A 2010 U.S. Tax Court decision creates potentially disastrous tax results for the flight crews of airlines that fly between France (and elsewhere outside the U.S.) and the U.S., and for the airlines, such as Air France, Air Tahiti Nui, American, Condor, Continental, Delta, Northwest, United, U.S. Airways, and XL Airways France, that employ them. The Tax Court, using a puzzling rationale, held that international airspace was part of the U.S. for purposes of applying the U.S. Internal Revenue Code and a U.S. tax treaty to airline international flight crews.

Under the rationale of this Tax Court decision, generally: (1) international flight crew members who are U.S. citizens or U.S. residents, and who are based in France, even if they are taxed by France on their salaries earned on their flights to and from the U.S., can be subject to duplicative U.S. income taxation on their salaries earned in-flight; (2) international flight crews who are based in France and are neither U.S. citizens nor U.S. residents may be taxed by the U.S. on their salaries earned in-flight; and (3) airlines who employ international flight crew members who are based abroad and are neither U.S. citizens nor U.S. residents may be required to withhold U.S. taxes on their salaries earned in-flight. This Tax Court decision seems to contradict the pro-flight-crew, pro-airline position, taken by the IRS in its earlier transportation industry position papers. In summary, this Tax Court decision threatens to impose, erroneously, a dramatically larger U.S. tax burden upon flight crews serving flights between the U.S. and France and the airlines themselves, with respect to flights between France and the U.S.

CIRCULAR 230 NOTICE: Any U.S. federal tax advice contained in this communication and article is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding penalties under the U.S. Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication and article.

To read Alan Lederman’s article  “Coffee? Tea? Section 863? Tax Court Dispenses Double Taxation in International Airspace,” 40 BNA Tax Management International Journal 227 (April 2011), click here.


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