Sixth Circuit overturns $39m tax bill against Flight Options
Flight Options was founded in 1998 by aviation entrepreneur Kenn Ricci.
The Sixth Circuit Court of Appeals handed the fractional share industry a significant victory after it unanimously reversed a $39m federal excise tax judgment against Ohio-based Flight Options, LLC.
Flight Options became Flexjet following the merger of two companies when Directional Capital acquired Flextjet from Bombardier for $195m in 2013.
At issue was whether the Internal Revenue Service (IRS) could extend the 7.5% ticket tax, long applied to per-flight usage charges across the fractional industry, to the fixed monthly management fees that operators charge their owners.
Those fees, which cover the day-to-day costs of running a fractional programme including hangar leasing, maintenance, insurance, pilot salaries, and programme administration had never been subject to the tax until the IRS reversed course in a 2004 internal memorandum and began auditing the industry accordingly.
For Flight Options, that meant an assessment of roughly $24m in back taxes covering January 2009 through March 2012, which ballooned to $39m once interest and penalties were added.
Law firm Liskow said that court was unconvinced by the IRS’s argument that any cost “reasonably necessary” for the provision of air transportation falls within the ticket tax.
The law firm adds that the judges noted that the Congress deliberately chose the word “transportation” rather than “transportation services”. A distinction that confines the tax to the fare paid for a specific flight, not the overhead infrastructure that makes that flight possible. The court also pointed to Treasury regulations that have long exempted charges for parking, de-icing, and similar services from the tax, observing that if the IRS’s broad logic were correct, virtually the entire cost of a fractional share purchase would be taxable.
Beyond the statutory question, Liskow highlighted that the court found a second, independent basis for reversal. Under established Supreme Court precedent, the IRS cannot hold a third-party collector liable for failing to withhold a tax unless it had provided clear and unambiguous notice of that obligation.
In the case of ticket tax, the IRS had issued conflicting guidance over the years, had quietly settled or abandoned similar assessments against other operators when challenged, and had never published a binding rule extending the ticket tax to fixed management fees. The court concluded it was simply not open to the government to penalise Flight Options for failing to collect a tax whose scope had never been clearly defined.
For operators, owners and advisers across the fractional and jet card space, the practical significance of the ruling extends well beyond Flight Options.
This is the first time a federal circuit court has held that fixed management and overhead fees sit outside the Section 4261 ticket tax. It also creates a direct conflict with the Fifth Circuit’s 2016 decision upholding excise tax liability on similar fees charged by Bombardier’s Flexjet programme.
Flight Options was founded in 1998 by aviation entrepreneur Kenn Ricci.
In September 2013, Ricci’s investment firm Directional Aviation Capital, which owned Flight Options, announced acquisition of Flexjet from Bombardier Aerospace for $185m, bringing two of the industry’s biggest fractional operators under the same roof.
The two companies completed their operational merger in 2015, with the combined entity moving forward under the Flexjet brand.
