A recent Ohio Board of Tax Appeals (“BTA”) decision presents warning signs when asserting the resale exemption in captive relationships. See Pi In The Sky, LLC vs. Testa, Ohio BTA, Case No. 2015-2005 (January 19, 2017). In this case, a single member limited liability company (“SMLLC”) purchased an airplane for lease to its sole member. The BTA disregarded the lease, denying the SMLLC’s claim to the resale exemption, finding that the lease lacked substance. Factors supporting the lack of any real substance to the leasing relationship included the following:
The lessee (an operating company) was the sole member of the SMLLC lessor.
- The same person executed the lease agreement on behalf of both lessor and lessee.
- There was no other lessee of the aircraft, and the SMLLC had no other activities.
- The loan for the purchase of the aircraft was not entered into on behalf of the SMLLC, but executed by the individual owner of the lessee.
- There was no advertising with respect to leasing the aircraft.
- The lessor had no business location; and
- The aircraft was leased for $80/hour under a “dry lease” (i.e., lessee was responsible for all operating costs, taxes, etc.). This was clearly not arms-length.
Sound familiar? Of course, these arrangements are quite common.
The BTA found that the lease had no factual or economic substance and, therefore, the lessor was not engaged in the business of leasing and did not qualify for the resale exemption.
Is this an aberration? Hopefully yes, as form usually predominates substance in the Ohio sales and use tax arena, even though there is a specific statutory provision that allows application of the sham transaction doctrine. See R.C. 5703.56(A). Moreover, it did not help that the taxpayer waived the BTA evidentiary hearing in this matter, making it easier to accept all of the Tax Commissioner’s assertions since no new evidence was presented to the BTA. The case is on appeal to the Ohio Supreme Court. More to come.
