Rev. Rul. 71-178

Advice has been requested regarding the proper determination, under the circumstances described below, of the number of days that an aircraft was used within the United States during the calendar year 1970 for purposes of section 1.48-1(g) of the Income Tax Regulations.

In 1970 the taxpayer, a domestic corporate air carrier certified by the Civil Aeronautics Board, leased an aircraft from M, another United States air carrier. The aircraft was placed in service by M in 1969 and, except as indicated below, has been registered by the Federal Aviation Agency since that date. The aircraft qualified as section 38 property in the hands of M who operated the aircraft on regularly scheduled flights within the United States during 1970, prior to its lease to the taxpayer. However, for twelve days during 1970 prior to such lease, the aircraft was used by M in scheduled service between the United States and a foreign country. Further, for an additional twenty-five days during 1970, prior to the lease to the taxpayer the aircraft was used by M under contract with the Military Airlift Command of the United States Air Force between the United States and various foreign countries.

The taxpayer subsequently, during 1970, subleased the aircraft to P an airline authorized by foreign country Y whose laws required that any aircraft operated by P must be registered under the laws of country Y.

The taxpayer took delivery of the aircraft from M on May 14, 1970, at 9 a.m. and flew it to country Y on the same day, leaving the United States at 11 p.m. The taxpayer delivered the aircraft to P on May 20, 1970. United States registry of the aircraft was canceled on May 19, 1970, and country Y registry was effective May 20, 1970.

The lease between the taxpayer and P permitted the taxpayer to require P to return the aircraft to the taxpayer in the United States for as many days during 1970 as may be necessary to avoid recapture of the investment credit under section 47 of the Internal Revenue Code of 1954.

Section 38 of the Internal Revenue Code of 1954 provides, in effect, that there shall be allowed as a credit against the tax imposed by chapter 1 of the Code an amount equal to 7 percent of certain property designated as section 38 property, subject, however, to certain limitations as set forth in section 46(a)(2) of the Code.

Under section 48(d) of the Code, a lessor of property may elect to treat the lessee of new section 38 property as having purchased such property for purposes of the credit allowed by section 38 of the Code.

Section 48(a)(2) of the Code provides, in general, that the term "section 38 property" does not include property which is used predominantly outside of the United States.

Section 1.48-1(g)(1)(i) of the regulations provides that property which is physically located outside the United States during more than 50 percent of the taxable year will be considered as used predominantly outside the United States.

Section 1.48-1(g)(2)(i) of the regulations provides, in part, that section 1.48-1(g)(1) of the regulations shall not apply to any aircraft which is registered by the Administrator of the Federal Aviation Agency, and which (a) is operated, whether on a scheduled or non-scheduled basis, to and from the United States, or (b) is placed in service by the taxpayer during a taxable year ending after March 9, 1967, and is operated under contract with the United States, provided that use of the aircraft under the contract constitutes its principal use outside the United States during the taxable year.

It becomes necessary, under the above-cited provisions, to make a daily analysis of the aircraft's activities in order to determine whether the physical presence test of section 1.48-1(g)(1)(i) of the regulations is met.

Accordingly, each day of M's operation of the aircraft in 1970, prior to May 14, is a day within the United States. May 14, 1970, is also considered a day within the United States since the aircraft did not leave the United States until more than twelve hours of the day had elapsed. Further, each day that the aircraft is physically in the United States for more than twelve hours while under country Y registry is considered a day within the United States for purposes of section 1.48-1(g) of the regulations.