Excise tax; Failure to collect an air transportation “ticket tax” (26 USC §§ 4261(a), (e)(1)(C), (e)(5), & 4262(a)(1)); Whether the taxpayer’s fixed fees for “overhead & management costs” for its clients’ private jets constituted payments for “transportation by air” & were subject to excise tax

The court held that because the excise “ticket tax” only applies to usage charges for each flight and not to fixed charges for overhead and management costs, plaintiff-Flight Options was not liable for uncollected excise taxes. Flight Options, a fractional-share jet company, challenged the IRS’s effort to impose a $39 million judgment arising from its failure to collect a 7.5% excise tax on the fixed fees it charged its clients for overhead and management of their private jets. This tax applies to “‘amount[s] paid for’ domestic ‘transportation by air[.]’” The IRS began to enforce “the tax on all fixed fees for management and overhead and, to that end, began audits of Flight Options and other fractional-share jet operators.” Congress later amended the Tax Code and exempted “fractional-share jet owners from all taxes under § 4261, whether applied to usage fees or fixed fees.” But litigation continued “over potential liability for the operators for failing to withhold the tax on fixed fees charged before the 2012 effective date” of the amendment, including this case involving the IRS’s assessment against Flight Options for the period from 1/1/09 through 3/31/12. A magistrate judge ruled in the IRS’s favor and “also imposed failure-to-collect penalties on Flight Options.” On appeal, after analyzing the text and context of § 4261, the court held that “[t]he tax does not apply.” Flight Options’ fixed fees were not “payments for ‘transportation by air.’ The monthly and membership fees provide neither a ‘fare’ nor a ‘ticket’ nor ‘the right to transportation.’ They instead provide the option to purchase flight hours—an option that fractional owners and jet members may exercise only after paying the hourly usage fee.” Additionally, the court found “that Flight Options lacked adequate notice of its tax-collection responsibility. Because the statute never clarifies how it would apply beyond the flight-by-flight context of a ticket tax, it never describes what types of fixed charges could count as paying ‘for transportation.’” Reversed.