200611755L



To:  Otis Fields, Manager, Audit Division

From:  Bryant Lomax, Manager, Tax Policy Division

Date:  November 15, 2006

Re:  Taxation of aircraft or other tangible personal property purchased through 
a transitory entity

You have asked us to review transactions in which a taxpayer creates a 
transitory company for the sole purpose of purchasing an aircraft tax-free and 
then transferring the aircraft via a liquidation, dissolution or merger to a 
company doing business in Texas, thus avoiding any sales tax.  Typically in 
these situations, a taxpayer will provide the funds for the purchase of an 
aircraft outside of Texas and will create a transitory entity to acquire the 
aircraft.  The aircraft is delivered to the transitory entity outside of Texas. 
 The transitory entity is then quickly liquidated and its only asset, the 
aircraft, is distributed tax free to the Texas taxpayer who created the 
transitory entity.  The taxpayer then brings the aircraft into Texas for use in 
the state and claims no Texas use tax is due.

Texas law has long recognized that a corporate entity may be ignored if 
operated as a mere tool or business conduit for another entity or if it is used 
to circumvent a statute.  See Castleberry v. Branscum, 721 S.W.2d 270, 272 
(Tex. 1986).  An entity used as a means of circumventing the statutory scheme 
of taxation will not be recognized.  See Gregory v. Helvering, 293 US 465 
(1935).  See also Delta Pipe Fabricators, Inc. v. Bullock, 638 S.W.2d 652, 653 
(Tex. App.--Austin 1982, writ ref’d n.r.e.) (providing that “One electing to do 
business as a corporation must accept the tax disadvantages of doing so; 
however the Government may not be required to acquiesce in that election and 
where the corporate form is a sham the Government ‘may sustain or disregard the 
effect of the fiction as best serves the purposes of the tax statute.’”) 
(quoting Higgins v. Smith, 308 U.S. 473 (1940)).

Therefore, such a transaction should be analyzed by looking at all the facts 
and circumstances from its inception to its ending.  If the method of 
transfer(s) of an aircraft, or other tangible personal property, does not have 
a business purpose other than tax avoidance, then the transitory entity should 
be ignored and use tax should be assessed accordingly.  This analysis will be 
applied to all such transactions that occur on or after December 1, 2006, and 
transactions that have not been completed, meaning the taxable item has not 
actually been brought into Texas for use, as of December 1, 2006.  Document 
9502L1333G03 on the STAR System, and any similar documents, are being 
superseded accordingly.

In the future, letters to taxpayers regarding these types of transactions will 
include the following language:  This opinion is based on the facts submitted.  
Transactions of this nature will be closely scrutinized, beyond the mere form 
of the transaction, to determine if they were conducted to achieve a legitimate 
business purpose or merely to avoid paying Texas use tax.




ACCESSION NUMBER: 200611755L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 11/15/2006
TAX TYPE: SALES