Executive Jet Aviation, Inc. v. U.S.

• Decision Date: 18 September 1997
• Docket Number: No. 96-5093,96-5093
• Citation: 125 F.3d 1463
• Parties: -6502 EXECUTIVE JET AVIATION, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1463

125 F.3d 1463

80 A.F.T.R.2d 97-6502

EXECUTIVE JET AVIATION, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

No. 96-5093.

United States Court of Appeals Federal Circuit.

Sept. 18, 1997.

Margaret K. Pfeiffer, Sullivan & Cromwell, Washington, DC, argued for plaintiff-appellant. With her on brief were Samantha E. Ross, Washington, DC, and Kendyl K. Monroe, of New York City.

Joan I. Oppenheimer, Tax Division, Department of Justice, Washington, DC, argued for defendant-appellee. With her on brief were Loretta C. Argrett, Assistant Attorney General, and Teresa E. McLaughlin. Of counsel was Gary R. Allen, Chief, Appellate Section.

Before RICH, SCHALL, and BRYSON, Circuit Judges.

SCHALL, Circuit Judge.

Executive Jet Aviation, Inc. ("EJA") appeals from the judgment of the United States Court of Federal Claims dismissing EJA's complaint seeking a tax refund. On cross-motions for summary judgment, the court held that EJA was not entitled to a refund of $15,674.60. Executive Jet Aviation v. United States, Slip Op. No. 95-7T (March 29, 1996). This sum represents the difference between the total air transportation taxes that were paid pursuant to Internal Revenue Code ("IRC") § 4261 with respect to certain flights EJA conducted for Texaco Air Services Inc. ("Texaco Air") and the total taxes that would have been paid had the flights instead been subject to the IRC § 4041(c) fuel tax for noncommercial aviation. We affirm.

BACKGROUND

I.

This case involves a dispute over the interpretation of two mutually exclusive provisions of the Internal Revenue Code concerning the taxation of commercial and noncommercial aviation. Prior to 1970, both commercial and noncommercial flights were subject to a gasoline tax, while commercial flights also were subject to a transportation tax of five percent of the amount paid. 26 U.S.C. §§ 4041(b), 4261(a) (1964 & Supp. V.1970). In 1970, Congress enacted the Airport and Airway Revenue Act, Pub.L. No. 91-258, 84 Stat. 219, 236. It did so in order to finance anticipated growth in demand for air transportation by increasing the tax rate on commercial aircraft users and by adding a new tax for noncommercial aviation users. H.R.Rep. No. 91-601, at 35-36 (1969), reprinted in 1970 U.S.C.C.A.N. 3047, 3082. Noncommercial flights were made subject only to gasoline and nongasoline fuel taxes, 26 U.S.C. § 4041(c), while commercial flights were made subject only to an air transportation tax, calculated as a percentage of the fee charged for the transportation, 26 U.S.C. § 4261. Id.

During the relevant period of time, IRC § 4261 imposed upon "the amount paid for taxable transportation (as defined in section 4262) of any person a tax equal to 10 percent of the amount so paid." 26 U.S.C. § 4261 (Supp.V.1993). "Taxable transportation" is "transportation by air which begins in the United States or in the 225-mile zone and ends in the United States or in the 225-mile zone." 26 U.S.C. § 4262(a)(1) (1988). ¹ IRC § 4041(c), on the other hand, provides for a per-gallon retail excise tax for fuels used in an aircraft in "noncommercial aviation." 26 U.S.C. § 4041(c). Under IRC § 4041(c)(4), "noncommercial aviation" is defined as "any use of an aircraft, other than use in a business of transporting persons or property for compensation or hire by air." This section also specifies that the term "noncommercial aviation" includes any use of an aircraft that is exempt from taxes imposed by section 4261. Id.

II.

The pertinent facts are not in dispute. EJA is an aircraft management and air charter service company. At issue in this case is its "NetJets" program. During the period April 1, 1993, to September 20, 1993, the program provided participants with air transportation and aircraft maintenance services. The program served parties who had the need for exclusive use of a corporate aircraft but who did not need the aircraft on a full-time basis.

A party wishing to become a NetJets participant was required to own or lease an interest in an aircraft. Fractional interests ranged from one-eighth to seven-eighths. Most NetJets participants purchased or leased their interests from Executive Jet Sales, Inc. ("EJS"), a wholly-owned subsidiary of EJA. When entering the NetJets program in this manner through a purchase, a participant would enter into a Purchase Agreement with EJS. Pursuant to the Purchase Agreement, on the closing date, EJS would transfer to the participant the specified interest in the subject aircraft by conveying a bill of sale. As a condition precedent to closing, the participant was required to enter into a Management Agreement with EJA, an Owners Agreement with the party or parties holding additional interests in the aircraft, and a Master Interchange Agreement with EJA (the "Interchange Agreement"). Under the Purchase Agreement, the participant agreed not to sell or otherwise transfer its interest in the aircraft--except to an affiliate--without the prior written consent of EJS, so long as the aircraft was being operated under the terms of the Management Agreement, the Owners Agreement, and the Interchange Agreement. The giving of such consent was, among other things, contingent upon the "New Purchaser" assuming all of the participant's obligations under the above three agreements.

With the Purchase Agreement, the Management Agreement, the Owners Agreement, and the Interchange Agreement in place, a participant in the NetJets program was entitled to share flight time per year in a subject aircraft based on its percentage of ownership in the aircraft. The aircraft would be maintained, fueled, hangared, and insured by EJA, with pilots being selected by EJA.

Pursuant to the Management Agreement, EJA assumed full responsibility for maintenance and operation of the aircraft. At its own cost and expense, EJA was required to inspect, service, repair, overhaul, and test the aircraft in order to maintain it in the condition required to maintain its air-worthiness certification from the Federal Aviation Administration ("FAA"). EJA also agreed to repaint the exterior and refurbish the interior of the aircraft, as often as it deemed necessary, in order to maintain the aircraft in accordance with the standards of EJA's fleet of aircraft. In addition, EJA was required to maintain all records, logs, and other materials required by the FAA to be maintained with respect to the aircraft. EJA further agreed to pay for fuel and to pay the salary and the travel and lodging expenses of the crew. It also agreed to pay hangar and tie-down costs, landing fees, in-flight food and beverages expenses, and the expenses of flight planning and weather contract services. EJA also was required to provide a pool of professionally qualified pilots who were licensed to operate the aircraft. However, a participant did have the right to remove a pilot and designate new pilots from the pool. Alternatively, a participant could substitute its own pilots upon 24 hours prior notice to EJA, provided that the pilots met EJA's suitability requirements. Finally, EJA agreed to obtain, at its expense, all-risk aircraft hull insurance and liability insurance with respect to the aircraft.

In return for the services to be provided by EJA under the Management Agreement, a participant in the NetJets program agreed to pay EJA a monthly management fee and an occupied hourly rate charge commensurate with actual flight time. The participant further agreed to allow EJA to use the aircraft when it was not otherwise in use, so that EJA could provide air transportation service to the public and flight training for its pilots. EJA was entitled to keep all money earned from providing air transportation service to the public. Although a participant in the NetJets program had the right to inspect the aircraft and all EJA's records concerning the aircraft, it was not permitted to place its own insignia on either the exterior or interior of the aircraft. The Management Agreement had a term of five years.

The Owners Agreement with respect to an aircraft stated each participant's percentage of ownership in the aircraft and recited that the relationship of the applicable participants with respect to the aircraft was that of tenants-in-common of a chattel. Pursuant to the Owners Agreement, each participant agreed to maintain its interest in the subject aircraft for at least the duration of a specified term. In addition, a participant could only divest itself of its interest in the aircraft by transferring the interest to a buyer who would execute the Owners Agreement. In the Owners Agreement, each participant acknowledged that it had given EJS the right to repurchase its interest in the aircraft in the event of a default by it under the Management Agreement. As far as usage was concerned, the Owners Agreement provided that no participant could utilize the aircraft in excess of its available flight hours--determined based upon its percentage of ownership in the aircraft--without incurring a surcharge. The Owners Agreement also prohibited use of the aircraft outside of the contiguous 48 states of the United States, Mexico, Canada, and portions of the Caribbean Islands without EJA's prior consent.

The Interchange Agreement was the third agreement that each participant in the NetJets program executed upon purchasing an interest in an aircraft covered by the program. The Interchange Agreement recited that participants in the NetJets program who were owners of "a Program Aircraft" wished to engage EJA to provide administrative services to enable such owners to participate in an interchange arrangement. The Interchange Agreement further recited that the owners of the Program Aircraft wished to participate in the NetJets program by sharing their aircraft with other participants and by using Program Aircraft provided by other participants in the program. The Interchange Agreement provided that each owner was entitled to the use of another...