In a unanimous decision issued May 27, 2026, the United States Court of Appeals for the Sixth Circuit reversed a $39 million judgment the government had obtained against Flight Options, LLC, an Ohio-based fractional-share jet company. The court held that the 7.5% federal excise ticket tax imposed on “transportation by air” under IRC Section 4261 applies only to flight-by-flight usage charges and does not extend to the fixed monthly management and overhead fees Flight Options charged its fractional jet owners. The decision rejects the IRS’s position that the “reasonably necessary” costs of running a fractional jet program are amounts paid “for transportation” within the meaning of the statute.
Background and the IRS’s Enforcement Position
Flight Options operated two programs: a fractional-share jet ownership program and a Jet Club Membership program. Under the fractional-share jet ownership program, clients purchased a percentage interest in a specific aircraft and paid both a fixed monthly management fee covering hangar leasing, inspections, repairs, insurance, pilot salaries, and program administration, and variable usage fees for each flight actually taken. Under the Jet Club Membership program, clients paid an upfront fee for the option to purchase flight time on company-owned aircraft. The fractional-share industry had collected the ticket tax on usage fees since 1992, when the IRS directed NetJets’ predecessor to do so through a technical advice memorandum.
However, the IRS had never applied the tax to fixed management and overhead fees. That changed in 2004, when the IRS issued a second technical advice memorandum asserting that the tax extended to those fees as well. The IRS then began auditing the industry, assessing approximately $24 million in uncollected taxes against Flight Options for the period from January 1, 2009, through March 31, 2012, plus interest and penalties, for a total of approximately $39 million. Flight Options sued to abate the assessment. A magistrate judge, relying on IRS revenue rulings, found for the government, concluding that the fixed fees were “amounts paid for transportation by air” and that Flight Options should have known to collect the tax on them.
The Sixth Circuit’s Primary Analysis
The court’s reversal rested on a textual reading of the statute, reinforced by its context, the implementing regulations, and two taxpayer-protective canons of construction. Beginning with the statute’s own label of a “ticket tax,” the court observed that tickets are purchased for specific flights, not for the ongoing overhead of running an aviation business. The operative statutory language taxes the “amount paid for taxable transportation of any person,” which the court read as referring to the fare paid for a specific journey from one point to another. The court noted that Congress chose the term “transportation” rather than “transportation services,” a deliberate narrowing that excludes the management infrastructure that makes transportation possible.
The court’s analysis also drew from the relevant Treasury regulations. The Treasury regulations expressly exclude from the tax charges “in connection with the charter of an air conveyance” for parking, de-icing, sanitation, dockage, wharfage, and similar items services just as “reasonably necessary” for flight as anything covered by Flight Options’ fixed fees. The fact that the IRS had long recognized those charges as outside the tax directly undermined its broad “reasonably necessary” test. As the court put it, if every cost reasonably necessary for flight were taxable, the entire purchase price of a fractional jet share would qualify.
The Notice Requirement and the Penalties Issue
The court found a second ground for reversal. Under the Supreme Court’s decision in Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978), the IRS cannot impose secondary collection liability on a third-party tax collector unless that collector had “precise and not speculative” notice of its withholding obligation. The court found that Flight Options had no such notice. The statute never specified how fixed charges could be allocated between taxable domestic transportation and nontaxable international transportation. The IRS had issued two conflicting technical advice memoranda, applying the tax only to usage fees in one and extending it to fixed fees without any allocation methodology in the other.
Additionally, the IRS had repeatedly settled or conceded fixed-fee assessments when challenged, while acknowledging internally that “specific advice was needed” to clarify the law. No revenue ruling, binding regulation, or published judicial decision had ever held that management and membership fees fell within the tax as of the relevant period. Because the government had not provided Flight Options with the precise guidance required before enlisting it as an involuntary tax collector, the court held the government could not hold it secondarily liable after the fact.
The Flight Options decision is the first circuit court ruling to hold that fixed management and overhead fees charged by fractional-share jet operators fall outside the Section 4261 ticket tax. It directly contradicts the Fifth Circuit’s 2016 decision affirming excise tax liability for Bombardier’s Flexjet program on similar fees, creating a circuit split on the issue. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.