Aircraft Owner Not Eligible for Lessor Exception

Tuesday, July 1st, 2014

An airplane.

The Michigan Court of Appeals recently ruled that a taxpayer was not eligible for the lessor exception from tax on its purchase of an airplane.

The taxpayer was an LLC created to purchase an airplane. It entered into an agreement to lease the plane to a related entity. The related entity was responsible for all fuel, insurance, and operational costs and for repairs to the plane, regardless of who used the plane. All replacement parts became the taxpayer's property upon installation. The related entity paid the taxpayer $80 per flight hour. The taxpayer also agreed to lease the plane to the president of the related entity. The president was only required to pay a per hour fee and was not responsible for any other costs. The taxpayer did not advertise leasing services and did not lease the plane to anyone else.

Michigan allows a lessor to choose to pay tax on receipts from the lease of tangible personal property instead of paying tax on the lessor's purchase of that property. The lessor must be engaged in the business of renting or leasing property to others. To be engaged in the business of leasing, a taxpayer must be engaged in the business of selling activities with the object of gain, benefit, or advantage.

The Court held that the taxpayer did not show that it was engaged in the business of leasing the plane to others. The leases with the related entity and its president were unreasonable: the fee charged would not even cover the cost of the plane, let alone make a profit. The taxpayer also did not advertise its services. The Court concluded that the taxpayer did not lease the plane with the object of gain, benefit, or advantage. The taxpayer was therefore not eligible for the lessor exception.

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