However, a recent Supreme Court ruling now instructs federal courts to not defer to Treasury Regulations interpreting “ambiguous” statutes.  Unsurprisingly, many tax laws are ambiguous.  Business aircraft owners/operators have new tools to respond to aggressive tax enforcement, including the IRS’s new enhanced business aircraft audit programme.

Under the old rule, called ‘Chevron deference’, after the 1984 Supreme Court decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., federal courts were required to defer their own judgement to a federal agency’s reasonable interpretation of an ambiguous law passed by Congress. However, the Supreme Court has overruled Chevron by its decision in Loper Bright Enterprises v. Raimondo, where the Supreme Court held that federal courts are required to exercise their independent discretion in deciding whether a federal agency has acted within its statutory authority, and federal courts shall not defer to a federal agency’s interpretation of the law simply because a statute is ambiguous.  This opens the door to new pushback on overly broad aircraft tax regulations and the opportunity for taxpayers to improve the tax treatment of their aircraft.

 A common dispute between the IRS and business aircraft owners/operators is whether a business flight is for “entertainment” purposes.  The statute disallows tax deductions for aircraft related expenses when the aircraft is used to provide transportation to certain specified Individuals (eg, officers, directors and 10% owners) for entertainment  purposes.  However, the Treasury Regulations define the term “entertainment” and require that an “objective test” be used to determine whether an activity is entertainment.  Now, federal courts shall not defer to the Treasury Regulations’ definition of “entertainment” nor its requirement to use an “objective test” in determining whether an activity is “entertainment”.

Under another Treasury Regulation, individuals are imputed with fringe benefit income for their personal use of business aircraft, either at the relatively modest, and preferred, ‘SIFL’ rate or the aircraft’s hourly charter rate.  If a company does not report the fringe benefit income in a timely manner, the Treasury Regulations require that the hourly charter rate be used. Post-Chevron, however, a federal court would not be required to impose the higher charter rate on the taxpayer just because the Treasury Regulations say so.

Business aircraft owners/operators undergoing tax audits or in litigation have additional defences.  During a tax audit, the IRS Revenue Agent will no longer be able to stand behind a Treasury Regulation as the justification and final word on their tax assessment position.  For IRS tax assessments that are appealed to the IRS Office of Appeals, the appeals officer will have a more difficult, less IRS favourable, “hazards of litigation” analysis that will lead to more taxpayer settlements. For tax cases headed to court, taxpayers will try to litigate where the taxpayers think that the independent discretion of a particular court will be to the taxpayer’s advantage.

The recent Supreme Court decision to limit Chevron deference is a significant shift in how federal courts interpret ambiguous tax statutes affecting business aircraft owners and operators. With newfound judicial independence, taxpayers now have a stronger position to challenge IRS interpretations and regulations, particularly concerning deductions for aircraft-related expenses. This change not only enhances taxpayer rights during audits but also introduces greater potential for negotiated settlements, signaling a pivotal moment in the regulatory landscape for business aviation taxation.

Gary I. Horowitz is an aviation and tax attorney representing aircraft owners and operators in the purchase, sale, exchange, lease, management, finance, ownership and use of business and commercial aircraft. A founder, member of HCH Legal, he advises on and structures the acquisition and operation of aircraft for federal and state tax efficiency.

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