With hopes dimming that IRS guidance will be released any time in the near future, industry leaders have turned to Capitol Hill for help in resolving the continuing confusion surrounding the tax treatment of management fees. “I think the legislative path is the best chance for success,” said Scott O’Brien, senior manager for finance and tax policy at NBAA.
U.S. Rep. Pat Tiberi (R-Ohio) and Sens. Sherrod Brown (D-Ohio) and Rob Portman (R-Ohio) have introduced companion bills in the House and Senate to clarify that aircraft management fees are not subject to the 7.5-percent air transportation tax.
The House version, H.R.3608, has gained some momentum, receiving approval from the Ways and Means Committee in July. The Senate version also has had support, with behind-the-scenes talk continuing about attaching such a measure to the taxes portion of a comprehensive FAA reauthorization bill.
Also providing a boost to the legislative effort was a finding from the congressional Joint Tax Committee that such a bill would cost the government less than $500,000 over the next 10 years. Such a finding—that a tax bill is essentially considered revenue neutral—is crucial to gaining support from both sides of the aisle to move the legislation.
Bill Deere, executive v-p for government and external affairs for the National Air Transportation Association, agreed the legislative path is the “most promising path forward,” saying, “We have the support. Now we have to find a vehicle for getting it through Congress.”
Backers of the bill have been looking at several options, among them bringing it up as a standalone or attaching it to a tax bill that could come up during a lame-duck session. The standalone option might be a more difficult path, with a finite number of congressional days remaining this year and few issues coming up for consideration independently.
As for an alternate tax vehicle, some are holding out hopes that after the elections, Congress will consider a bill to renew certain energy tax breaks that have expired. Such a bill could serve as a venue for the management fees measure. But whether there is enough support to push through the energy tax breaks remains to be seen. An effort to renew the energy tax breaks was blocked this spring.
If the management fee measure fails to move this fall, the association executives believe it will at a minimum remain in discussions for the next long-term FAA reauthorization bill. Since Congress renewed the FAA’s authorization only through the end of Fiscal Year 2017, FAA reauthorization will come up again next year.
Tax Structure in Limbo
However, that might come sooner than the long-awaited IRS guidance on the tax treatment of management fees. The IRS agreed to put out the guidance after a 2012 Chief Counsel Advice Memorandum caused an uproar by concluding that management services were taxable as air transportation. That memorandum spurred audits and costly tax bills, a number of which were either overturned or reduced on appeal.
After several meetings with industry leaders, the IRS agreed to halt enforcement of the tax assessments and suspend further tax audit findings until more permanent guidance is released. That guidance has been placed on the U.S. Treasury Department’s priority list, but churn at the agency and other higher-priority issues such as the Affordable Care Act and international tax reform have slowed progress, O’Brien noted.
“There have been times when a lot of energy is devoted to this and times when it has been quiet,” O’Brien noted. He added that he believes a draft has gone back and forth between the IRS and the Treasury Department. Potentially further hampering progress is the upcoming changeover in the administration, which could spell turnover in the agencies and another education effort on the issue. In the meantime, though, both IRS agents and management companies have remained in limbo with the potential of future tax bills still looming.
The IRS does not appear to be “actively looking for management companies to audit on this issue,” O’Brien said. But the treatment of management fees could still come up for companies that are under audit for other reasons. In these cases, the management companies are asked to sign a statute of limitations extension agreement that would enable the IRS to revisit the issue later.
This is frustrating for the companies involved, which do not know how to budget for or set aside taxes on management services, as well as for the auditors who lack the guidance on how to approach the audits, O’Brien said.