On September 26, 2005, the IRS issued Revenue Ruling 2005-64 which “describes the circumstances in which losses incurred by an individual who provides air transportation through a passthrough entity can qualify as passive losses under section 469 of the Code. In addition, this ruling describes the applicability of section 4261 to the amounts paid for the air transportation services.” The ruling analyzes two separate fact patterns and the resulting interaction of these two sections of the code under each scenario.
The ruling holds that an “S” corporation’s lease of an aircraft, without a pilot or maintenance crew, to a related “C” corporation for the “C” corporation’s use in meeting its air transportation needs was a rental activity and, therefore, subject to the IRC Sec. 469 passive activity loss limitations. However, it was not subject to IRC Sec. 4261 excise tax on air transportation.
Under the second scenario, if an “S” corporation leases an aircraft, with pilot and maintenance crew, to a related corporation for that corporation’s use in meeting its air transportation needs, that activity is not considered a rental activity subject to the passive activity loss limitations, but it is subject to IRC Sec. 4261 excise tax.
Keep in mind that this revenue ruling only addresses the interaction of these two provisions of the tax code under the presented fact patterns. It does not mention or address any of the FAR’s that may be applicable to the “S” corporation’s lease of the aircraft (e.g. operation under Part 91 v. Part 135). Suffice it to say that the FAA would likely view the two fact patterns as quite distinctive with the first pattern subject to the operating limits/requirements of Part 91 and the second pattern subject to the more restrictive operating limits/requirements of Part 135. But, that is a discussion for another day.