Below Market Lease Rates and Transactions Not at Arms-Length Tainted the Leases
In Heidrich Aviation LLC v. Department of Treasury, Michigan Tax Tribunal, No. 358557, December 9, 2011, the Michigan Tax Tribunal determined an assessment for Michigan use tax based on the purchase price of the subject aircraft was upheld because the taxpayer was not a "lessor" qualifying for the rental receipts election. The taxpayer reported and paid use tax based on rental receipts derived from leases entered into between itself and both related and unrelated parties. However, its overall business activities showed that it was not truly "engaged in the business of renting or leasing tangible personal property to others."
The leases between the taxpayer and related parties reflected below-market rates and were not arm's-length transactions. The taxpayer also failed to make substantial efforts to advertise itself as a leasing business. Rather, the advertisements the taxpayer did place referenced opportunities for partial ownership. Furthermore, the number of hours that the aircraft was leased to related parties far outnumbered the hours leased to unrelated parties. Overall, the taxpayer's actions reflected a fractional or joint ownership arrangement as opposed to a leasing business.