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Audit Techniques Guide
Aviation Tax Table of Contents
Chapter 1 -
Introduction to the Aviation Market Segment
Background
The
aviation market segment includes all persons involved in commercial and
noncommercial air transportation. This group includes but is not limited
to
The Internal Revenue Code (IRC)
imposes taxes on both commercial and noncommercial aviation. For flights
in commercial aviation, a tax is imposed on amounts paid for the
transportation of persons by air (IRC section 4261) and property by air
(IRC section 4271). Also, commercial aviation is burdened by a
relatively small fuel tax on aviation gasoline (IRC sections 4081 and
6421) and aviation fuel (other than gasoline) (IRC section 4091). For
flights in noncommercial aviation, a much higher rate of tax on fuel is
imposed. Whether commercial or noncommercial
aviation taxes apply is determined on a flight-by-flight basis.
Determining which set of taxes applies to which flights is a recurring
audit issue. Determining the amount paid for commercial transportation
is another recurring audit issue. Aviation taxes go into the Airport and
Airway Trust Fund (IRC section 9502). Expenditures from the fund support
the Federal Aviation Administration (FAA). This document serves as a self-study
text and a market segment specialization guide for examiners. The
contents of this document are not to be used or cited as authority for
setting or sustaining a technical position. Great caution should be used in
applying existing regulations and revenue rulings to present fact
situations. The IRC section 4261 regulations, which were last revised in
1963, do not reflect the many changes in the Code since that time.
Similarly, many revenue rulings contain out-of-date tax rates and do not
reflect the significant changes made in the Code in 1996 and 1997. Outside
Stakeholders
A
partial list of outside stakeholders is provided below. Trade Associations
Federal
Agencies
FAA
Certificates (Licenses)
The
types of certificates (licenses issued by the FAA) are:
The FAA defines commercial aviation as
the carriage of persons or property by air for profit. Compare this to
the IRS definition, which simply requires that the carriage be
undertaken for compensation. The differing definitions have caused
confusion among some aircraft operators. Flight departments often assume
that, since a flight is not considered commercial for FAA purposes, the
flight is not considered commercial for tax purposes. However, the IRS
is not bound by other agencies' definitions. Rev. Rul. 78-75, 1978-1 C.B.
340 states that the status of an aircraft operator as a "commercial
operator" under FAA regulations does not determine the commercial
or noncommercial status of the operator in the application of the
aviation fuel and air transportation taxes. Air
Transportation Excise Issue Specialist Program
The
November 1991 Excise Tax Task Force Report addressed the need to move to
a market segment approach in the excise tax arena. Corporate decisions
were made to integrate market segment approaches throughout all
compliance activities. The establishment of a work group to address the
air transportation industry was the beginning of the implementation of
the market segment approach to excise tax. Members of the work group
were selected on the basis of their work, technical experiences,
training, and background. Each member of the work group is
responsible for providing advice, assistance, and technical expertise to
agents in the planning and conduct of examinations. Please feel free to
request assistance from the work group whenever you feel it would be
appropriate. This assistance can be in the form of information, advice,
or if necessary, physical assistance at the examination sites. The
workgroup members develop market segment audit techniques and
guidelines, update and revise the Internal Revenue Manual, lead or
participate in technical conferences, and submit articles to trade
publications. In addition, the group advises IRS Headquarters on issues
and practices in the application of the law, emerging issues, changes in
technology, and innovative audit techniques from the field. Chapter 2 -Return
Filing and Deposit Requirements and Blind Credits
Filing
Requirements
Fuel
Taxes
Forms
720, Quarterly Federal Excise Tax Returns, for aviation fuels taxes
(both aviation gasoline and aviation fuel other than gasoline) are
required for each calendar quarter. They are due on the last day of the
month following the close of the quarter. (Treas. Reg. section
40.6071(a)-1(a)(1)) Air Transportation Taxes
Returns
are due 2 months after the close of the quarter when other Forms 720 are
due one month after the end of the quarter. (Treas. Reg. section
40.6071(a)-2) Multiple Taxes
If
a taxpayer is required to file returns for two or more taxes with
different due dates, the return is due on the later of the due dates.
For example, if a taxpayer is required to file a return for both
aviation fuel and transportation of persons by air, the return is due on
the last day of the second month after the close of the quarter. Treas.
Reg. section 40.6071(a)-1(a)(2)) Deposit
Requirements
Form
720 Schedule A ties deposits to the tax liability. Electronic Deposit Requirements
The
taxpayer must make electronic deposits for all depository taxes that
occur after 1997 if
Electronic
Federal Tax Payment System
The
Electronic Federal Tax Payment System (EFTPS) must be used to make
electronic deposits. If the taxpayer is an employer required to use
EFTPS, he or she must also use EFTPS to deposit excise taxes. Taxpayers who are not required to make
electronic deposits may voluntarily participate in the EFTPS Program. Federal Tax Deposit Coupons
If
the taxpayer is not required to use EFTPS and does not voluntarily
participate in the EFTPS Program, he or she should deposit federal
excise taxes at an authorized depository or the Federal Reserve Bank
servicing the area in which he or she is located. When To Make Deposits
Taxes
that are required to be deposited are grouped into the following
classes:
If the taxpayer deposits more than one
tax in a class, he or she should combine all the taxes in the class and
make one deposit for the semimonthly period. 9-Day Rule
The
deposit of tax for a semimonthly period is due by the 9th day following
that period. Generally, this is the 24th day of a month and the 9th day
of the following month. The 9-day rule applies to all taxes in Part I of
Form 720 except for
Alternative
Method (IRS Nos. 22, 26, 27, and 28)
Deposits
of communications and air transportation taxes may be based on amounts
billed or tickets sold during a semimonthly period instead of on taxes
actually collected during the period. Under the alternative method, the
tax included in amounts billed or tickets sold during a semimonthly
period is considered collected during the first 7 days of the second
month following semimonthly period. The deposit of tax is due by the 3rd
banking day after the 7th day of that period. For example, the tax included in
amounts billed or tickets sold for the period from December 16, 1997, to
December 31, 1997, is considered collected from January 16, 1998, to
January 22, 1998, and must be deposited by January 27, 1998. To use the alternative method, you
must keep a separate account of the tax included in amounts billed or
tickets sold during the month and reported on Form 720. The tax is
included in amounts billed or tickets sold, not the amount of tax that
is actually collected. For example, amounts billed in December, January,
and February are considered collected during January, February, and
March and are reported on Form 720 as the tax for the 1st quarter of the
calendar year. 14-Day Rule (IRS Nos. 14, 60, 62, 58, 73, 74, 59, 75, and 76)
Deposits
of the gasoline and diesel fuel tax for a semimonthly period by an
independent refiner or any person whose average daily production of
crude oil for the preceding calendar quarter did not exceed 1,000
barrels may be made by the 14th day following the semimonthly period.
The deposits must be made using EFTPS. If the 14th day is a Saturday,
Sunday, or legal holiday, the due date is the immediately preceding day
that is not a Saturday, Sunday, or legal holiday. The 14-day rule does
not apply to dyed diesel fuel used in trains (IRS No. 71) or to dyed
diesel fuel used in certain intercity or local buses (IRS No. 78). Delayed Deposits
The
following deposits have a delayed deposit due date of October 5, 1998:
Amount
To Deposit
Deposits
of taxes for a semimonthly period must be at least the net tax liability
for that period, unless one of the safe harbor rules applies. The safe
harbor rules apply separately to deposits under the 9-day rule, the
30-day rule, the alternative method, and the 14-day rule. The net tax liability for a
semi-monthly period is the total liability for the period plus or minus
any adjustments for the period. Net tax liability for a semimonthly
period may be figured by dividing the net tax liability for the month by
2, provided this method of computation is used for all semimonthly
periods in the calendar quarter. Under the alternative method, the
deposit of tax for any semi-monthly period must not be less than the net
amount of tax that is considered collected during the semi-monthlyperiod.
The net amount of tax that is considered collected during the
semi-monthly period must be
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Quarter |
Aviation Fuel IRS No. 69 |
Commercial Use Of Aviation Fuel |
|
Jan. 1994 |
.219 |
.001 |
|
Apr. |
.219 |
.001 |
|
July |
.219 |
.001 |
|
Oct. |
.219 |
.001 |
|
Jan. 1995 |
.219 |
.001 |
|
Apr. |
.219 |
.001 |
|
July |
.219 |
.001 |
|
Oct. |
.219 |
.044 |
|
Jan. 1996 |
.043 |
.043 |
|
Apr. |
.043 |
.043 |
|
July |
.043 |
.043 |
|
Aug. 27, 1996 |
.218 |
.043 |
|
Oct. |
.218 |
.043 |
|
Jan. 1997 |
.043 |
.043 |
|
Mar. 7, 1997 |
.218 |
.043 |
|
Apr. |
.218 |
.043 |
|
July |
.218 |
.043 |
|
Oct. |
.219 |
.044 |
Exemptions
Sales to
Producer
Under
IRC section 4092(c), tax is not imposed on aviation fuel sold to a
producer of such fuel. Section IIIB(1)(c) of Notice 88-30 provides that,
"This provision applies only if --
- Both
the seller and the buyer are registered under IRC section 4101 with
respect to the tax imposed by IRC section 4091;
- The
buyer has notified the seller in writing with which district
director the buyer is registered and the Certificate of Registry
number (now letter of registration number) of the buyer; and
- The
buyer's registration number appears on the invoice for each tax-free
sale made to the buyer."
In this context, invoice includes an
invoice, purchase order, or other record of sale that is maintained by
the seller in the normal course of business. (
Producers apply for registration by
the IRS on Form 637, Application for Registration (For Certain Excise
Tax Activities). A bond may be required as a condition of registration.
The bonding rules are set forth in section V of Notice 88-30. A taxpayer
registered by the IRS as a producer of aviation fuel is assigned a
registration number with an "H" suffix.
Sales for
Nontaxable Uses
Under
IRC section 4092(a), tax is not imposed on a producer's sale of aviation
fuel for use by its buyer for a use that is exempt from the tax imposed
by IRC section 4041(c)(1). These uses are:
- Use
other than as a fuel in an aircraft;
- Use
as a fuel in an aircraft on a farm for farming purposes (as that
term is defined in Treas. Reg. section 48.6420-4);
- Use
as a fuel in an aircraft in foreign trade (as that term is used in
Treas. Reg. section 48.4221-4) or trade between the United States
and any of its possessions;
- Use
as a fuel in an aircraft owned by the
- Exclusive
use of a state or local government;
- Export
or shipment to a possession of the
- Exclusive
use of a nonprofit educational organization (as that term is defined
in Treas. Reg. section 48.4221-6);
- Use
as a fuel in an aircraft by an aircraft museum (as described in IRC
section 4041(h)(1)) for the procurement, care, or exhibition of
aircraft of the type used for combat or transport in World War II;
and
- Use
as a fuel in an aircraft of the type and for a purpose described in
IRC section 4261(e) or (f).
The IRC section 4261(e) exemption
applies to helicopters engaged in the exploration for or the development
or removal of hard minerals, oil, or gas and in timber (including
logging) operations if the helicopters neither take off from nor land at
a facility eligible for Airport Trust Fund assistance or otherwise use
federal aviation services during flights. In the case of helicopter
flights for hard minerals, oil, or gas, each flight segment is treated
as a distinct flight.
The IRC section 4261(f) exemption
applies to any air transportation for the purpose of providing emergency
medical services (1) by helicopter or (2) by a fixed-wing aircraft
equipped for and exclusively dedicated on that flight to acute care
emergency medical services.
The IRC section 4261(e) and (f) rules
were modified in 1996 and 1997. In a case involving such issues, be
aware of the dates on which the aviation fuel in question was sold.
Section IV of Notice 88-132 generally
provides that a producer may make a tax-free sale for any nontaxable use
if the producer receives a described exemption certificate from the
buyer.
Reduced Rate
Sales for Domestic Commercial Aviation
Under IRC section 4092(a) and (b), tax
is imposed at a reduced rate on a producer's sale of aviation fuel for
use by a buyer in domestic commercial aviation.
Section IV of Notice 88-132 generally
provides that a producer may make such reduced-rate sales if the
producer receives a described exemption certificate from the buyer. As
an additional requirement, the buyer (the airline) must be registered by
the IRS.
Airlines apply for registration by the IRS on Form 637. A bond may be required as a condition of registration. The bonding rules are set forth in section V of Notice 88-30. A taxpayer tha