Michigan – Aircraft Leased to its Subsidiary is Taxable

SALT Report 1214 – In November 1996, a Michigan corporation (taxpayer) purchased an aircraft which it then leased to its subsidiary, AeroGenesis Aviation, Inc. for use in AeroGenesis’ cargo and passenger transport business.  AeroGenesis was certified to operate as a carrier under Federal Aviation Administration regulations, but the taxpayer was not.

In December 1996, the Michigan Department of Treasury notified the taxpayer of a 6% use tax on the aircraft.  The taxpayer responded that the aircraft was exempt because it was “being used by a domestic air carrier in the scheduled transport of passengers.”  The taxpayer provided supporting documentation, and the MDoT informed the taxpayer that the aircraft was exempt and that the taxpayer would not be billed.  Subsequently, the MDoT determined they had incorrectly allowed the taxpayer to share the exemption with AeroGenesis and sent a final assessment for taxes due.

The taxpayer argued that both entities should be considered one company when determining the tax exemption.  However, the court denied the exemption based on the terms of the lease agreement which stated that the taxpayer would retain control of the aircraft, despite its lease to AeroGenesis. Further, the taxpayer was required to service, maintain, and repair the aircraft, and AeroGenesis was barred from making any alterations.
Since the taxpayer did not relinquish control of the aircraft they did not qualify for the exemption due AeroGenesis. Furthermore, the taxpayer could not claim that the Michigan Department of Treasury was estopped from making its assessment due to a letter it initially sent regarding the exemption because the letter was received in 1997 and the taxpayer purchased the aircraft in 1996.
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