Tennessee Court Rules Aircraft Purchase And Lease Qualifies As Exempt Sale For Resale

In a much-anticipated decision on the tax exemption for aircraft sales and purchases, a Tennessee trial court has ruled that a taxpayer's purchase of an aircraft outside the state and subsequent transportation into the state is exempt from Tennessee use tax as a sale for resale when the aircraft was leased to a third party. In this case the aircraft was leased to an affiliate of the taxpayer. CAO Holdings Inc. v. Roberts, Davidson County, Tennessee, Chancery Court Dkt. No. 06-719-II (Sept. 29, 2011).

The case was tried on remand after the Tennessee Supreme Court reversed a summary judgment ruling in favor of the taxpayer by the trial court that had been affirmed by the Tennessee Court of Appeals. CAO Holdings, Inc. v. Chumley, No. M20081679COAR3CV, 2009 WL 1492230 (Tenn. Ct. App. 2009). The Supreme Court found that there were genuine issues of material fact precluding summary judgment as a matter of law and remanded the case for trial on these merits. CAO Holdings, Inc. v. Trost, 333 S.W.3d 73 (Tenn. 2010).

Background

The taxpayer purchased the Cessna aircraft in Kansas and immediately leased the aircraft to an affiliated entity before bringing it to Tennessee. The affiliated entity managed and operated the aircraft and provided air transportation services to third parties. Despite the relatively straightforward application of the Tennessee sale for resale exemption under these facts, the Tennessee Department of Revenue challenged the transaction, arguing that the taxpayer's use of the aircraft was inconsistent with the lease transaction and, instead, the taxpayer was the actual user of the aircraft. The Department argued in the alternative that the transaction should be disregarded because it lacked "economic substance." Following a bench trial and briefing, the trial court rejected both of the Department's arguments and entered a judgment in favor of the taxpayer.

At trial, the taxpayer offered evidence that the aircraft was used exclusively for leasing to the affiliated management company. The proof included a nonexclusive lease agreement between the taxpayer and the management company, time-share agreements between the management company and third party users of the aircraft, invoices from the management company to the time-share users, documentation of payment of the invoices and deposits to the management company's separate bank account, and the management company's payments of the amounts due to the taxpayer under the lease on which...