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Tax Assessed Against Managers Of Fractionally Owned Aircraft Is Constitutional, But Cannot Be Retroactively Applied
June 28, 2012 | Bulletin No. 1003162.1
A California court of appeal recently upheld the constitutionality of legislation that levies a property tax on fractionally owned aircraft to be assessed in the county(ies) where the aircraft land. However, the court of appeal concluded the retroactive application of the new tax is unconstitutional. (NetJets Aviation, Inc. v. Guillory (--- Cal.Rptr.3d ----, Cal.App. 4 Dist., June 21, 2012).
Fractional aircraft owners buy fractional interests in a specific aircraft and receive a certain number of hours to use the aircraft based on their ownership interests (analogous to a time-share in aircraft). The fractional interests are managed by managers who furnish pilots, obtain insurance, maintain the aircraft and administer reciprocal lease agreements.
California law provides that “general aviation aircraft are taxed as personal property in the county in which they are hangared.” Taxation of commercial aircraft is “based on an allocation formula that considers the time the aircraft spends in California (whether on the ground or in flight) and the number of arrivals and departures the aircraft makes within California.” Due to the hybrid nature of fractionally owned aircraft, they were not taxed by any authority in California before the Legislature enacted new legislation in 2007 (“Legislation”) to assess a personal property tax for fractionally owned aircraft. The tax is not assessed against the individual fractional owners but against the managers of fractionally owned aircraft.
The Legislation added certain sections to the Revenue and Taxation Code, including sections 1160 and 1161, which institute the tax and provide an allocation system for calculating the tax due on fractionally owned aircraft. Section 1160 defines “fractionally owned aircraft” as “those aircraft registered with the Federal Aviation Administration [(“FAA”)].” Section 1161 provides, in part, that “fractionally owned aircraft that has situs in this state shall be assessed on a fleetwide basis to the manager in control of the fleet and a notice of that assessment shall be issued to that manager.” Section 1161 mandates that not only will the tax be assessed from 2007 forward but also “for preceding fiscal years for which an assessment was not made, and for which a statute of limitations either does not apply or has been waived.” A fleet establishes situs in California “if an aircraft within the fleet makes a landing in the state.”
A fleet will be assessed on an allocated basis. An allocation factor must be established in each county for each fleet type for which situs has been established. The “allocation factor is a fraction, the numerator of which is the total number of landings and departures made by the fleet type in the county during the previous calendar year and the denominator of which is the total number of landings and departures made by the fleet type worldwide during the previous calendar year.” Under the new law, a fleet of fractionally owned aircraft is taxed by the county where the fleet lands.
NetJets Aviation, Inc., NetJets International, Inc., NetJets Large Aircraft, Inc., Flight Options, LLC, CitationShares Management, LLC, and Bombardier Aerospace Corporation (collectively, Managers”) are managers of fractionally owned aircraft fleets who filed lawsuits to challenge the Legislation. The cases were consolidated for the purpose of trial. The trial court held the Legislation is unconstitutional because it unlawfully imposes the tax “on managers who neither own, control nor possess the aircraft in question” and “it is unconstitutionally retroactive.”
The court of appeal, reversing the trial court, in part, held that the tax on fractionally owned aircraft is constitutional but that the new assessment cannot be applied retroactively. Pursuant to the Legislation, taxes on fractionally owned aircraft are assessed against the manager of a fleet of fractionally owned aircraft. Revenue and Taxations Code section 405, subdivision (a), “requires each county assessor to ‘assess all the taxable property in his county, except state-assessed property, to the persons owing, claiming, possessing, or controlling it on the lien date.’” The court found that the Legislature could assess the tax against the managers because they control the fleets.
The Managers control the aircraft within the meaning of sections 405 and 1161 even if they do not “own” the aircraft. The fractional aircraft owners cannot transfer their interest without the Manager’s consent and they can only use the aircraft within the confines of the fractional ownership program. The Managers retain the right to sell additional shares in the aircraft and retain possession of the aircraft except when in use by a fractional owner. They obtain insurance for and maintain the aircraft, provide pilots and staff under most circumstances, and handle scheduling for use of the aircraft. The Managers not only retain the right to use the aircraft when not in use by the fractional owners but they also make money on the aircraft that they do not share with the fractional owners. Fractional owners are not guaranteed use of a certain aircraft and the Managers retain the right to transfer an owner’s interest in one aircraft to another.
The court of appeal rejected the Managers’ argument that the fractionally owned aircraft do not have a sufficient connection to California to justify the imposition of a tax on them. The aircraft in the fleets “have a substantial nexus with California.” No manager had fewer than 13 arrivals and departures each day in California and the average was as high as 181 per day, which represented between 5 and 13 percent of their worldwide totals. The tax is fairly apportioned because it is based on arrivals and departures in California as measured against a fleet’s arrivals and departures worldwide. The tax does not discriminate against interstate commerce and it is fairly related to services provided by California such as police and fire protection. The court of appeal found that the tax is constitutional under both the commerce clause and the due process clause.
The court, however, found that because “the Legislation constitutes a new law regarding the assessment of taxes against the managers in control of fractionally owned aircraft fleets” it cannot be applied retroactively. Before the Legislation was passed, taxes were not assessed against any party involved in the ownership or management of fractionally owned aircraft. The court held that “the new tax imposed by the Legislation may not constitutionally be applied retroactively” and therefore the portion of section 1161 which purports to apply the tax retroactively is unconstitutional. Therefore, inasmuch as the Legislation was enacted in 2007 as an urgency measure, such taxes are valid for 2007 and later years, but not for prior years.
If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.
Brett L. Price | 661.864.3800
Jeffrey L. Massey | 916.321.4500