An Administrative Law Judge has held that a company that owned two aircraft and leased them to officers and family members of a related company was not a sham and should not be disregarded for sales and use tax purposes. Matter of WRBC Transportation, Inc., DTA No. 822722 (N.Y.S. Div. of Tax App., Sept. 16, 2010). The ALJ rejected the arguments of the Division of Taxation that the Petitioner was so dominated and controlled by its parent corporation that the use of the Petitioner’s aircraft by its parent and the parent’s officers and employees amounted to “self use” rather than commercial use.  

WRBC Transportation (“Transportation”) was a wholly owned subsidiary of a privately held financial services company, W.R. Berkley Corporation, Inc. (“WRBC”). Transportation owned all the shares of Interlaken Capital Aviation Holdings, Inc., which in turned owned all the shares of Interlaken Capital Aviation Services, Inc. (“Interlaken”). The companies had interlocking boards of directors and officers. During the audit period, Transportation owned a helicopter and a jet, which were registered in its name and stored in a hangar in New York State owned by Interlaken. Transportation charged WRBC for all flights. The charges were considered revenue to Transportation and expenses to WRBC on their respective books and records, although no funds were transferred. The charges were computed by multiplying the number of flight hours by a fixed rate, which was based upon certain of the costs of operating the aircraft for the previous year. Revenue and expenses were reported via journal entries, which were eliminated when the entities’ federal returns were consolidated. Transportation had no bank accounts of its own. Interlaken paid all of the bills related to the operation expenses of the aircraft, and treated the management fees owed to it by Transportation as an item of revenue, while Transportation treated the fees as an expense, but again no funds moved between the two entities. Interlaken provided all of the services needed to maintain, manage and operate the aircraft, including all accessory equipment, and had approximately 26 employees to perform those services. Interlaken was responsible for hiring all of the pilots and other personnel, approving all flights, administering scheduling and documentation and providing dispatch services. The only uses of the aircraft were for the officers, directors, employees and family members of WRBC. No sales or use tax was paid by Transportation on the aircraft.  

New York’s law provides an exemption from the sales and use tax for commercial aircraft primarily used in intrastate or interstate commerce, and an exemption from the tax otherwise due on the service of maintaining or repairing tangible personal property for services rendered with respect to commercial aircraft. Tax Law §§ 1115(a)(21), 1105(c)(3)(v). During the years in issue, “commercial aircraft” was defined as aircraft used primarily to transport persons or property for hire, as well as to transport passengers’ tangible personal property. Tax Law § 1101(b)(17) (in effect during the years in issue).  

The ALJ held that Transportation’s aircraft met the definition of commercial aircraft, and that adequate compensation was paid by WRBC for its use, so that Transportation was entitled to the sales and use tax exemption. He then considered – and rejected – the Division’s argument that the corporate form of the entities should be disregarded, whether that argument was framed as “piercing the corporate veil” or “substance over form” or “alter ego.” He found that the company had a legitimate business purpose, and that its desire to limit liability made business sense. Transportation carried on its business, and there was no evidence it was set up as a sham or for the purpose of tax avoidance. The ALJ stated that, while courts will disregard the corporate form when necessary to “‘prevent fraud or to achieve equity,’” no such situation was present. The facts that the aircraft were used exclusively by officers, directors, employees and family members of WRBC, that the compensation paid covered only the operating costs and that WRBC had funded the purchase of the aircraft did not require that the corporate form be disregarded. While the ALJ noted that the Division “seems to allege” that Transportation was formed for the purpose of tax avoidance, there was no evidence in the record to support such a contention, and the history of the company indicated otherwise: Transportation had been in existence since 1983; it owned various aircraft since 1996; and it had a service contract with Interlaken, which had also entered into similar service agreements with third parties. The ALJ also did not appear to be troubled by Transportation’s lack of a bank account, noting that its contractual arrangement with Interlaken obviates the need for one.  

Additional Insights

Since the years at issue in this case, the definition of exempt “commercial aircraft” has been amended, and it now excludes aircraft used primarily to transport employees, officers, members and others associated with affiliated persons. See “Amendments Affecting the Application of Sales and Use Tax to Aircraft, Vessels and Motor Vehicles,” TSB-M-09(4)S (N.Y.S. Dep’t of Taxation & Fin. May 12, 2009). However, the principles articulated in this case are still of great interest. In many areas of the tax law, including Article 9-A, the Division’s auditors have argued that related corporations should be disregarded, and often the facts cited are very similar to the facts in this case: interlocking officers and directors; intercompany payments made via journal entry, without actual transfer of cash; and all transactions of the taxpayer conducted with related parties. Here, the ALJ reviewed all of those facts and realized that they are normal indicia of business relationships; without other, real evidence that a company is a sham or was formed for tax avoidance rather than business purposes, its existence should be respected.