Michigan – Lease of Aircraft to Related Entity Not a Taxable Use

SALT Report 1823 – The Michigan Court of Appeals issued a ruling regarding a Taxpayer’s purchase and subsequent lease of an aircraft to a related entity.  In this case, the Taxpayer purchased the aircraft and ceded total control to the lessee who was already in possession of the aircraft prior to the Taxpayer’s purchase. The lessee was responsible for all repairs, insurance, and taxes and bore the risk of loss of the aircraft.

During a subsequent audit, the Taxpayer was issued a use tax assessment in the amount of $414,000, plus a penalty of $103,500 and interest, for use tax on the purchase of the aircraft.  The Taxpayer filed a petition with the Michigan Tax Tribunal, stating that it was not subject to the use tax, as it never had “possession or control of the aircraft” as required by the Use Tax Act.

The Court concluded that the Taxpayer did not “use” the aircraft as it “did not have possession of the aircraft and did not, at any time, take responsibility for such things as repairs and maintenance, insurance, potential benefit of warranties, or any options for use.” As a result, the Taxpayer was not liable for Michigan use tax and the use tax assessment was dismissed.

For Further Information:

Michigan Court of Appeals – Docket Number 306773