Sundance Helicopters, Inc. v. United StatesSundance Helicopters, Inc. v. United States
OPINION
This is an action for refund of Mr Transportation Excise taxes paid by plaintiff. Before the court are the parties’ cross-motions for summary judgment. The broad issue is whether plaintiff operates on “an established line” by flying standardized helicopter sightseeing tours, and if it does, whether plaintiff has a legal obligation to collect and pay the tax. Briefing is complete, and we heard oral argument on February 2, 2012. For the reasons explained below, we deny plaintiffs motion for summary judgment and grant in
BACKGROUND
This dispute arises from an excise tax audit conducted by the Internal Revenue Service (“IRS”) to check compliance with the Air Transportation Excise Tax, I.R.C. § 4261 (2006),
I. Overview of Sundance’s Tours
Sundance Helicopters, Inc., was founded in 1985 and was, as of 2005, the largest helicopter aviation company in Nevada. It provides helicopter tours, charter flights, utility flights, and government flights. Sundance provides aerial tours of areas such as the Las Vegas “Strip,” the Grand Canyon, the Colorado River, and portions of the Hualapai Indian Reservation. It flies exclusively a fleet of six-passenger helicopters. During the disputed period of a year and a half, Sundance flew 151,763 passengers.
Although plaintiff prefers to view all of its flights as “charter,” in fact its own books and records indicate that it segregates purely charter flights from packaged sight-seeing tours. Deposition testimony by Sundance employees makes clear that it views one-of-a-kind bookings by film crews, fire suppression crews, or government agencies as different from standardized tourist flights. Such true charter flights are routed to separate in-house schedulers. Charter flights are billed at an hourly rate rather than on a per-seat basis. Prices are determined by estimated flight time, estimated additional fees from use of fuel trucks, on-site maintenance, and landing and flight clearances.
For the balance of its flights, which the government contends are subject to the tax, plaintiff offers standardized sight-seeing tours. Plaintiffs most popular tour is the “Grand Canyon Picnic,” which accounts for ninety percent of plaintiffs tour flights from McCarran International Airport near Las Vegas and the majority of its tom’ revenue. This tour includes flights over Lake Mead, Hoover Dam, extinct volcanoes, and culminates in a landing in the Grand Canyon for a picnic. On the return leg, the helicopter flies above the Las Vegas Strip. There are variations of this tom’ that are known as the Escape, Sunset Escape, or the Grand Canyon Wedding. Plaintiff also offers group tours, which generally use the standard tours, such as the Grand Canyon Picnic or the VIP Deluxe. Plaintiffs other tours include flying customers from Grand Canyon West Airport into the canyon to connect with boat tours.
II. Sundance’s Advertising and Reservation Practices
Plaintiff prints over 100,000 brochures every six months for distribution to tour operators, hotels, and other vendors. These brochures describe the details of the tours offered by plaintiff, including price and duration. See Def.’s Ex. 16, 17. They do not specify a time of departure. This is in part because most trips are conducted in daylight, and the number of daylight hours fluctuates during the year. The brochures indicate that “Tour times may vary depending on aircraft and weather.... Tours require a minimum number of passengers to operate. 24-hour cancellation notice required,” and that “Prices and tour itineraries are subject to change without notice.” See Def.’s Ex. 16, 17.
Tours are reserved primarily by third-parties, such as tour operators and travel agencies, as well as directly by the customer. During the disputed period, approximately three hundred third-party vendors sold Sun-dance tours. Most of plaintiffs passengers during the disputed period came from hotels and independent travel agencies. Between 15% to 20% were walk-ins and direct bookings.
Third-party vendors establish a tour sales agreement with plaintiff. These agreements, which are valid typically for six months, provide the retail price, net rate, fees passed to the customer, and the commission collected by the third-party. The commission is the difference between the retail price paid by the customer and the net amount paid to Sundance. The retail rate is generally the same for all third-parties, which is typically the rate published in the brochure. Although the net rate may be negotiable, plaintiff has the final authority. Plaintiff accepts three modes of payment from its third-party sellers: (1) cash on demand, which the customer pays Sundance directly, (2) “net 30,” in which the customer pays the third-party seller, and the seller pays plaintiff within 30 days of travel, and (3) by voucher, in which the customer pays the third-party seller and receives a voucher that the customer presents at the flight terminal, which plaintiff then redeems from the third-party seller.
Plaintiff uses a computerized internal reservation process consisting of a system of drop-down lists on a computer screen showing available tours on a given day. The reservation process generally takes less than three minutes to complete, including data entry. Direct bookings may take longer, depending on the customer’s knowledge about the tours. Internet customers generally request an approximate time of the day for the tour, and through an iterative process between the reservation agent and the customer, a specific time is established. For third-party bookings, which occur primarily over the phone or Internet, a specific departure time is negotiated through the same iterative process with Sundance.
III. Sundance’s “Preferred Model”
Plaintiff seeks to reserve customer flights based on a “preferred model” in an attempt to allocate efficiently Sundance’s helicopters throughout the day by managing occupancy. On any given-day, the preferred model shows the Sundance reservation agent the projected flight times for each helicopter. This schedule is not seen by the third-party or the customer. Although it changes throughout the year, this model is essentially established by ascertaining the earliest possible flight for the day (normally sunrise) for a particular helicopter, adding two hours and fifteen minutes for each round trip, and then adding a thirty minute buffer. The model then continues flights until sunset. The time slots allowed under this model, generally two hours and forty-five minutes, allow plaintiff to accommodate its most popular tour, the Grand Canyon Picnic. By determining the number of daylight hours in a given day, the duration of the most popular tours, and by setting up optimal flight times, plaintiff achieves the most flights possible from each helicopter in a day.
The times generated by the preferred model are not published, although we note
Along with the preferred model, due to efficiency and revenue considerations, plaintiff will not send out a flight with less than three or four passengers, the minimum number of seats to breakeven financially. Customers can purchase additional unused seats to make it a private flight. If the minimum seat quota is not met, plaintiff may offer the customers a different time or tour. Plaintiff strives to get its aircraft as full as possible and averages 5.8 passengers per flight.
IV. Sundance’s Flight Operations
Plaintiff operates pursuant to a Federal Aviation Administration Part 135 certificate. During pilot training, plaintiff teaches its pilots the tour routes, which plaintiffs Director of Operations, Kurt Barton, has described as “canned flight plan[s].” Kurt Barton Dep. 26:10-25, Sept. 1, 2010. Specific flight plans are required and enforced by the FAA and National Park Service within the Grand Canyon. Deviating from these paths for any reason other than safety can lead to a violation for the pilot, who can face fines and license forfeiture. Additionally, over the Hualapai Indian Reservation in the western portion of the Grand Canyon, flights are similarly restricted to approved routes. The skies surrounding McCarran International Airport are likewise restricted to set flight paths. Plaintiff has entered into letters of agreement with the FAA and other flight operators dictating permissible routes and altitudes for other designated areas, such as Lake Mead.
It is possible for customers to request inflight deviations within these corridors, but these deviations must comport with flight route restrictions, and customers must pay the charter rate for any significant deviations. Such a deviation will not be granted without the consent of all passengers because it may involve additional expense. The pilot of the helicopter at all times retains the right to veto any deviations and may do so if concerned about safety or maintaining the schedule for the day.
V, Sundance’s Previous Dealings with the IRS
Plaintiff contends that it was previously audited by the IRS in 1994 for Air Transportation Excise Tax compliance. Sundance thereafter requested a written determination confirming that it was not subject to the tax. Plaintiff offers a letter dated April 5, 1995, from Larry R. Gillich, an IRS revenue agent, to plaintiffs counsel. See Pl.’s Ex. at 5-7.
Defendant does not deny that the letter was written by Agent Gillieh, but contends that it was not the result of an official audit. Defendant points to another letter plaintiff addressed to Agent Gillieh, dated November 21,1994, in which plaintiff seeks confirmation that there would be no official audit: “based upon the materials submitted to you [Agent Gillieh] in advance of the audit, you would not be auditing the federal excise tax accounts of Helicopter Services of Nevada for the year 1993 or for any prior year.” Pl.’s Ex. at 6. Defendant also points out that the “determination letter” reflects “Tax Period: N/A.” Defendant argues that, in any event, Agent Gillieh’s letter is not an “official” writ
VI. Sundance’s Audit
On March 7, 2007, the IRS issued an examination report asserting that plaintiff owed Air Transportation Excise Tax pursuant to I.R.C. § 4261 because it had been operating flights on an established line. See Pl.’s Ex. at 8. This report asserted that plaintiff owed $2,970,494 in taxes, plus penalties of $742,623 for the calendar quarters ending March 31, 2004 through September 30, 2005. Plaintiff takes the position that it was subject to and paid the Aviation Fuel Excise Tax
In its claim for refund, plaintiff also asserts that the IRS failed to account for amounts plaintiff received to cover non-air transportation expenses, such as ground transportation, meals, beverages, videotapes, DVDs, photographs, National Park fees, and other services. According to plaintiff, the rates charged to its customers during the disputed period included these non-air transportation services, which should not be subject to the tax. Defendant responds that plaintiff has failed to document these separable charges as required by Treasury Regulation § 49.4261-2(c).
Plaintiff also asserts that the IRS assessed penalties against it without identifying the type of penalty or the sections under which the penalty was assessed. Defendant contends it was sufficient to identify the penalties as “Failure to File Tax Return,” and “Failure to Pay Tax” under IRC § 6651(a) and (b), throughout the documents provided to plaintiff at the conclusion of the audit. See Pl.’s Ex. at 11 (noting “Penalties assessed per IRC section 6651-Failure to File Tax Return or to Pay Tax”).
After receiving the examination report, plaintiffs counsel, R. Glenn Woods, sent a letter protesting the report. Pl.’s Ex. at 40-49. Along with the letter, plaintiff paid $823.31, which is a divisible portion of the Air Transportation Excise Tax assessed for the disputed period. Plaintiff filed suit here in June 2009 seeking a refund and abatement of its Air Transportation Excise Taxes.
DISCUSSION
I.R.C. § 4261 imposes an excise tax on “taxable transportation.” Section 4261(a) imposes a tax of 7.5% on the amount of taxable transportation paid, and I.R.C. § 4261(b) imposes a fixed dollar amount tax on each domestic segment of taxable transportation. Taxable transportation includes “transportation which begins in the United States ... and ends in the United States.” I.R.C. § 4262.
Section 4281 carves out an exemption to the tax imposed by I.R.C. § 4261, however, for aircraft that have a maximum certificated takeoff weight of 6,000 pounds or less, except when such aircraft is “operating on an established line.” There is no dispute that plaintiff satisfies the 6,000 pounds ceiling. Thus, plaintiff is not subject to the Air Transportation Excise Tax unless it “operates on an established line” within the meaning of I.R.C. § 4281. Plaintiff contends that it does not operate on an established line because its business amounts to chartered sight-seeing tours controlled by customers. Defendant argues that plaintiff operates on an established line because it provides regular flights on fixed routes and exercises great control over them.
A motion for summary judgment can be granted only if there is no genuine dispute as to any material fact. Rule 56(c) of the Rules of the United States Court of Federal Claims
A. Plaintiff operates on an established line and is therefore subject to the Air Transportation Excise Tax
1. Treasury Regulations and Revenue Rulings
Treasury regulations clarify that “operation on an established line” means:
operated with some degree of regularity between definite points. It does not necessarily mean that strict regularity of schedule is maintained; that the full run is always made; that a particular route is followed; or that intermediate stops are restricted. The term implies that the person rendering the service maintains and exercises control over the direction, route, time, number of passengers carried, etc.
Treas. Reg. § 49.4263-5(c). There are thus three elements to an established line. First, operating on an established line means “operating] with some degree of regularity.” Second, this regularity must be “between definite points.” Third, the flight operator must maintain control over “the direction, route, time, number of passengers carried, etc.” Due to the presumption that the tax assessed is correct, plaintiff bears the burden of showing that these elements are not present.
The parties call our attention to two Revenue Rulings which apply the established line concept. In Revenue Ruling 72-219, 1972-
By contrast, in Revenue Ruling 72-617, 1972-
2. Other courts’ interpretation of “operated on an established line”
While the established line concept is a matter of first impression in this court, three district courts in the Ninth Circuit have considered the issue. The most recent decision is by the District Court of Hawaii in Schuman Aviation Company Ltd. v. United States, in which the court held that a Hawaiian helicopter tour company operated on an established line. See
In Lake Mead Air, Inc. v. United States, the Nevada District Court held that the flight operator was subject to the tax, but also held that the operator had no duty to collect it. See
The court held that the “definite points” requirement was satisfied, even though the routes began and ended at the same place. It pointed to Treasury Regulation § 49.4261-1(e), which provides: “It is not necessary that the transportation be between two definite points. If not otherwise exempt, a payment for continuous transportation beginning and ending at the same point is subject to the tax.”
In NorthStar Trekking LLC v. United States, the Alaska District Court came to a different conclusion with respect to a helicopter operator offering tours to and from glaciers.
The persuasiveness of NorthStar, however, is drawn into question by the more recent decision of the Ninth Circuit in Temsco Helicopters, Inc. v. United States,
We believe that the decisions in Schuman, Lake Mead, and Temsco correctly interpret the established line exemption. In addition, as we explain below, plaintiffs operations
3. Plaintiff satisfies the three elements required by Treasury Regulation § 49.4263-5(e).
(a) Plaintiff operates with some degree of regularity
While recognizing that strict regularity of schedule is not required, plaintiff contends, however, that some formal schedule must exist.
The Lake Mead court analyzed the regularity element by focusing on the “frequency of travel over a certain area.”
We agree with that approach and find that plaintiff satisfies the first element of regularity. Certainly the regulations do not contemplate an absolutely-fixed schedule, and the terms “regularity” and “regular” have commonly defined meanings which denote following or arranged in a pattern. See 13 Oxford English Dictionary 522 (2d. 1989). Thus, if plaintiffs tours operate in a discernable pattern, amounting to a level such that the public could rely on for transportation, plaintiff satisfies the regularity element.
The defendant has submitted two months of plaintiffs tour flight records, which it offers as representative of plaintiffs operations. See Def.’s Ex. 26, 27. After reviewing these records, it is plain to the court that plaintiffs flights operate with a high degree of regularity, as reflected in two of plaintiffs popular tours: the Grand Canyon Picnic and the Sunset tours.
The first month provided is January 2004.
Although the mere quantity of flights alone cannot be enough to demonstrate an established line, we plainly have more here than just a large number of flights: we have a discernable pattern of the same tours being flown at approximately the same time every day. A potential customer could have said at the time with a high degree of certainty that plaintiff will fly a Grand Canyon Picnic tour mid-morning and a Sunset tour mid-afternoon. Because the regulations require only “some degree of regularity,” we hold that plaintiffs tour operations satisfy this element.
(b) Plaintiff operates between definite points
In its motion for summary judgment, plaintiff argues that the “definite point” element requires two distinct points, and for it to be subject to the tax, the “tours must have taken off and landed at two predetermined, identifiable locations.” Pl.’s Mot. Sum. J. 22. Thus, because a “substantial number of Sun-dance’s flights were circular (i.e., they departed and returned to only one location),” id., plaintiff contends it did not operate on an established line.
We disagree. The regulation applicable to transportation excises taxes generally, provides that: “It is not necessary that the transportation be between two definite points. If not otherwise exempt, a payment for continuous transportation beginning and ending at the same point is subject to the tax.” Treas. Reg. § 49.4261-1(c). We agree with both the Temsco and Lake Mead courts in holding that circular transportation falls within the tax. See
(c) Plaintiff satisfies the control element
The final element of the “operated on an established line” test requires that the flight operator maintain and exercise control over the flights. See Treas. Reg. § 49-4263-5(e); see also Temsco,
In sum, plaintiff operates on an established line because it operates with some degree of regularity between definite points and maintains the requisite control over numerous aspects of the flights. Accordingly, it does not fit within the excise tax exemption provided by I.R.C. § 4281.
B. Plaintiff had a legal obligation to pay the Air Transportation Excise Tax to defendant
Plaintiff argues that, even if it was subject to the tax, it had no legal obligation
For its part, defendant relies on I.R.C. § 4263(e), which it asserts shifts the excise tax liability to plaintiff when the tax is not collected at the time of sale. Section 4263(c) provides:
Where any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, under regulations prescribed by the Secretary, to the extent that such tax is not collected under any other provision of this subchapter such tax shall be paid by the carrier providing the initial segment of such transportation which begins or ends in the United States.
Plaintiff asserts that the liability imposed by I.R.C. § 4263(c) is secondary only, i.e., the government must first seek to collect from the individual customer. Alternatively, plaintiff argues that because the Secretary has not promulgated regulations to implement I.R.C. § 4263(c), the section is of no effect.
1. Primary versus secondary liability
To support its argument that customers or third-party vendors are the proper payors of the tax, plaintiff cites to Lake Mead, which held that although the tour company operated on an established line, it had no legal duty to collect the excise taxes: “the passenger is liable for the tax (section 4261), but section 4291 requires the entity receiving payment from the passenger to collect the tax and pay it over to the Government.”
In 1992, the end of the tax period audited in Lake Mead, I.R.C. § 4263(c) read as follows:
Where any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, under regulations prescribed by the Secretary, to the extent that such tax is not collected under any other provision of this subchapter-
(1) such tax shall be paid by the person paying for the transportation or by the person using the transportation;
(3) payment of such tax shall be made to the Secretary, to the person to whom the payment for transportation was made, or, in the case of transportation other than transportation described in section 6262(a)(1), to any person furnishing any portion of such transportation.
26 U.S.C. § 4263(c) (1994).
The prior version of I.R.C. § 4263(c) thus placed no payment obligation on the air carrier. Section 1031 of the Taxpayer Relief Act of 1997, Pub.L. 105-34, as the Lake Mead court noted, however, amended I.R.C. § 4263(c) by: “striking ‘subchapter — ’ and all that follows and inserting ‘subehapter, such that tax shall be paid by the earner providing the initial segment of such transportation which begins or ends in the United States.’ ”
The plain language of I.R.C. § 4263(e) provides that the air earner is to pay the tax if it is not otherwise collected. There is no mention of primary versus secondary liability in the text of the statute. Furthermore, as the Ninth Circuit noted in Temsco, nothing in the text of the statute requires the government to first attempt collection from the tour purchaser. See Temsco,
2. Regulations under I.R.C. § 4263 are not a precondition to the section’s application
Plaintiff also argues that Treasury’s failure to adopt implementing regulations means that I.R.C. § 4263(c) is unenforceable. We disagree.
The Tax Court has developed what we view to be an appropriate test in determining whether the issuance of such regulations is a precondition to the application of the statute. The rule, set out in Estate of Neumann v. Commissioner,
The Seventh Circuit took a similar approach in Pittway Corp. v. United States,
It is plain from the text of I.R.C. § 4263(c) that Congress sought to place final liability of the tax on the transportation provider. The intent to tax is clear. The regulations, therefore, could deal only with how, not whether, the payments are to be made. See Temsco,
C. Because genuine disputes as to material facts exist relating to the amount of tax owed, summary judgment is not appropriate
Plaintiffs final argument is that the IRS erroneously calculated the assessment because it did not exclude non-air transportation related services, and that the IRS thus improperly calculated the penalties assessed against it. In response, defendant argues that the burden is on plaintiff to put forward sufficient undisputed evidence of non-air-transportation-related charges to war-rant
Tax assessments enjoy a presumption of correctness, and “a taxpayer bears the burden of proving it to be wrong.” Conway v. United States,
Plaintiff also argues that it is entitled to offset against any Air Transportation Excise Tax owed what it has paid in Aviation Fuel Excise Tax. Defendant does not dispute the premise behind plaintiffs argument that it is entitled to an offset for any fuel tax paid, but points out that plaintiff has provided no specific proof of the amounts involved. We agree with defendant that generalized assertions that Sundance has paid the fuel tax will ultimately be insufficient to warrant an offset. At this stage in the litigation, however, having concluded that plaintiff is incorrect with respect to the underlying legal issues, we believe it appropriate to allow plaintiff to assemble whatever proof it has on the quantum of offset. We therefore decline to address, for now, the amount of tax owed, including whether plaintiff willfully neglected to pay the excise tax.
In sum, we hold that plaintiff was subject to the Air Transportation Excise Tax during the disputed period for its non-charter flights and that plaintiff had a legal duty to remit those taxes to defendant. Disputes remain as to whether plaintiff is entitled to an offset for fuel excise taxes paid, whether it can demonstrate that portions of its revenues relate to services not subject to the flight excise tax, and whether plaintiff is subject to penalties for willful failure to collect and pay the tax.
CONCLUSION
For the reasons stated above, we deny plaintiff’s motion for summary judgment and grant in part and deny in part defendant’s cross-motion for summary judgment. The parties shall submit a joint status report on how they would like to proceed by March 30, 2012.
Notes
. These facts are derived from the parties’ proposed findings of fact and are uncontested unless noted.
. All citations to "I.R.C.” refer to the Internal Revenue Code of 1986, as amended, within Title 28 of the United States Code.
. This exemption thus does not cover plaintiff's operations during the disputed period. See Pub.L. 109-59, § 11124(b),
.While the facts relating to the existence of a separate Charter Department are contested, no Air Transportation Excise Tax was levied on those flights. Consequently, we view these facts as neither necessary nor material to establish whether plaintiff's tour flights, on which excise taxes were levied, operate on an established line.
. Plaintiff has provided twenty exhibits spanning hundreds of pages to the court. These exhibits are consecutively paginated, and for the sake of clarity, we refer to the exhibits collectively ("Pl.’s Ex.”), and cite to individual page numbers instead of exhibit numbers.
. I.R.C. § 4081 levies an excise tax on aviation fuel.
.Corollary to this proposition, plaintiff relies on Revenue Ruling 66-301, 1966-
. January 2 and January 7 are unaccounted for.
. On January 3, 2004, a two-hour time block in the morning is labeled as "weather.” On January 12, 2004, although a picnic tour did not depart at 9:00 AM, one "Escape" tour and one "Freedom” tour left at 9:00 AM. On January 24, 2004, although a picnic tour did not depart at 9:00 AM, a Freedom tour departed. January 31, 2004, had multiple time slots in the morning labeled as "weather.”
. In fact, on one of these days, plaintiff flew multiple picnic tours instead of the Sunset tour, and on the other day, plaintiff did fly a Sunset tour, but did so at 3:45 PM.
. The exact dates provided are August 5, 2004 through August 30, 2004. Additionally, the logs for August 13, 21, and 22, 2004 are missing. Plaintiff has not attempted to supplement the exhibit.
. On August 29, 2004, the Sunset tour left at 6:15 PM.
. Section 4261 (d) also provides an exception for payments under I.R.C. § 4263(a), which concerns payments made outside of the United States and is of no application in this case.