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Bush Pilots Hit Hard By New Interpretation Of Tax Law

By | February 19, 2014

Alaska air taxi operators say the IRS has re-interpreted tax law for their industry, hitting some Bush pilots with tax bills of up to a million dollars. Alaska’s federal lawmakers are asking the revenue office to back off until they get some answers about what the rules are. The unexpected burden is driving some air carriers into debt or out of business entirely.

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At issue are excise taxes, those sums you see on an airline ticket receipt, just before the total. On an airliner, the passenger usually pays a tax of 7.5% of the price, plus $4 per flight, and the airline passes it along to the IRS.

Sitka Air service operator Scott Harris thought his Cessna 185 and de Havilland Beaver flights were exempt, because the tax has an exception for small aircraft. But there’s a catch, an exception to the exception. IRS publications say flights in small aircraft are taxable if they’re on an established route, which the IRS defines as a route operated “with some degree of regularity.”

Understanding, or misunderstanding, that term has cost Harris a pile of cash.

“‘Some degree of regularity.’ This is an IRS term that means places you go to frequently, apparently,” he says.

In the summer, Harris is busy, and he does fly repeatedly to a number of destinations – a few communities, certain lodges, favorite spots for sports fishermen. He says he never imagined the excise tax applied to flights like that. He says he spoke to IRS personnel about it years ago and no one told him otherwise. Then, in 2011, he got audited. The IRS found he went to a few destinations with “some degree of regularity” over three years and hit him with a $250,000 bill. Harris says he’s read the regulations and he’s still astounded by the IRS interpretation.

“For us there’s probably two paragraphs that cost me a quarter of a million dollars,” he says. “And they’re so vague! I don’t know how anybody could read these and say, ‘Yep, you’re going to a lodge in Southeast Alaska, you gotta be taxed.’”

He considered appealing, but the IRS said that would open him up to greater scrutiny.

“So the unveiled threat to me was, ‘Yeah, sure appeal. Go ahead. And when we come back to check it again we’re going to look at everything your float planes do, everywhere they go, how often they go there and we’re going to go back seven years.’ So imagine the dollar value in that. It’s insurmountable.”

Soon, he says, IRS enforcement officers were calling, asking for a list of his assets. Harris says that was it for him. He took out a loan and paid the full $250,000.

“We do government work here. We do lots of things. I can’t afford to have my name out there in public as a tax evader, with a tax bill and being levied, so there was no negotiating,” he says,

The IRS responded to questions for this story by emailing links to publications on its website. Alaska’s U.S. senators and Congressman Don Young have written joint letters to the IRS for two years. They say they’ve heard of IRS agents bullying air carriers while refusing them clear
guidance.

In 2012, the IRS did write a memo addressing a few scenarios Bush pilots face, and it draws some interesting distinctions. It says carriers don’t need to collect the tax for sightseeing on a small plane, even if they land for, say, bear-viewing. If the passengers deplane and board a boat to view bears, that’s still not taxable. But if they deplane to fish, the IRS says that’s a taxable flight. At least, it is the way many flight services sell it, by letting customers choose among several locales and offering to go every day. That constitutes “some degree of regularity,” according to the IRS.

Jane Dale of the Alaska Air Carriers Association says even after the 2012 memo, the regulations are too murky for her organization to give much guidance to its members. At one point, half of the audited carriers she knew of had been forced to sell or shut their doors. Dale’s group is urging
the IRS to take a softer approach.

“We would encourage education over audits,” Dale says. “It would likely take less manpower by the agency, and with clear regulations, certainly groups like the Alaska air Carriers association would help education and put that information out.”

Jack Barber, of Alaska Air Taxi on Lake Hood in Anchorage, says his IRS audit eight years ago hit like a thief in the night. He didn’t have the $240,000 the service said he owed. He filed for bankruptcy protection. Last he looked, the bill had climbed to over $800,000. Barber says the battle has cost him his financial security and, he says, his marriage.

“It’s about destroyed my life,” he says.

He says he still isn’t sure when to collect the tax but he’s changed his business. He took down all the brochures that list his flight-seeing rates, lest those be seen as a schedule. And he tries not to fly anywhere with any degree of regularity. The term itself aggravates him.

“It’s an overreach on the IRS’s part. You know, if a comet comes flying by earth once a year, you might think that’s some degree of regularity,” he grumbles.

In a letter to Alaska’s federal lawmakers in December, the acting IRS commissioner said the matter is under review, and he pledged to have results soon.

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