowan v. United States, 296 F.2d 252 (5th Cir. 1961), that the plaintiff did bear the
economic burden of the tax and therefore had standing, although it largely ruled against the
plaintiff on the merits. McGowan, 222 F. Supp. at 331.
10

The Fifth Circuit’s opinion states in its entirety:
The facts involved in this appeal and the applicable law are well
set forth in the findings and conclusions of the district court.
222 F.Supp. 329. We are in agreement with the district court
and its judgment is Affirmed.

McGowan v. United States, 323 F.2d 655, 655 (5th Cir. 1963) (per curiam).
- 11 -

Code (26 U.S.C. § 7422(a)) and the Treasury regulation issued thereunder (Treas. Reg. §
31.6402(a)-2(a)(2)) that Chicago Milwaukee addresses, there are material differences as well.
In Chicago Milwaukee the question was whether Treas. Reg. § 31.6402(a)-2(a)(2)
imposed a jurisdictional requirement under § 7422(a). Chi. Milwaukee, 40 F.3d at 375. This
was material because the plaintiff brought suit under § 7422(a), which waives sovereign
immunity from refund suits, provided the taxpayer files a qualifying refund claim. See id.
at 374. The statute “imposes, as a jurisdictional prerequisite to a refund suit, filing a refund
claim with the IRS that complies with IRS regulations.” Id. It was necessary for the Federal
Circuit to interpret Treas. Reg. § 31.6402(a)-2(a)(2) to decide whether it imposed a
jurisdictional requirement, and the court ultimately concluded that it did not. Id. at 375. But
Treas. Reg. § 31.6402(a)-2(a)(2) provided: “Every [administrative] claim filed by an
employer for refund or credit of [RRTA] tax . . . collected from an employee shall include
a statement that the employer has repaid the tax to such employee or has secured the written
consent of such employee to allowance of the refund . . . .” Id. (emphasis added; bracketed
material and ellipses in original) (quoting Treas. Reg. § 31.6402(a)-2(a)(2)). By contrast, 26
U.S.C. § 6415 does not merely require a statement that the tax collector has repaid the tax
or obtained the taxpayer’s consent; it requires that the party seeking a credit or refund
establish under the applicable regulations that it has repaid the amount of the tax to the
taxpayer or has obtained the taxpayer’s consent. This is an important distinction because in
Chicago Milwaukee the Federal Circuit interpreted Treas. Reg. § 31.6402(a)-2(a)(2) as a
certification requirement and 26 U.S.C. § 7422(a) as a notice provision. Chi. Milwaukee, 40
- 12 -

F.3d at 375. The court explained that Treas. Reg. § 31.6402(a)-2(a)(2) specified that the
claim must include a certification, but the regulation did not specify when the employer must
provide the certification, and it neither required nor prohibited including the certification at
the time of filing, id.; the regulation did not indicate whether the refund claim must include
the certification when filed, or whether the employer might provide certification after filing,
and, if certification need not have accompanied the claim when filed, then it did not impose
a jurisdictional filing requirement under 26 U.S.C. § 7422(a); the Court of Claims (the
Federal Circuit’s predecessor) had construed § 7422(a) as a notice provision, suggesting that
the § 31.6402(a)-2(a)(2) certification need not accompany the refund claim when filed; if a
claim fairly apprised the IRS of the ground on which recovery was sought, then the claim
was adequate for the purposes of bringing suit under § 7422(a); and the Federal Circuit’s
precedent militated against treating § 31.6402(a)-2(a)(2) as imposing a jurisdictional
requirement, id.; certification of repayment or consent played no part in fairly apprising the
IRS of the ground on which recovery was sought, because the question whether an employer
had repaid the employee portion or obtained consent provided no information about whether
an over payment of taxes had in fact occurred; and, if a party submitted the certification after
filing, it would not surprise the IRS as to the basis for the claim. Therefore, treating
§ 31.6402(a)-2(a)(2) as jurisdictional would not advance the policies expressed in 26 U.S.C.
§ 7422(a). Id.11 But the reasoning of Chicago Milwaukee—applied in the context of a statute

11

The Federal Circuit also relied on a decision of its predecessor, the Court of Claims,
in IBM v. United States, 343 F.2d 914 (Ct. Cl.1965), and on the views of the IRS as set forth
- 13 -

and regulation construed, respectively, as a certification provision and a notice provision—is
distinguishable from a statute that requires that the taxpayer establish that the prerequisites
to suit have been satisfied.12
BAC therefore lacks standing to recover FET that it collected from Aircraft Owners
and paid on VRF and FSF, because it has not established that it repaid these taxes to the
Aircraft Owners or that it obtained the necessary consents from them. Accordingly, the court
dismisses this claim.

in a General Counsel Memorandum. Chi. Milwaukee, 40 F.3d at 375-76. In IBM the court
held that a statute imposing a similar certification requirement (§ 6416(a)(1)(C)) did not
require certification on claim filing. Id. at 375. In the General Counsel Memorandum, the
IRS stated that it viewed the specific certification requirement at issue in Chicago Milwaukee
as non-jurisdictional. Id. at 376. Neither of these additional grounds relates specifically to
26 U.S.C. § 6415.
12

In NetJets the court held that the plaintiff had standing under § 6415(a). NetJets,
2015 WL 313939, at *7-8. The court declines to follow NetJets in this respect. First, NetJets
relied on Chicago Milwaukee to hold that § 6415(a) does not specify when its requirements
must be satisfied. Id. (quoting Chi. Milwaukee, 40 F.3d at 375). For reasons this court
explains above, it concludes that Chicago Milwaukee is distinguishable. Second, to the
extent NetJets analyzed § 6415(a) as a mere certification requirement, see id. (“the Court
agrees with those courts that require certification prior to any issuance of a refund, and not
before the commencement of a lawsuit”), the court holds for the reasons explained above that
§ 6415(a) imposes a proof burden, not a mere certification obligation. And third, although
NetJets declined to follow non-binding Fifth Circuit authority, see id. at *8 (citing, inter alia,
McGowan, 296 F.2d at 254-55), distinguishing it on the basis that it “did not address whether
consent needed to be obtained before filing a lawsuit or before recovery,” id., this court is
bound by Fifth Circuit precedent, which it considers indistinguishable from the present case.
- 14 -

IV
BAC also sues for a refund of FET that it paid on MMF charged to Aircraft Owners
and for abatement of the unpaid portion of IRS assessments of FET on MMF.13 The
government counterclaims for unpaid FET for tax years 2006 and 2007, plus penalties,
accrued, unassessed interest, and statutory additions.
The government moves for summary judgment dismissing BAC’s MMF-based claims
and establishing its entitlement to recover on its counterclaim for unpaid FET. It contends
that, during 2006 and 2007, BAC provided “taxable transportation” to Aircraft Owners as
part of its Flexjet program; that the MMF were payments for “taxable transportation”; and
that BAC is liable for additional FET assessed for the calendar quarters in tax years 2006 and
2007, as reflected in the Certificate of Assessments, Payments, and Other Matters (Form
4340).
BAC moves for summary judgment, maintaining that it is entitled to a refund of FET
paid, and the abatement of FET owed, on MMF. First, it contends that FET cannot be
imposed on flights conducted by the Aircraft Owners because, under § 119.33 of the Federal
Aviation Regulations (“FARs”), BAC is prohibited as a non-U.S. citizen from carrying
passengers for compensation or hire; the only litigated case, Executive Jet, 125 F.3d 1463,
supports BAC’s position in that the government conceded that FET do not apply to MMF;14

13

BAC has standing to pursue at least part of this claim. See supra note 6.

14

As the court explains below, the initial part of BAC’s argument concerning
Executive Jet is devoted to showing why, in BAC’s view, the decision does not apply to
- 15 -

under pertinent Revenue Rulings, BAC is not providing taxable transportation to the Aircraft
Owners; and there have been no changes in the law to support the conclusion that FET need
to be paid on MMF. Second, it posits that its obligation to collect and remit FET on MMF
was vague and speculative and violated Central Illinois and the Duty of Clarity.
Although the government and BAC both move for summary judgment, their motions
are not mirror images. Some issues are logically considered before others because of their
potential to moot other issues. Accordingly, before turning to the ultimate questions whether
the MMF that Aircraft Owners paid BAC were for taxable transportation and whether the
IRS is entitled to recover on its counterclaim for unpaid FET, the court will address other
grounds that, if meritorious, would pretermit the need to reach these issues.
V
BAC contends that it is entitled to summary judgment because FET cannot legally be
imposed on flights conducted by fractional aircraft owners who use BAC’s management
services.
A
BAC argues, first, that, as a non-U.S. citizen (it is a Canadian citizen), it is prohibited
under FAR § 119.33 from carrying passengers for compensation or hire, and therefore cannot
provide “taxable transportation” to Aircraft Owners as part of its Flexjet program on which
FET are owed. BAC contends that it is not a United States citizen; it is therefore prohibited

BAC. Regarding MMF, however, BAC contends that, even if Executive Jet applies, it
supports BAC’s position given the concession made by the government in that case.
- 16 -

by FAR § 119.33 from carrying passengers for compensation or hire; 26 U.S.C. § 4083(b)
defines “commercial aviation” as “use of an aircraft in a business of transporting persons or
property for compensation or hire by air”; the legal standard “for compensation or hire” is
therefore used for both the relevant FARs and FET; because BAC is legally prohibited by
the FARs from providing air transportation “for compensation or hire,” it cannot engage in
air transportation “for compensation or hire” for purposes of FET; the Federal Aviation
Administration (“FAA”), the agency that enforces the FARs, has not suggested that BAC is
illegally conducting commercial aviation; instead, the FAA has decided that a fractional
aircraft ownership program like BAC’s that provides management services does not
constitute providing air transportation “for compensation or hire”; the FAA has therefore
decided that BAC is engaged in providing management services, not commercial aviation
that is subject to FET; and the government’s position directly conflicts with the FAA’s
licensing of BAC, because BAC must have an Air Carrier Certificate to engage in
commercial aviation, the FAA has only licensed BAC to manage fractionally owned aircraft
under the noncommercial rules of the FARs, not to engage in “commercial aviation,” and this
licensing precludes BAC from engaging in taxable commercial transportation as a matter of
law.
In reply to the government’s opposition, and in a post-NetJets supplemental brief,
BAC refines its position somewhat. It posits that the factual, not legal, conclusions of the
FARs are relevant when analyzing whether BAC is engaged in taxable transportation.
Relying on Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), and Sprint Corp. v.
- 17 -

Commissioner, 108 T.C. 384 (1997), in which the Supreme Court of the United States and
the U.S. Tax Court held that agency regulations that governed the taxpayers’ accounting
practices in turn controlled how taxes were to be calculated, BAC maintains that the court
should strongly consider the fact-finding of the FAA, which is the administrative agency that
regulates BAC in its particular industry and that has expertise regarding whether BAC
provides bona fide management services or commercial charter services, a matter on which
the IRS has no expertise. BAC contends that, even if the court decides that the FARs are not
determinative when deciding how 26 U.S.C. § 4261 is to be interpreted legally, they are
entitled to some weight when deciding as a factual matter whether BAC is providing
noncommercial management services to the Aircraft Owners or is engaged in carrying
passengers for compensation or hire. BAC also asserts that the FARs must be applied to this
case because there are no conflicting Treasury regulations. It posits that the FARs are more
than simple regulations that only apply legal standards for aviation safety, as evidence by the
preamble to the 2003 FARs, which contains factual findings explaining why certain rules
were adopted.
B
The court holds that BAC’s reliance on the FARs is misplaced because they are not
tax regulations. To paraphrase the NetJets court, “critically, [BAC] offers no authority—and
the Court knows of none—to support the contention that the FARs—which are safety
regulations—are ‘controlling’ or ‘applicable’ in a tax dispute.” NetJets, 2015 WL 313939,

- 18 -

at *11.15 As NetJets explained:
The IRS has long considered its application of the tax code
independent from the FAA’s safety rules. In 1978—well before
this dispute—the IRS issued a revenue ruling stating that “[t]he
status of an aircraft operator as a ‘commercial operator’ under
[FAA] regulations is not determinative in applying the aviation
fuel and transportation taxes imposed by section[ ] . . . 4261 . . .
of the Code.” Likewise, in promulgating the 2003 FARs at issue
here, the FAA recognized Executive Jet’s holding that
“fractional ownership programs are commercial operations for
tax purposes,” but announced that “[t]ax law does not govern
safety rules. The FAA considers fractional ownership programs
private operations for safety and operational control purposes.”
Thus, even in promulgating the very regulations that NetJets
relies upon, the FAA did not claim to change how the tax law
applies.
Cementing the conclusion that the FARs did not change
the application of the tax code, Congress amended 26 U.S.C.
§ 4261 in 2012 to temporarily exclude fractional ownership
programs. For periods beginning April 1, 2012 and ending
September 30, 2015, fractional ownership aircraft programs are
not subject to § 4261 but instead a special fuel tax surcharge.
This action would be unnecessary if the FARs already took the
NetJets program out of § 4261’s reach indefinitely. Though
NetJets highlights two comments in the amendment’s legislative
history stating that the amendment was designed to “clarify[]
and reaffirm that fractional aviation is non-commercial
aviation,” the statutory text unambiguously applies the
amendment prospectively and for a limited time—not
retroactively to cover the time period at issue here. Thus, the
Court concludes that NetJets provides taxable transportation.
Id. at *11-12 (citations omitted; alterations in original). The reasoning of NetJets is well

15

In NetJets the court addressed the FARs for purposes of deciding whether they
impacted the Federal Circuit’s decision in Executive Jet, which the government relied on to
argue collateral estoppel. See NetJets, 2015 WL 313939, at *9-12. This difference does not
affect this court’s agreement with NetJets in this respect.
- 19 -

supported and applies equally to the present case.
Nor is this court persuaded by BAC’s reliance on Idaho Power and Sprint, or by what
BAC characterizes as FAA factual findings. In Idaho Power the Court addressed whether,
for federal income tax purposes, a taxpayer was entitled under one provision of the Internal
Revenue Code to deduct from gross income depreciation on equipment the taxpayer owned
and used in constructing its own capital facilities or whether the capitalization provision of
another section of the Code barred the deduction. Idaho Power, 418 U.S. at 3. In deciding
this question, the Court held:
Some, although not controlling, weight must be given to the fact
that the Federal Power Commission and the Idaho Public
Utilities Commission required the taxpayer to use accounting
procedures that capitalized construction-related depreciation.
Although agency-imposed compulsory accounting practices do
not necessarily dictate tax consequences, they are not irrelevant
and may be accorded some significance.
Id. at 14-15 (citation omitted).
In Sprint the Tax Court addressed whether certain expenditures qualified for the
investment tax credit and depreciation, and the proper classification as recovery property of
certain telecommunications equipment [known as “drop and block”]. Sprint, 108 T.C. at 385.
In addressing the classification question, the court relied in part on Idaho Power to hold:
Public utilities, whose rates are often mandated by expenses, are
routinely required to utilize uniform systems of accounting
promulgated by regulatory agencies. For Federal tax purposes,
if the generally accepted method of accounting of a taxpayer is
made compulsory by a regulatory agency, and the method
clearly reflects income, it is virtually presumed to be valid for
Federal tax purposes.
- 20 -

Id. at 403-04 (citations omitted).
Idaho Power and Sprint support the premise that a taxpayer should be able to rely for
tax purposes on accounting methods and practices that are dictated by another government
regulatory agency. They do not support the broader contention that one agency’s general,
non-tax-related regulations of an industry should be permitted to regulate another agency’s
collection of taxes. Were this so, it would be necessary for Treasury regulations, if not
perhaps the Internal Revenue Code itself, to account for myriad regulations adopted by other
federal and state agencies that were not promulgated for a tax-related purpose but could
nevertheless negatively (even unintentionally) impact the collection of taxes.
As for BAC’s reliance on FAA factual findings, BAC cannot show that the FARs
actually impose requirements that should be accorded some significance (Idaho Power) or
be presumed to control for Federal tax purposes (Sprint). This is so at least for the reason
that, when the FAA adopted its final rule on the regulation of fractional aircraft ownership
programs and on-demand operations in 2003, it explicitly distinguished the regulation of
safety and operational control from how tax law might apply.
When the FAA issued its final rule, it addressed the public comments to the proposed
rule. See Final Action on the Regulation of Fractional Aircraft Ownership Programs and OnDemand Operations, 68 Fed. Reg. 54520, 54521, 2003 WL 22134765 (Sept. 17, 2003). As
the FAA noted, “[o]ne commenter cite[d] a U.S. Federal Circuit court ruling [Executive Jet,
125 F.2d 1463] that held a fractional ownership program to be a ‘commercial operation’ for
certain tax purposes and question[ed] how the FAA [could] ignore this ruling.” Id. at 54522,
- 21 -

2003 WL 22134765. The FAA explained why it had placed the rules governing fractional
ownership programs under part 91. Id. It stated that it recognized that fractional ownership
programs contained elements of private ownership and use of a management company that
were similar to a traditional management company operation under part 91; that they
provided aviation expertise and services to the owner and the program manager and did not
hold themselves out to the public to provide air transportation; that they differed from the
traditional management company model in the size and complexity of the program
operations, reducing the individual owner’s ability to exercise operational control; and that
the appropriate approach was to regulate fractional ownership programs under part 91, but
to define operational control responsibilities and procedures and to prescribe added safety
requirements appropriate to the size and complexity of those operations. Id. at 54522-23,
2003 WL 22134765. The FAA then responded to two specific comments, stating that it
viewed fractional ownership programs to be private operations and therefore not subject to
the commercial transport standards and definition. It noted that, in Executive Jet, the Federal
Circuit had determined that fractional ownership programs were commercial operations for
tax purposes. But significantly, it then explained that “Tax law does not govern safety rules.
The FAA considers fractional ownership programs private operations for safety and
operational control purposes.” Id. at 54523, 2003 WL 22134765. BAC should not be
permitted to rely on factual findings in FARs that, not only were adopted without apparent
consideration of their tax consequences, but that themselves rejected any potential
application of tax law.
- 22 -

Absent some reasonable basis to reach a contrary conclusion—and the court has
discerned none here—it is possible for an entity to be classified one way for tax purposes and
another way for other purposes: here, for purposes of aircraft safety and operational control.
The court therefore rejects BAC’s attempt to rely on the FARs to establish as a matter of law
that, as a non-U.S. citizen, it does not provide “taxable transportation” to Aircraft Owners
as part of its Flexjet program.
VI
The court now turns to BAC’s contention that the only litigated case—Executive Jet,
125 F.3d 1463—supports its position. This argument consists of two components. First,
BAC asserts that Executive Jet supports BAC’s position because the decision is
distinguishable on various grounds. This argument would probably be more accurately reframed as asserting that Executive Jet does not support the conclusion that FET are owed.
Regardless how it is phrased, this ground is insufficient of itself to support summary
judgment in BAC’s favor, so the court will not address it.
Second, BAC contends that, even if Executive Jet applies, it supports BAC’s position
because the government conceded in Executive Jet that FET are not owed on MMF. This
contention is not developed in the briefing as an independent basis for granting summary
judgment. The government does not address the argument in response to BAC’s motion,
although in its brief in support of its own summary judgment motion, it refers to the decision
of the Court of Claims in Executive Jet, stating that “[t]he trial court didn’t understand why
the IRS hadn’t assessed the excise tax on the monthly management fee, since it wasn’t
- 23 -

asserted in that case, so it assumed that it was the Government’s then current stipulation as
to the proper measure of the tax,” and that “[a]t present it is impossible to determine why the
Government did not press for applying the tax to the monthly management fee in that case,
as the Government trial attorney is now deceased.” D. 4/29/14 Br. 24 n.38. BAC does not
address Executive Jet in its reply brief in support of its summary judgment motion, except
to assert that the decision either is no longer good law or is strictly limited to its facts. And
in its supplemental brief filed after the NetJets opinion was issued, and in its response brief
to the government’s post-NetJets supplemental brief, BAC focuses on Executive Jet to
support its Duty of Clarity argument. See, e.g., P. 2/24/15 Br. 3 (stating that “during the
litigation in [Executive Jet], the United States entered in to a stipulation wherein it
concede[d] that Monthly Management Fees (‘MMFs’) . . . are NOT part of the FET tax
base,” and that “the United States’ litigating position in [Executive Jet], the United States’
stipulations in [Executive Jet], and other subsequent conduct of the IRS are applicable to the
Duty of Clarity analysis.”). A similar reliance on Executive Jet is found in BAC’s opening
summary judgment brief. See, e.g., P. 4/29/14 Br. 38 & 38 n.19 (relying on Executive Jet in
support of Duty of Clarity argument).
BAC does not contend that the government’s position in Executive Jet that FET are
not owed on MMF precludes the government from taking a different position in this case.
The Court of Claims assumed that this was “the government’s current stipulation as to the
proper measure of the tax.” P. 4/29/14 Br. 30 (quoting Executive Jet Aviation v. United
States, No. 95-7 (Ct. Claims Mar. 29, 1996)). Although the Executive Jet decision arises in
- 24 -

multiple contexts in this case and plays roles of varying importance, at least insofar as the
opinion pertains to FET on MMF, BAC appears to rely on Executive Jet primarily to bolster
its analysis of the Duty of Clarity. Accordingly, the court concludes that BAC is not entitled
to summary judgment based on Executive Jet alone, and it will consider BAC’s reliance on
Executive Jet when analyzing BAC’s contention that the IRS violated its Duty of Clarity.
VII
BAC contends that the IRS is precluded by the Duty of Clarity from recovering FET
on MMF.
A
BAC maintains that holding it liable for FET on MMF would violate the Duty of
Clarity and that FET assessed on MMF must be refunded and abated. It argues that it has
been the target of three consecutive tax audits of the exact issue (whether MMF are subject
to FET) for a 13-year period; the IRS’s initiation of the third audit, which forms the basis of
this litigation, surprised BAC given the IRS’s concession of this exact issue in both of the
two prior IRS administrative audits spanning the 11-year period (1995 through 2005) that
immediately preceded the Tax Periods; the IRS’s institutional determination in both prior
audits was clear—MMF paid to BAC by the Aircraft Owners were not subject to FET; the
facts and law have remained unchanged since the prior audits; the IRS is attempting to
impose FET on the same Aircraft Owners, who own the same aircraft, utilize the same drylease exchange with other Aircraft Owners, and pay the same MMF that the IRS conceded
in the prior audits for the immediately preceding tax quarter; during the Tax Periods and
- 25 -

approximately one month before the due date of the first tax return for the Tax Periods, the
IRS issued a concession letter to BAC in the prior audit explaining that the IRS was
conceding this exact issue in favor of BAC; consequently, BAC collected and remitted FET
and filed its tax returns for the Tax Periods consistent with the results of the prior two audits;
BAC, as the tax collector of FET owed by others, was left to sift through the facts of the
various rulings and prior audits, which did not provide precise and non-speculative notice of
a duty to collect FET; BAC carefully sifted through the facts of its two prior audits, the
rulings, and Executive Jet and determined that its situation was materially indistinguishable
from Revenue Ruling 58-215, 1958-1 C.B. 439, 1958 WL 10832; and, under a reasonable
person standard, no FET were due on MMF.
BAC contends on the following six grounds that it is entitled to a refund and
abatement of FET on MMF: first, the IRS expressly approved BAC’s tax treatment of MMF
in the two prior audits that involved the 11 preceding years; second, the IRS’s concessions
were substantial, involving more than $40 million in FET; third, after conceding this issue
in the prior audits during the Tax Periods, and a few weeks before the first tax return for the
Tax Periods was due, the IRS failed to advise BAC that it was changing its position that FET
were due on MMF; fourth, the IRS stipulated in Executive Jet that FET did not apply to
MMF (which the Executive Jet court noted in its opinion), and at no time has the government
issued a statement deviating from this position; fifth, more than 50 years ago, in Revenue
Ruling 58-215, the IRS opined that FET do not apply to any fees—including MMF—paid
by fractional aircraft owners to management companies; and, sixth, the IRS admits in its IRS
- 26 -

Audit Technique Guide (2008), concerning fractional management companies such as BAC,
that neither title 26 of the United States Code nor any IRS published guidance addresses the
issues discussed in this chapter, and these issues include the application of FET to the MMF
at issue. BAC posits that, at most, the results of the two prior audits spanning the 11-year
period (1995 through 2005) and the IRS’s concession of the MMF issue in Executive Jet
stand for the proposition that BAC must collect and remit FET on VRF only, which BAC has
done, and, absent clear guidance, the IRS cannot retroactively impose secondary FET
liability on BAC for MMF collected from the Aircraft Owners. BAC maintains that clear
guidance would have allowed it to determine that it was liable to collect and remit FET on
these fees; that, since the time it filed this suit, the IRS has conceded the exact issue in a
lawsuit involving one of BAC’s direct competitors; and that the Duty of Clarity prevents the
IRS from assessing FET from BAC on payments of MMF.
The government argues in response that, since at least February 14, 2004, BAC has
been aware that the IRS required that it collect excise taxes from the owners in its Flexjet
program based on VRF, FSF, MMF, and lease payments. It posits that BAC has neither
received inconsistent treatment from the IRS nor, for the years at issue, has it been unaware
that the IRS expected BAC to collect FET on MMF. The government maintains that, as part
of the examination of the FET returns of Jet Solutions LLC (“Jet Solutions”), BAC’s
predecessor, for periods in 1995 through 1997, the parties agreed that a Technical Advice
Memorandum (“TAM”) would be requested from the IRS National Office addressing
whether § 4261 FET applied to the MMF, VRF, and other fees that fractional interest owners
- 27 -

in the Flexjet program paid to Jet Solutions. Technical Advice Memorandum 143115-03
(Feb. 17, 2004) (“2004 TAM”) was issued on February 17, 2004, well before any period at
issue in this case, and it held that all of the fees received by the manager in the Flexjet
program were subject to FET. The government notes that BAC has complained about the
TAM request process, asserting that new facts and legal arguments were included unilaterally
by the IRS and that no reference was made to the new FARs in a revised IRS request. But
the government contends that BAC has failed to point out that, before the TAM was issued,
a conference was held at which Jet Solutions and BAC could have addressed, if they did not
in fact address, the alleged deficiencies in the request. The government argues that the TAM
clearly relies on the actual facts of this case and also clearly advises BAC that the various
fees it received from the fractional interest owners in the Flexjet program were subject to
§ 4261 FET. According to the government, although BAC might disagree with the
conclusions reached in the TAM or the process by which it was obtained, BAC was clearly
aware when the TAM was issued, and thereafter, that the IRS considered all of the fees BAC
or Jet Solutions received in the Flexjet program to be subject to FET. And a March 1, 2007
letter from IRS Appeals stated that the “underlying issue [was] very strong for the
Government,” D. 5/20/14 Br. 10 (quoting P. 5/20/14 App. 19), which clearly reconfirmed the
requirement to collect FET.
In response to BAC’s assertions that the IRS has previously conceded that FET are
not owed on MMF, the government contends that the relief that BAC and Jet Solutions
received in previous examinations regarding the payment of FET on MMF was based on the
- 28 -

concept of unfair comparative disadvantage, which no longer applies. The government
disputes BAC’s assertion that the IRS previously considered MMF to be nontaxable under
§ 4261. It maintains that its concessions during the examinations of the returns of Jet
Solutions for periods in 1995 through 1997, and of BAC for periods in 1998 through 2005,
were based solely on the concept of unfair competitive disadvantage, which was made clear
in the March 1, 2007 letter from IRS Appeals and confirmed in the testimony of the IRS
Appeals officer involved with both previous examinations, who testified that this rationale
was based on the treatment given MMF in Executive Jet. According to the government,
during the years at issue here, Executive Jet Aviation’s fractional interest program (called
NetJets) was the largest fractional interest program in the United States (Flexjet was the third
largest).16 For some or all of the calendar quarters in 2003 through 2009, the IRS assessed
§ 4261 FET against the NetJets entities for MMF charges made to participants in their
fractional interest programs. The government maintains that, because the IRS has assessed,
and is now attempting to collect, FET on MMF from the largest of BAC’s competitors for
the same years at issue here, it cannot be said that BAC will be placed at a competitive
disadvantage if it is also required to collect FET based on MMF.
B
At the outset, the court notes that, although BAC uses the phrase “Duty of Clarity,”
see P. 4/29/14 Br. 36 (“This obligation is called the government’s ‘Duty of Clarity.’”), the

16

The district court’s decision in NetJets prompted this court to request additional
briefing.
- 29 -

phrase is not found in either Central Illinois, 435 U.S. 21, or General Elevator v. United
States, 20 Cl. Ct. 345, 353 (1990), the cases that BAC cites to support such a duty. The
court’s own research indicates that, although federal courts have sporadically used the phrase
“Duty of Clarity,” they have never done so in this context or for the purpose for which BAC
employs it. Even so, the government does not argue that there is no Duty of Clarity, or that,
regardless of the doctrine’s name, it had no duty to give clear guidance to a tax collector in
the circumstances of this case; indeed, it maintains that it did give such guidance. The court
will therefore use the phrase “Duty of Clarity.”
In Central Illinois the Supreme Court addressed the question whether an employer
who reimbursed certain employee lunch expenses was required to withhold federal income
tax on such reimbursements, that is, whether the lunch reimbursements qualified as wages
under the Internal Revenue Code. Cent. Ill., 435 U.S. at 21-22. In holding that the employer
was not required to withhold federal income tax, the Court rejected an expansive and
sweeping definition of wages, id. at 31. Noting that the withholding system standard was
intentionally narrow and precise and that it had not been changed by Congress since 1942,
but that administrative and other pressures had sought “to soften and stretch the definition,”
the Court stated: “Because the employer is in a secondary position as to liability for any tax
of the employee, it is a matter of obvious concern that, absent further specific congressional
action, the employer’s obligation to withhold be precise and not speculative.” Id. at 31.
In General Elevator the Court of Claims addressed whether an employer was entitled
to recover withholding taxes on per diem allowances paid to certain construction workers.
- 30 -

Gen. Elevator, 20 Cl. Ct. at 347. The issues before the court were whether the per diem
payments were “wages,” and, if so, whether the employer, as withholding agent of the IRS,
had adequate notice that these payments were to be withheld as wages. Id. at 351. After the
Court of Claims found that the payments were wages, id. at 352, it addressed whether the
employer had sufficient notice of its duty to withhold taxes, id. As does BAC in this case,
the employer relied on Central Illinois to contend that, without “clear and precise” notice that
there was a duty to withhold, no employer could reasonably have suspected that a
withholding obligation existed. Id.
Plaintiff argues that as a “deputy tax collector” or agent of the
Government for purposes of withholding, its obligation to
withhold must be clear. Further, since no instructions from its
principal were received, plaintiff argues it was under no
obligation to withhold from the per diem payments at issue.
Finally, plaintiff contends that to now find that it should have
withheld on such payments would constitute a prejudicial
retroactive imposition of the duty to withhold and would
undermine the uniformity of the withholding system since the
evidence shows that to date plaintiff is the only elevator
company upon which the IRS has imposed this obligation.
Id. at 352-53. The government argued in opposition that the employer had adequate notice
that the per diem payments were considered wages subject to employment taxes because it
knew about a specific revenue ruling (Rev. Rul. 76-453), and, although the ruling had been
suspended indefinitely and did not specifically cover the employer’s practices, it served as
sufficient notice to alert the employer to investigate the law about possible withholding to
ensure that its per diem system was in compliance with the regulations. Id. at 353. The
government also argued that, even if the revenue ruling did not constitute notice, two other
- 31 -

rulings that related to “somewhat similar circumstances” provided sufficient notice as to the
“possible” requirement of withholding on “travel allowances.” Id. It also asserted that the
employer had not followed the advice that its trade organization gave its members: that each
employer should contact its own tax advisor concerning their expense arrangements. Id.
The General Elevator court ruled in favor of the employer on the notice issue. It
began by holding that the employer, as “deputy tax collector,” “must have adequate notice
so that it will ‘know what the IRS thinks the law is and therefore what actions they have to
take.’” Id. (citing Cent. Ill., 435 U.S. at 31-32; McGraw Hill, Inc. v. United States, 623 F.2d
700 (Ct. Cl. 1980)). It then concluded that “[t]he facts in this case do not establish a precise
and clear duty to withhold.” Id. None of the revenue rulings that the government cited as
providing adequate notice specifically applied to the circumstances of the employer’s per
diem arrangement. Id. And the suspension of the revenue ruling indicated to the employer
that it did not have a duty to withhold. Id. at 354. Based on the court’s review of the
pertinent revenue rulings that the parties cited, the case law, and IRS informal administrative
directions, it concluded that the employer had inadequate notice that it was required to
withhold on per diem payments. “In sum, these rulings leave a speculative gap where
plaintiff, when faced with ambiguous or inapplicable interpretations, cannot reasonably be
held to have received the degree of notice the law requires.” Id. The court also pointed out
that the employer’s trade organization had advised its members that per diem payments were
not subject to withholding, and its review of the matter took into account an IRS agent’s
letter opinions, which specifically found that per diem payments were not subject to
- 32 -

withholding; that the IRS elected not to audit any other relevant elevator companies
regarding per diem withholding even after auditing the employer; and that, if the issue were
that clear cut against the employer, it would seem reasonable that the IRS would have already
audited and sought recovery of such taxes from other, similarly-situated elevator companies.
Id.
C
The court holds that a reasonable trier of fact could only find from the summary
judgment evidence that BAC was given notice of a precise and clear duty to collect FET on
MMF, that is, that the notice was sufficient to apprise BAC about what the IRS thought the
law was and therefore what actions BAC was required to take.
BAC relies on a host of factors that the court details above (including the Federal
Circuit’s decision in Executive Jet) to contend that it lacked sufficiently clear and precise
notice of its obligation to collect FET on MMF. But it is undisputed that, on February 14,
2004, before any Tax Period at issue in this case, the IRS notified BAC via the 2004 TAM
that all of the fees received by the manager in the Flexjet program were subject to FET. In
other words, unlike in General Elevator, where the IRS apparently expected the employer
to divine its tax collection obligations from such sources as a revenue ruling that had been
suspended indefinitely and did not specifically cover the employer’s practices, and two other
rulings that related to “somewhat similar circumstances,” in the present case the IRS stated
its position unequivocally in a TAM involving the very conduct at issue in this litigation,

- 33 -

which was addressed to BAC’s predecessor.17
“A technical advice memorandum represents an expression of the views of the Service
as to the application of the law, regulations, and precedents to the facts of a specific case[.]”
Treas. Reg. § 601.105(b)(2)(viii) (1987). The 2004 TAM arose from an examination of Jet
Solutions’ excise tax returns. BAC had an opportunity to participate in the TAM process at
a December 5, 2003 conference. The TAM identified the issue as “[w]hether the [MMF] or
the [VRF], including the Additional Fees, paid to Taxpayer by aircraft owners are subject to
the excise tax on amounts paid for taxable transportation under § 4261 of the Internal
Revenue Code.” D. 5/20/14 App. 82. It concluded by clearly stating that “[b]oth the [MMF]
and the [VRF], including the Additional Fees, paid to Taxpayer by aircraft owners are subject
to the excise tax as amounts paid for taxable transportation under § 4261.” Id. In addition
to conveying this conclusion, the TAM explained the rationale on which it was based. Id. at
86-87.
“[A] taxpayer that is subject to a particular TAM is entitled to rely on the IRS’s
position in the TAM until that holding is withdrawn, revoked, or modified.” NetJets, 2015
WL 313939, at *14.

17

In its reply brief, BAC asserts that it “never received prior notice that the IRS
believed that the [MMF] were subject to FET.” 6/3/14 Br. 13. BAC’s counsel made a
similar assertion at oral argument. See Tr. Oral Arg. 20 (“After they told us that you don’t
have to do anything else, they issued nothing telling us or the world that they were changing
their position and now taxing management fees.”). It is difficult to understand how BAC can
take this position given the undisputed summary judgment evidence to the contrary.
- 34 -

[A TAM] is generally applied until it is withdrawn or until the
conclusion is modified or revoked by a final decision in favor of
the taxpayer with respect to that issue, the enactment of
legislation, the ratification of a tax treaty, a decision of the
United States Supreme Court, or the issuance of temporary
regulations, final regulations, a revenue ruling, or other
statement published in the Internal Revenue Bulletin.
Rev. Proc. 2014-2, 2014-1 I.R.B. 90. The 2004 TAM was never withdrawn, modified, or
revoked. BAC was therefore entitled to rely on it when deciding whether to collect FET on
MMF for the Tax Periods in question.18
BAC argues that the 2004 TAM was nullified because, after it was issued for the first
audit cycle, the IRS conceded during the same administrative audit that BAC did not owe
FET on MMF, and it conceded the same issue in the next audit cycle as well. BAC maintains
that these two concessions constitute a final decision in favor of the taxpayer that is
subsequent and contrary to the 2004 TAM. Based on the same two IRS concessions, BAC
maintains that the 2004 TAM could not have provided “clear, non-speculative notice” for
purposes of satisfying the Duty of Clarity. P. 2/10/15 Br. 5. It essentially contends that the
IRS confused it when, after issuing the 2004 TAM, it conceded in the two audits that no FET
were owed for two tax years (conceding millions of dollars in proposed FET assessments)

18

At oral argument, the court asked BAC’s counsel to give an example of how the IRS
could have provided notice in a clear manner. He responded that a Treasury regulation that
stated that fractional management companies owed FET on MMF would have been
sufficient. Tr. Oral Arg. 19. In the context of this case, and for purposes of evaluating the
IRS’s compliance with the Duty of Clarity, the court discerns no material distinction between
the 2014 TAM, issued specifically to BAC’s predecessor and on which BAC was entitled to
rely, and a Treasury regulation.
- 35 -

and refunded more than $1.2 million of FET on MMF.
A reasonable trier of fact could not find in BAC’s favor on these grounds. The
evidence shows that, when the IRS Appeals officer wrote to BAC on March 6, 2007
conceding that FET were not owed, he stated, in relevant part:
As I indicated in our discussion, I am recommending the excise
tax on aircraft management fees issue be conceded in full by the
Government for the tax periods indicated due to the unfair
competitive disadvantage principle established by International
Business Machines Corp., 343 F.2d 914 (Ct. Cl. 1965), and
followed by Sirbo, 476 F.2d 981 (CA-2, 1973). No Form 906
closing agreement will be entered into because as I explained
the underlying issue is very strong for the Government, but will
be conceded for the periods indicated only for the reason stated
above.
D. 5/20/14 App. 19.19 The evidence therefore establishes that the IRS Appeals officer was
addressing excise taxes on aircraft management fees for the tax quarters ending June 30,
1998 through December 31, 2005, i.e., periods prior to the ones at issue in this lawsuit, and
that the concession was not based on any agreement with BAC’s position regarding whether
FET were owed on MMF. To the contrary, the letter asserted that the government’s position
was “very strong.” BAC could not therefore have reasonably interpreted the letter to take
any position other than this: with respect to tax years prior to the ones in question in this
litigation, the IRS was conceding that FET were not owed, and it was entering into this

19

BAC objects to this letter on the ground that it is inadmissible under Fed. R. Evid.
408. The court concludes that Rule 408(a) does not preclude the government from using the
statements in the letter, including for the purpose of demonstrating that the IRS did not
violate the Duty of Clarity.
- 36 -

concession based solely on the “unfair competitive disadvantage principle.”20 The 2004
TAM was therefore not compromised in the least.
BAC also relies extensively on Technical Advice Memorandum 93-14-002 (Dec. 22,
1992) (“1992 TAM”), which was issued to NetJets.21 BAC contends that, although the 1992
TAM was issued to Netjets, it was never revoked, it became the government’s litigating
position in Executive Jet, the government stipulated in Executive Jet that FET were not owed

20

BAC at once challenges whether the IRS actually did so for this reason and asserts
that “the reasoning behind [the IRS’s] concessions in the two prior audits is unimportant.”
P. 6/3/14 Br. 14-15. Although there is ample record evidence that the IRS made this
concession based on the taxation of MMF paid as part of Executive Jet’s fractional interest
program (most recently the subject of the NetJets case), the court agrees with BAC’s
assertion that the IRS’s precise reasoning (or motivation) is “unimportant.” This is because
what matters for purposes of applying the Duty of Clarity is that BAC was on notice that the
IRS, when conceding the issue for the tax periods in question, was not questioning the merits
of whether FET were owed on MMF but was conceding the point for reasons unrelated to
the merits. Indeed, the IRS opined in the letter that the government’s position was “very
strong.”
BAC also relies on a June 7, 2006 memorandum of IRS Manager John S. Munholland,
in which he stated that the concessions by the IRS were based upon a legal conclusion that
MMF were not payments for taxable transportation and therefore not subject to FET. This
reliance is misplaced for purposes of applying the Duty of Clarity because it is based on a
position taken in a document that was first produced after the fact—during discovery in this
litigation. It therefore could not have confused or misled BAC concerning its obligation to
collect FET on MMF.
21

In its supplemental brief addressing NetJets, BAC maintains that, although the
NetJets court did not “specifically state that it [was] considering the issue of whether the
Duty of Clarity prevent[ed] the IRS from assessing FET,” P. 2/10/15 Br. 3, its analysis “is
very relevant and beneficial to the analysis that this Court must perform in the case at hand
for purposes of the Duty of Clarity,” id. at 4. The court concludes, however, that the NetJets
court not only did not base its decision on the Duty of Clarity; it relied on several grounds
that are unique to that case and the protracted FET dispute involving the IRS, NetJets, and
Executive Jet.
- 37 -

on MMF, and it is relevant for purposes of the Duty of Clarity and whether the IRS gave
clear, non-speculative advice to BAC. The court disagrees.
Under § 6110(k)(3), a taxpayer may not rely on a TAM issued
by the Service for another taxpayer. In addition, retroactive or
non-retroactive treatment to one member of an industry directly
involved in a letter ruling or TAM does not extend to another
member of that same industry, and retroactive or non-retroactive
treatment to one client of a tax practitioner does not extend to
another client of that same practitioner.
Rev. Proc. 2014-2, §13.04, 2014-1 I.R.B. 90, 2014 WL 16118. Accordingly, because the
1992 TAM was issued to another taxpayer, BAC knew it could not rely on it. Moreover, the
2004 TAM actually applied to BAC (it was issued specifically to BAC’s predecessor). BAC
could not have been confused about the clear directive found in the 2004 TAM.
In sum, regardless of what was happening in the industry, and regardless of the IRS’s
concession concerning prior tax periods, the 2004 TAM provided clear and non-speculative
advice to BAC that it was obligated to collect FET on MMF. The court therefore holds that
the government is entitled to summary judgment concerning BAC’s Duty of Clarity
argument.22
VIII
In its supplemental brief addressing NetJets, BAC contends that the NetJets court’s
decision that NetJets is not required to collect and remit FET on MMF or FSF unequivocally
shows that the IRS is estopped from arguing that BAC is liable for failing to collect and remit

22

Assuming arguendo that this is properly considered a separately pleaded cause of
action, the court reaches the same result.
- 38 -

FET on MMF or FSF. BAC also contends that the IRS’s position regarding BAC violates
the doctrine of competitive disadvantage.
A
BAC relies on the NetJets court’s decision that NetJets is not required to collect and
remit FET on MMF or FSF to contend that the IRS is estopped from arguing that BAC is
liable for failing to collect and remit FET on MMF or FSF. It cites its opening summary
judgment brief in which it relied on the government’s concession on MMF and FSF issues
for one of BAC’s competitors in PlaneSense, Inc. f/k/a Alpha Flying, Inc. v. United States,
No. 1:11-CV-00136-PB (Distr. N.H. filed Mar. 22, 2011). BAC also asserts that the IRS has
announced that it will suspend the assessment of FET on owner flights on aircraft managed
by aircraft management companies as of May 16, 2013, until the government issues clear
authoritative guidance. BAC posits that, now that the NetJets court has held that NetJets,
which holds a 75% market share in the industry of fractional management services, did not
have to collect and remit FET on MMF and FSF for a very large percentage of the aircraft
management industry (over 75 percent), it has already been determined that MMF and FSF
are not part of the FET tax base. BAC cites an internal IRS memorandum in which an IRS
manager stated (regarding the IRS’s earlier concession to BAC on the FET issue) that it
would violate the fairness doctrine/competitive disadvantage if NetJets, the largest member
of the industry, did not have to pay FET while BAC was assessed FET. BAC argues that
because it and other fractional aircraft owners are similarly situated to other aircraft
management companies and their aircraft owners, and these companies have not been
- 39 -

required to collect FET on MMF and FSF, BAC and the Aircraft Owners would be placed
at a significant disadvantage to similarly-situated taxpayers if FET are imposed on BAC’s
MMF and FSF, which would violate the IRS’s obligation to treat BAC similarly to its
competitors.
B
The court declines to grant BAC’s summary judgment motion or deny the
government’s motion based on BAC’s estoppel assertion. Although BAC alleged an estoppel
claim in its complaint, it did not brief estoppel in support of its own summary judgment
motion or in opposition to the government’s motion. It is too late to raise estoppel for the
first time in the context of the supplemental briefing that the court requested regarding a
court decision that did not involve estoppel.23 And even if the court were inclined to consider
the argument, BAC has failed in its supplemental brief to show how, as a consequence of the
NetJets decision, the government is estopped from arguing that BAC is liable for tax for FET
on MMF. BAC’s complaint alleges estoppel based on the contents of Revenue Ruling 58285, on the government’s concession of the non-applicability of FET to MMF in Executive
Jet and in response to BAC’s claim for a refund of FET on MMF for tax periods beginning
July 1, 1995 and ending December 31, 1997, in an examination of that refund claim, and in
a second examination that followed the refund claim. BAC does not explain in its
supplemental brief how the NetJets decision bolsters any of these grounds for alleging

23

NetJets involved collateral estoppel. See, e.g., NetJets, 2015 WL 313939, at *9.
BAC is not relying on collateral estoppel.
- 40 -

estoppel against the IRS.
If anything, BAC’s supplemental brief primarily relies on the NetJets decision, in
combination with other predicates, such as the IRS’s position in the PlaneSense litigation,
to contend that the IRS’s treatment of BAC violates the fairness doctrine and places BAC at
a competitive disadvantage. The court declines to accept BAC’s reliance on this doctrine.
As a threshold procedural matter, the court notes that the fairness doctrine/competitive
disadvantage, which entered the case as the IRS’s stated rationale for conceding that BAC
did not owe FET on MMF for certain tax years, has become a basis for BAC’s claim (or
defense) that the IRS is barred from collecting FET for other tax years. But assuming that
it qualifies as a claim (or defense), it is not found (or even mentioned) in BAC’s complaint
or in its answer to the government’s counterclaim.
Moreover, BAC’s reliance on the fairness doctrine/competitive disadvantage for the
tax years in question is misplaced. As BAC recognizes in its brief, this doctrine is based on
the principle that the IRS must treat similarly-situated taxpayers similarly. In NetJets the
government in fact assessed FET on MMF, NetJets, 2015 WL 313939, at *17, and it alleged
by way of a counterclaim that NetJets owed FET on MMF, id. at *7. The NetJets court ruled
against the government on the MMF issue, but the IRS did not treat NetJets more favorably
than it has BAC. It asserted in NetJets, as here, that FET were owed.
In PlaneSense the IRS settled with the taxpayer after asserting that FET were owed.
Due to the settlement, the evidence in the summary judgment record related to the
PlaneSense litigation is scant and largely limited to public documents. This evidence would
- 41 -

not permit a reasonable trier of fact to find that the IRS treated a similarly-situated taxpayer
more favorably than it treated BAC for the tax years in question. The proof is too sparse to
make this finding.
BAC’s contention that the IRS has announced that it will suspend the assessment of
FET on owner flights on aircraft managed by aircraft management companies as of May 16,
2013, until the government issues clear authoritative guidance, is distinguishable. This
assertion is based on a Chief Counsel Advice that relates to an aircraft where the 100%
aircraft owner has contracted with a management company to manage the aircraft. The Chief
Counsel Advice makes clear that it does not apply to fractional interest programs.
Finally, the court declines to base today’s decision on the effect of the ruling in
NetJets. BAC reasons that, as a result of NetJets, a competitor with greater than 75% of the
market share in the industry of fractional management services does not have to collect and
remit FET on MMF. When the decision in NetJets becomes final, however, it will be subject
to appellate review. Decisions in other circuits may also call it into question. Therefore,
although it is evident that this court agrees with NetJets in several respects, the court declines
to accord NetJets the effect necessary to entitle BAC to relief based on that ruling alone.
IX
The court now turns to BAC’s claim for a refund and abatement of FET on MMF and
the government’s counterclaim for unpaid FET.
A
The government contends that it is entitled to summary judgment because the
- 42 -

Commissioner of Internal Revenue’s findings of tax deficiencies have a presumption of
correctness; BAC, as the taxpayer, has the burden of proof of showing them to be wrong; a
Certificate of Assessments, Payments, and Other Matters (Form 4340) is presumptive proof
of a valid assessment where the taxpayer has produced no evidence to counter the
presumption; nowhere in BAC’s Protest, in its two sets of amended returns and its claim for
refund, or in its complaint has it contested the actual amounts of the additional assessments
made by the IRS for the calendar quarters in tax years 2006 and 2007; and BAC instead
incorrectly asserts that no taxes were owed for these quarters because the monies received
from the purchasers and lessees constituted management fees, not payments for taxable
transportation. The government maintains that, because BAC can produce no evidence to
counter the presumption of correctness as to the IRS’s findings, the court must hold that the
additional assessments are correct, as stated in the government’s counterclaim, and that BAC
is liable for the amounts of the additional assessments reflected in the Certificate of
Assessments, Payments, and Other Matters (Form 4340) for each of the calendar quarters in
2006 and 2007.
BAC asserts on several grounds that the government is not entitled to summary
judgment and that BAC is entitled to summary judgment, including those urged in support
of its own summary judgment motion, which the court has addressed and rejected above. In
addition to these grounds, BAC contends that FET are not owed on MMF because BAC was
not engaged in commercial aviation and therefore was not providing taxable transportation.
BAC posits on several grounds that the government is relying erroneously on the
- 43 -

“possession, command, and control” test. It maintains that the appropriate standard, instead,
is whether the fees are paid for “commercial aviation.” And because at no point does the
government state or suggest that BAC was engaged in “commercial aviation,” or address
(referring to the FARs) that BAC is legally prohibited from engaging in “commercial
aviation,” the MMF that BAC charged were not subject to FET. BAC also maintains that,
under the FARs, it performed its services as the agent of the Aircraft Owners. It challenges
the government’s assertion that it is an owner or lessee of each program aircraft, that the
Aircraft Owners have no choice as to whether to appoint BAC as the manager, and that the
Aircraft Owners’ ownership interests in their aircraft are highly fettered. BAC posits that the
summary judgment evidence shows that the Aircraft Owners, not BAC, are in operational
control. It argues that the IRS cannot rely on substance over form to recast BAC’s program
as “commercial aviation” or taxable transportation because the government is asking the
court to ignore the FAA’s certification of BAC as a provider of “Fractional Management
Services,” the IRS’s concessions of this exact issue over the previous 11 years, the FARs that
regulate BAC’s management business, and the hundreds of Aircraft Owners whose aircraft
are managed by BAC under Federal regulation. BAC asserts that the government has failed
to plead substance over form, and reliance on this doctrine is now time-barred; the
substance-over-form doctrine does not apply because the management services are compelled
and encouraged by business and regulatory realities; the IRS recognizes that BAC is a bona
fide management company that does not engage in commercial aviation; the FARs refute the
substance-over-form argument; the U.S. Treasury Department also recognizes that fractional
- 44 -

aircraft ownership is bona fide; and Executive Jet does not control this case.
B
“In a refund suit the taxpayer bears the burden of proving the amount he is entitled to
recover.” Cooper v. United States ex rel., Comm’r, 513 F.Supp.2d 747, 750 (N.D. Tex.
2007) (Fitzwater, J.) (quoting United States v. Janis, 428 U.S. 433, 440 (1976)). “In a tax
collection suit, the government’s deficiency assessment is generally afforded a presumption
of correctness.” Id. (citing Portillo v. Comm’r, 932 F.2d 1128, 1133 (5th Cir. 1991), and
Burnett v. Comm’r, 67 Fed. Appx. 248, 248 (5th Cir. 2003) (per curiam)). “The taxpayer has
the burden of proving by a preponderance of the evidence that the Commissioner’s
assessment—its final determination of the taxpayer’s liability—was erroneous, since the
assessment is presumed to be correct.” Trinity Indus., Inc. v. United States, 757 F.3d 400,
413 (5th Cir. 2014). “In essence, the taxpayer’s burden of proof and the presumption of
correctness are for the most part merely opposite sides of a single coin; they combine to
require the taxpayer to prove by a preponderance of the evidence that the Commissioner’s
determination was erroneous.” Portillo, 932 F.2d at 1133 (citing Carson v. United States,
560 F.2d 693, 695-96 (5th Cir. 1977)). In a tax refund suit, the plaintiff “bears the burden
of proving both the excessiveness of the assessment and the correct amount of any refund to
which he is entitled.” Id. Form 4340 is sufficient to demonstrate the amount of the IRS
assessment against BAC for the Tax Periods, and the assessment is entitled to a presumption
of correctness. See Trinity Indus., 757 F.3d at 413 (“[T]he assessment itself is entitled to a
presumption of correctness[.]”); United States v. McCallum, 970 F.2d 66, 71 (5th Cir. 1992)
- 45 -

(affirming that Form 4340 is “presumptive proof of a valid assessment where the taxpayer
has produced no evidence to counter that presumption”).
To determine whether BAC provided taxable transportation under § 4261, the court
applies the “possession, command, and control” test. NetJets, 2015 WL 313939, at *17.
Through a series of revenue rulings, the IRS has . . . developed
a test for determining whether an entity provides commercial
transportation triggering § 4261, or whether an entity is merely
assisting the owner of the means of transportation, in which case
the owner is engaged in non-commercial transportation and
§ 4261 does not apply. The IRS has ruled that if an entity, other
than the entity being transported, has “possession, command,
and control” of the means of transportation and charges for its
use, that entity is providing taxable transportation within the
meaning of § 4261.
Id. (citing Revenue Rulings). While “Revenue Rulings do not have the presumptive force
and effect of law,” and “are merely persuasive as the Commissioner’s official interpretation
of statutory provisions,” the Fifth Circuit “usually ‘accord[s] significant weight to the
determination of the IRS in its revenue rulings.” Kornman & Assocs., Inc. v. United States,
527 F.3d 443, 452-53 (5th Cir. 2008) (quoting Sealy Power, Ltd. v. Comm’r, 46 F.3d 382,
395 (5th Cir. 1995), and St. David’s Health Care Sys., 349 F.3d 232, 239 n.9 (5th Cir.
2003)). “[T]he IRS has employed this test for over fifty years, and courts have respected it
in the meantime[.]” NetJets, 2015 WL 313939, at *18 (citation omitted). “[T]he Court looks
beyond only the flight time in determining who has possession, command, and control of the
aircraft.” Id. at *19.

- 46 -

C
1
The government maintains that, during the Tax Periods, BAC had possession,
command, and control of the means of transportation (i.e., the aircraft) in its Flexjet program.
It relies on evidence that, as a condition precedent to the sale of a fractional interest,
purchasers were required to enter into a series of agreements, commonly referred to as the
“Governing Documents.” D. 4/29/14 Br. 11. One document was the Dry Lease Exchange
Agreement,24 under which the purchaser of a fractional interest in a program aircraft leased
the interest back to BAC. At the time of each purchaser’s flight, BAC possessed a current
leasehold interest in the program aircraft being used. When BAC leased a fractional interest
to a customer, BAC owned the interest while the program aircraft was being used. Even
though the Purchase Agreement (another Governing Document) spoke of delivering the
program aircraft to the purchaser, an exhibit to the agreement, which the purchaser signed,
gave BAC a power of attorney to inspect and accept delivery of the program aircraft on the
purchaser’s behalf, meaning that delivery to the purchaser never took place. Under the
Management Agreement (another Governing Document), BAC was given immediate
possession of the program aircraft at the time of the sale. BAC therefore not only had a
leasehold or ownership interest in each program aircraft, it also had possession. As part of

24

See D. 4/29/14 Br. 11 n.15 (“A ‘dry lease’ is a lease of the aircraft without the flight
crew, while a ‘wet lease’ is a lease of the aircraft with a flight crew.” (citing Netjets Aviation,
Inc. v. Guillory, 143 Cal.Rptr.3d 111, 117 n.2 (Cal. Ct. App. 2012)).
- 47 -

the Purchase Agreement, the purchaser also executed another power of attorney that
permitted BAC to register the aircraft with the FAA. This power was coupled with an
interest and was to last until the earlier of ten years from the date executed or the date the
purchaser terminated its interest in the aircraft. Under the Management Agreement, BAC
was required to arrange for the program aircraft to be used, operated, inspected, maintained,
serviced, repaired, overhauled, and tested. BAC was required to (a) maintain the program
aircraft in good working order and repair, (b) provide other services, such as hangar space,
tie down, standard aircraft stocking, flight planning, weather services, communications,
Aeronautical Radio, Inc. or its equivalent, and a computerized maintenance program, (c)
make all necessary take-off, flight, slot, and landing arrangements, and (d) provide normal
in-flight catering. BAC was also required to maintain all records, logs, and other materials
required by the FAA to be maintained with respect to a program aircraft. And BAC was
required to furnish professionally trained and qualified pilots for each Flexjet flight. The
costs of all the foregoing services were, with certain minor exceptions, BAC’s sole
responsibility. BAC was also required to arrange for and obtain all-risk aircraft hull
insurance, with both BAC and the interest owners being loss payees. BAC was also required
to arrange for and obtain liability insurance for bodily injury and property damage to the
aircraft, with BAC and the interest owners both being the insureds. The insurance premiums
were at BAC’s expense, except the interest owners were required to pay their share of any
premium increases. The Management Agreement associated with a lease by BAC of an
interest in a program aircraft to a customer was not materially different from the management
- 48 -

agreement associated with the purchase of an interest in a program aircraft with respect to
what duties BAC was to perform at its own expense. The government maintains that the
foregoing duties and activities make it clear that BAC was not only in possession of the
program aircraft, but that it was also responsible for registering, operating, maintaining, and
servicing the aircraft and furnishing the pilot. The fractional owners and lessees simply had
to timely submit their request for a flight and then show up at the appointed time. BAC
therefore at all times had possession, command, and control of the program aircraft, and, as
such, was the one doing the moving.
2
In its response to the government’s motion, BAC challenges 13 of the government’s
factual assertions. But having considered these objections and the government’s reply, the
court concludes that a reasonable trier of fact could only find from the summary judgment
evidence that BAC had possession, command, and control of the program aircraft. The
Governing Documents themselves plainly demonstrate this. And BAC has neither presented
evidence that raises a genuine issue of fact nor overcome the presumption of correctness
afforded the government’s deficiency assessment.
Instead, BAC relies largely on arguments that are unrelated to whether the government
should prevail under the possession, command, and control test, including the assertions that
this test is the wrong standard, that the controlling question is whether BAC provided
“commercial aviation”), and that the government has failed in its motion to address whether
BAC provided “commercial aviation.” None of these grounds is sufficient to avoid liability
- 49 -

for FET on MMF.
Insofar as the possession, command, and control test itself is concerned, BAC
contends that it acted as the Aircraft Owners’ agent, and that the Aircraft Owners were in
operational control. Both of these arguments are based largely on the FARs. But as the
government points out in its reply brief, an Aircraft Owner could comply with the FARs
while delegating the responsibilities that effectively placed the program manager in
possession, command, and control of the aircraft. See D. 6/3/14 Br. 11-12 (addressing
operational control).
Finally, BAC maintains on several grounds that the substance-over-form doctrine
cannot be used to recast BAC’s program as “commercial aviation” or taxable transportation:
the government failed to plead substance-over-form and reliance on this doctrine is now
time-barred; the substance-over-form doctrine does not apply because the management
services are compelled and encouraged by business and regulatory realities; the IRS
recognizes that BAC is a bona fide management company that does not engage in
commercial aviation; the FARs refute the substance-over-form argument; the United States
Treasury Department also recognizes that fractional aircraft ownership is bona fide; and
Executive Jet does not control this case. The court disagrees.
BAC does not cite any authority for the proposition that the substance-over-form
doctrine must be pleaded. It is not a claim, defense, or affirmative defense, so neither Fed.
R. Civ. P. 8(a), 8(b), nor 8(c) requires that it be pleaded. And the only authority that the
court has located confirms that it is not a matter that the government was required to plead
- 50 -

in its answer. See Miller v. Comm’r, 68 T.C. 767, 774 n.3 (1977) (holding that although an
affirmative defense is a matter that requires special pleading other than a mere denial, “[i]n
contrast, a substance versus form argument is an underlying legal argument that supports a
party’s position on a previously raised issue.”).
The substance-over-form doctrine can still apply even if BAC’s management services
are compelled and encouraged by business and regulatory realities (BAC is relying primarily
on the FARs), the IRS recognizes that BAC itself is a bona fide management company, the
FARs regulate BAC’s business, and the Treasury Department recognizes that fractional
aircraft ownership is bona fide. See Rogers v. United States, 281 F.3d 1108, 1116 (10th Cir.
2002) (“[T]he court does not apply the substance over form analysis where the transaction
is not bona fide; rather, if the transaction lacks economic reality, it is analyzed using the
economic substance doctrine.”).
The court is not relying on the reasoning or result of Executive Jet alone to conclude
that BAC had possession, command, and control of the aircraft. It is therefore immaterial
whether Executive Jet arguably does or does not control this case.
Finally, to the extent the government is relying on the substance-over-form doctrine,25

25

It is not entirely clear how the government is relying on this doctrine. The
government does discuss substance over form in its opening brief, contending that, “[i]n
determining whether BAC used the Flexjet program aircraft in a business of transporting the
fractional interest owners or lessees for compensation or hire by air, this Court must look to
the substance of the Flexjet fractional interest program, rather than its form.” D. 4/29/14 Br.
20. But it follows this statement by analyzing how the Flexjet program worked under the
terms of two of the Governing Documents: the Joint Ownership Agreement and the
Management Agreement. And although it also characterizes what it thinks the Aircraft
- 51 -

BAC has not raised a genuine issue of fact concerning whether the doctrine applies.
D
BAC also opposes the government’s summary judgment motion on the grounds set
out in its own summary judgment motion. But for the reasons already set out, the court
concludes that these grounds lack merit.26

Owners were attempting to achieve—that they “were more interested in acquiring, and the
Flexjet program was designed to provide, flight time without the detriment of lost
repositioning time, not an ownership or a leasehold interest in a corporate aircraft,” and that
“[a]cquiring an ownership or leasehold interest was simply a means to that end,” id. at
22—the government does not urge the court to recharacterize BAC’s business relationship
with the Aircraft Owners in accordance with its true nature. Instead, it maintains that the
Governing Documents themselves evidence that BAC was in possession, command, and
control of the program aircraft.
In its reply brief in support of its summary judgment motion, the government plainly
asserts that the substance-over-form doctrine applies in determining the precise nature of
BAC’s business, but four of its six arguments are procedural. And although the government
replies by contending that BAC cannot meet all the requirements for avoiding the form-oversubstance doctrine, there is no suggestion that the government is asking the court to examine
the substance (i.e., the true nature) of the Flexjet program as opposed to the form. Rather,
the government appears to maintain that the form reflected in the Governing
Documents—without recharacterization—establishes that BAC was in possession, command,
and control of the program aircraft.
26

BAC asserts in its reply brief in support of its summary judgment motion that, even
if it is assumed that it provided taxable transportation to the Aircraft Owners, FET still would
not apply to MMF because such fees do not qualify as an “amount paid” for “taxable
transportation” under 26 U.S.C. § 4261. BAC reasons that the term “transportation” means
movement from one point to another; for a payment to be made for “transportation by air,”
the payment must be made in return for actually being transported; and MMF are unrelated
to actual transportation and cover the fixed costs that an Aircraft Owner must incur as a result
of owning an aircraft, regardless whether the owner actually uses the aircraft. The court
disagrees. Both fixed and variable costs are included in what is paid to move a passenger
from one point to another. Payment of MMF is one of the preconditions to receiving air
transportation services. MMF therefore qualify as “amounts paid” for “taxable
transportation” under 26 U.S.C. § 4261.
- 52 -

The court therefore holds that BAC is not entitled to recover on its claim for a refund
and abatement of FET owed on MMF, and that the government is entitled to summary
judgment on its counterclaim.
X
A holistic theme of BAC’s briefing—encapsulated in a timeline in one of its
supplemental briefs—is that there is a certain “impropriety” to holding BAC liable for failing
to collect and remit FET on MMF given the protean positions that the IRS has taken on this
issue over the last 22 years. P. 2/10/15 Br. 19.27 There are laws and doctrines, however, that
address such concerns. BAC relies on one of them—the Duty of Clarity—although it has not
shown that this doctrine assists it here.28 And, in the end, the court discerns no “impropriety”
in holding BAC to the terms of a 2004 TAM issued directly to its predecessor, of which BAC
At oral argument, the court questioned the government concerning whether some
components of MMF are not taxable. The government acknowledged that “some of the
things that probably are paid out of those [MMF] aren’t subject to tax.” Tr. Oral Arg. 7. But
it added that it is incumbent upon the tax collector or the taxpayer to determine which are and
which are not; that if this showing is not made, then, under Treas. Reg. § 49.4261-2(c), FET
must be charged on the MMF in their entirety; and that BAC has never asserted that some
portions of the MMF are taxable and others are not. Id. at 7-8. Because BAC does not argue
that some components of MMF are not taxable—it maintains that no component is
taxable—the court need not decide whether FET are owed on some (but not all) portions of
the MMF for the Tax Periods.
27

BAC does not contend that it should not be subjected to penalties if the court
concludes that BAC owes unpaid FET.
28

At oral argument, the court asked BAC’s counsel whether the government is legally
prevented from changing its position. In response, he did not assert that the government is
generally precluded from doing so; instead, he stated that the government must comply with
the Duty of Clarity, and that it is precluded from doing so “until they tell us in a clear and
nonspeculative manner we had an obligation to collect that tax.” Tr. Oral Arg. 19.
- 53 -

was aware, that clearly advised that the MMF were subject to FET as amounts paid for
taxable transportation under 26 U.S.C. § 4261.
*

*

*

Accordingly, the court grants the government’s motion for summary judgment and
denies BAC’s motion for summary judgment. The court grants BAC’s motion for leave to
file supplemental appendix, and BAC’s third supplement to appendix is deemed filed today.
The court denies without prejudice as moot the government’s motion to exclude expert
testimony of Gary M. Arber. The court directs the government to present a draft form of
judgment for review by BAC’s counsel for proper form and for the court’s consideration for
entry.29 The May 4, 2015 trial docket setting is vacated.
SO ORDERED.
March 20, 2015.

_________________________________
SIDNEY A. FITZWATER
UNITED STATES DISTRICT JUDGE

29

This procedure appears advisable in case it is necessary to compute sums (such as
interest) that have accrued during the pendency of the litigation.
- 54 -