CLIENT ALERT

Reinstatement of BARR Program
by
Chris Younger

The FAA had attempted to modify and severely restrict the availability of the BARR program by requiring that aircraft owners provide it with a “valid security concern” to enroll in the program.  The Department of Transportation’s budget, which was passed last month, included language prohibiting the Federal Aviation Administration (FAA) from continuing to implement the “valid security concern” prerequisite to aircraft owners and operators’ ability to opt out from having their movements broadcast over the Internet.

The FAA is now accepting new BARR program blocking requests.  Detailed information regarding how to block or unblock an aircraft pursuant to the BARR program is available on the website of the National Business Aviation Association at: http://www.nbaa.org/ops/security/barr.

Please contact us with any questions regarding the BARR program or if you need our assistance with preparing a BARR.

This Client Alert is a source of general information for the readers thereof.  Its content may not be construed as legal advice.  No reader of this Client Alert should act on the information contained herein without consulting competent counsel to advise such reader regarding matters relating hereto.

IRS CIRCULAR 230 DISCLOSURE:  To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this client alert is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

CLIENT ALERT – August 8, 2011

Reinstatement of Federal Transportation Excise Taxes

by

Keith G. Swirsky

As you all know from reading our prior client alert, Congress failed to extend federal excise tax legislation prior to July 22^nd, and it expired at midnight on July 22, 2011.  On August 5, 2011, the Senate passed the House Bill (H.R.2553) to extend federal excise taxes until September 16, 2011, and the Bill was signed by President Obama.  The reinstatement is retroactive to July 23, 2011 at 12:01 a.m.

On August 5, 2011, the IRS issued a press release stating that since the reinstatement of the federal excise tax was retroactive, there would be no refund of federal excise taxes on tickets bought before the expiration on July 23^rd for flights after that date.  Accordingly, neither air carriers nor the IRS will issue refunds to passengers for such tickets.  Additionally, the IRS stated that airlines have a grace period from Saturday, July 23^rd, through Sunday, August 7^th, during which time they will be granted relief with respect to federal excise taxes that were not collected due to the lapse in the federal excise tax legislation. 

The IRS does intend to provide further guidance to airlines which will allow for an orderly restart of the collection of federal excise taxes and to address other unanswered questions.  Airlines have until 12:01 a.m. on today’s date, Monday, August 8, 2011, to resume collection of federal excise taxes. 

Federal excise taxes are currently set to expire again on September 16, 2011.  Stay tuned for more information.

This Client Alert is a source of general information for the readers thereof.  Its content may not be construed as legal advice.  No reader of this Client Alert should act on the information contained herein without consulting competent counsel to advise such reader regarding matters relating hereto.

IRS CIRCULAR 230 DISCLOSURE:  To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this client alert is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

by Chris Younger

The Federal excise tax on commercial air transportation (FET) and the additional fuel tax on noncommercial aviation (Fuel Tax) expired as of midnight on July 22 due to the failure of Congress to pass a bill extending the Federal Aviation Administration’s (FAA) programs, taxes and fees.    Click here for more………

CLIENT ALERT

More Restrictions on Aircraft Related Tax Deductions May Be Ahead –

Time to Return to the Horse and Buggy?

by

 Keith Swirsky and Chris Younger

Recent remarks by President Obama have caused considerable consternation within the business aircraft community. The President stated in a June 29 press conference that “if we choose to keep a tax break for corporate jet owners . . . , then that means we’ve got to cut some kids off from getting a college scholarship.  That means we’ve got to stop funding certain grants for medical research.  That means that food safety may be compromised.  That means that Medicare has to bear a greater part of the burden.”  The President went on to state that “those are the choices we have to make.  I think it’s only fair to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys.”

The President’s remarks stemmed from the ongoing debate regarding the increase in the U.S. debt ceiling and long term strategy for reducing the federal budget deficit and overall U.S. debt.  The larger issue under discussion was whether as part of that strategy the depreciation schedules for depreciable assets should be lengthened.  In that context, the debate regarding the depreciation of corporate aircraft apparently focused on an increase in the depreciation schedule for such aircraft from five to seven years.  The irony in all of this rhetoric is that the President championed the use of accelerated depreciation in the context of aircraft purchases as part of his economic stimulus package that extended the availability of so-called “bonus” depreciation through the end of this year and increased the amount of such depreciation from 50% to 100% of the purchase price of a qualifying aircraft.

So just what does this mean for you, the corporate aircraft owner?  For the moment, not a whole lot.  These discussions all address changes to the tax code that according to the parties involved including the President and key members of Congress, would not take effect until 2013 at the earliest.  Therefore it does not appear that the President’s politically charged remarks and any resulting legislation that is part of a larger deficit reduction package will have any immediate effect on the ability of a corporate aircraft owner to deduct expenses relating to such aircraft.

This, however, still leaves corporate aircraft owners in the position of needing to ensure that aircraft costs are in fact deductible and are not subject to many existing limitations in the tax code that the President did not address in his remarks.  These include limitations relating to hobby losses, passive activity losses, personal and recreational use of corporate aircraft, and “qualified business use” requirements.  These and other limitations already exist and were presumably designed to “close” the perceived tax loopholes that President Obama has repeatedly referred to in his comments on the subject.  Thus, even if any change to the rules regarding deduction of aircraft expenses is several years away, there are still important limitations on such deductions that every corporate aircraft owner must deal with now.

This Client Alert is a source of general information for the readers thereof.  Its content may not be construed as legal advice.  No reader of this Client Alert should act on the information contained herein without consulting competent counsel to advise such reader regarding matters relating hereto.

IRS CIRCULAR 230 DISCLOSURE:  To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this client alert is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Should I Make My Aircraft Available to a Management Company for Charter

Board of Directors Briefing - Charge-Backs for Personal Use

For more information, please click here.

January 3, 2011 by Thomas W. Wilcox

On December 28, 2010, the United States Court of Appeals for the D.C. Circuit denied the Union Pacific Railroad Company’s petition for review of the STB’s January, 2010 decision awarding U.S. Magnesium LLC $1,000,000 in reparations and future rate relief from the common carrier rates UP established for two movements of USM’s chlorine.  USM had challenged the reasonableness of the rates in STB Docket NOR 42114, under the Three Benchmark framework adopted by the Board in Simplified Standards for Rate Cases, STB Ex Pate No. 646 (Sub. No.1).  The opinion and order were issued by the court in Case 10-1019, Union Pacific Railroad Company v. Surface Transportation Board.  GKG Law, PC was counsel for USM before the STB and as the intervenor in the D.C. Circuit proceeding.  Set forth below are several comments and observations on the court’s opinion and the underlying STB decision.

UP’s appeal challenged the Board’s selection of USM’s comparison traffic groups for the Three Benchmark rate analysis.  Under the Three Benchmark process, the parties – using data provided by the STB - assemble and submit groups of movements that they believe are most comparable to the movements at issue in the case.  These comparison groups are submitted in a “final offer arbitration” format, and the rules provide for simultaneous rounds of evidence and a discretionary technical conference before the Board staff.  While the rules don’t require oral argument, the current Board has added it to the process. Under the rules, the Board must accept one group or the other without any modifications.  While the STB concluded in its January decision that neither party’s groups were ideal, it determined that USM’s groups provided a better gauge of the proper comparison to the issue movements.  This was primarily because UP’s groups had included “re-billed” traffic (traffic UP interchanges with other railroads as part of a longer joint line movement.  Rebilled movements are also called Rule 11 movements).  More specifically, in addition to being operationally different than the issue single line movements, UP’s rates for rebilled movements had margins that were well in excess of single line rates, indicating that the re-billed movements had much different demand characteristics than the movements at issue, which meant they were not comparable to the issue movements and therefore distorted the overall results.

There are several aspects of the case that bear on future Three Benchmark cases, particularly cases challenging the reasonableness of chlorine rates.

1.         Comparison Group Makeup – In the USM case, the Board backed away from its previous acceptance of a comparison group that contained chlorine and other TIH commodities in E. I DuPont de Nemours and Co.  v. CSX Transportation, STB Docket 42100 (served June 30, 2008).   In that case, which also involved challenges to chlorine rates, the Board accepted a mixed TIH traffic group in part based on the rationale that the operating and transportation demand characteristics of other commodities – primarily anhydrous ammonia – were reasonably comparable to chlorine.  While the STB in USM ultimately accepted USM’s mixed TIH groups, it clearly retreated from its prior acceptance of mixed TIH traffic groups in DuPont and indicated it would favor chlorine-only comparison groups in future such cases.  While this does not necessarily preclude a mixed TIH comparison group in future Three Benchmark cases challenging chlorine rates, complainants would appear to now have a heavier burden of demonstrating other TIH commodity movements are comparable to chlorine. 

2.         Rebilled Movements – The USM case was the first Three Benchmark case where rebilled movements were included in a comparison group to test the reasonableness of single line rail rates.  The Board rejected UP’s attempt to include rebilled chlorine rates primarily because UP never explained the large discrepancy between the revenues associated with the rebilled movements in its group and the revenues associated with the single line movements in the group.  The STB’s determination in the USM case does not necessarily mean that re-billed rates can never be used in a comparison group in a case challenging single line rate, but the overall comparability of such movements to the issue movements would have to be demonstrated.  

3.         STB Participation in Three Benchmark cases  - When the STB proposed the Simplified Standards it included a mandatory technical conference immediately after opening evidence in Three Benchmark cases.  This was part of the agency’s overall intent to have a collaborative process of preparing final comparison traffic groups.  However, the final version of the rules made technical conferences in Three Benchmark casesdiscretionary, and STB staff did not seek to hold technical conferences in either DuPont or USM.  Nevertheless, the Board (and the court) criticized both parties in USM for choosing not to modify their opening comparison group submissions.  Complainants in future Three Benchmark cases should weigh the pros and cons of requesting Board staff involvement during the evidentiary process, since proactive STB involvement has not yet occurred despite being a stated purpose of the Three Benchmark rules.

Click to view the Court’s opinion.  (UP v. STB)  If you have questions, please contact Thomas Wilcox at twilcox@gkglaw.com or (202) 342-5248.

GKG Law Obtains Arbitration Award in Excess of $900,000

On November 17, 2010, GKG Law’s client, YRC Logistics Global, LLC (YRC) was awarded $934,963.92 in arbitration conducted pursuant to the rules of the Society of Maritime Arbitrators.  YRC is an ocean freight forwarder that provides forwarding and logistics services between the United States and various international destinations.  YRC and DWL International, BV (DWL), a Dutch company, entered into an Agency Agreement whereby DWL agreed to serve as YRC’s logistics agent for transportation from China to the Netherlands.  Despite language in the Agency Agreement, as well as standard practices in the industry, barring DWL from releasing cargo without presentation of original bills of lading, DWL released numerous containers to one if its customers without presentation of original bills of lading. As a result, YRC’s affiliate was sued in China by the shippers of the containers.  YRC’s affiliate ultimately settled those actions for $665,389.68. 

Following DWL’s refusal to pay YRC’s settlement costs, YRC initiated arbitration against DWL pursuant to the terms of the Agency Agreement.   Although DWL initially consented to proceeding with the arbitration, DWL subsequently claimed that the Agreement had been forged by YRC.  DWL filed suit in the United States District Court for the Northern District of Illinois seeking to enjoin the arbitration.  After an evidentiary hearing involving the testimony of a handwriting expert, the district court judge concluded that the Agency Agreement was signed by DWL and was valid and binding.  Accordingly, DWL was ordered to participate in this arbitration.  Subsequently, the arbitrator issued his award in favor of YRC, which included the costs of the settlements in China, as well as all of YRC’s legal fees and costs associated with pursuing the matter in arbitration and before the United States District Court.

Canada EManifest and US Export Controls
-By Edward D. Greenberg-

The Canada Border Services Agency (CBSA), implementing legislation enacted last year, has established a requirement that all parties arranging for transportation of cargo into Canada are required to provide advance manifest information, electronically, at set time frames before the goods reach the Canadian border. This is what is called the eManifest reporting system. Essentially, this appears to be the functional equivalent of US Customs and Border Protection’s 24-hour rule for providing advance manifest data on shipments inbound to the U.S.

There is ample information available on the CBSA website concerning the required data elements and time line for implementation, so that there is no need to go over those details here. Instead, this is intended to bring to your attention an important, but perhaps overlooked, issue that could lead to violations of the US export control laws.

Traffic destined to Canada from the U.S. is, with certain exceptions (e.g., licensed cargo or cargo destined for third countries), are exempt from AES filing requirements of Census, BIS and DDTC. As such, US forwarders and other companies that typically are involved in the movement of Canada bound cargo might conclude that it is not necessary to screen the parties for this traffic against the various denied party/entity lists maintained by OFAC and BIS.

That would be a mistake. The fact that a particular transaction involves only a US exporter and a Canadian company does not necessarily ensure that those parties are not sanctioned parties. To the contrary, there have been a number of investigations and prosecutions of US and Canadian companies that are on the various sanction lists, and any participation by third parties of export transactions involving those companies could be problematic.

The new eManifest requirements, while providing an additional service that forwarders and customs brokers might be able to provide to US or Canadian shippers/receivers, accordingly also carries the potential for running afoul of US export control requirements. It is not unlikely that US authorities could take the position that any company making eManifest filings with the CBSA is facilitating export transactions. And, if those transactions involve parties on the various sanction lists, merely doing the eManifest filings - - even if the filer is not otherwise involved in the actual transportation arrangements - - could implicate a company in an investigation and possible prosecution. Whether or not this results in imposition of a penalty, being caught up in a BIS, DDTC or ICE investigation is extremely time-consuming, costly and of course risky.

For this reason, it is prudent for companies to screen every transaction against the sanction lists without regard to whether you are limited to making transportation arrangements. The concept of facilitation, as defined by OFAC, is very broad and amorphous, so that the mere submission of eManifest data to CBSA might be viewed as contravening US export control laws if the parties to the transaction are on the sanction lists.