Illinois Circuit Court Holds Fractional Ownership Of Aircraft Subject To Use Tax

In a case of first impression in Illinois, a circuit court determined that the holding of a fractional ownership interest in an aircraft was subject to use tax.1 The court determined that the company holding the ownership interest in the aircraft purchased tangible personal property at retail from a retailer. Based on the court's assessment of the substance of the transaction, the company had rights or powers over the aircraft that were incident to the ownership of an aircraft. Furthermore, in the court's estimation, the aircraft was sufficiently present in Illinois to establish substantial nexus between Illinois and the aircraft.

Background

The company, a Delaware corporation that operated as an aviation company with headquarters in Illinois, was a wholly-owned subsidiary of Terlato, a wine company. The company purchased from Bombardier Business Jet Solutions (Bombardier) an 18.75 percent fractional interest in a business jet through Bombardier's Flexjet program for over $2.9 million. In order to participate in the Flexjet program, the company was required to enter into a series of governing documents, including a purchase agreement, joint ownership agreement, management agreement and a dry lease agreement.

The purchase agreement set forth the company's acquisition of its fractional interest in the aircraft and also limited its ownership interest.2 The management agreement governed the company's relationship with Bombardier Aerospace Corporation (Manager), the entity that maintained the Flexjet aircraft and controlled their day-to-day operations. Manager made the flight arrangements, provided the pilots and insurance, and made the aircraft or a substitute available to the company for 150 hours per year.

The joint ownership agreement governed the company's relationship with the other owners of fractional interests in the aircraft.3 Each owner's use of any Flexjet aircraft was limited to its "allocated hours" as specified in the management agreement.4 The owners were entitled to a pro rata share of any depreciation, gain, loss, deduction, credit or other tax benefit. The company took a pro rata share of depreciation on the aircraft for federal income tax purposes. The dry lease agreement was between Manager and the hundreds of owners of interests in Flexjet aircraft, including the company. The owners agreed to pool their aircraft so that Manager could substitute one aircraft for another. Each owner was entitled to be flown in another aircraft on an equal time, as available, first come, first served basis.

As part of the Flexjet program, the aircraft in which the company specifically held the fractional ownership interest was flown on 713 flights during the two-year tax period and 56 (7.85 percent) of these flights were to or from...