Berkshire's NetJets defeats $500 million IRS tax claim

By Jonathan Stempel

NEW YORK (Reuters) - NetJets Inc, the private jet-sharing company owned by Warren Buffett's Berkshire Hathaway Inc <BRKa.N>, has defeated a U.S. Internal Revenue Service lawsuit attempting to recoup more than $500 million of unpaid taxes, penalties and interest.

U.S. District Judge Edmund Sargus in Columbus, Ohio, said on Monday that the IRS was bound by guidance it gave a NetJets predecessor in 1992 over when to collect federal transportation excise taxes, and could not impose more taxes retroactively.

The judge's 37-page decision was not a complete victory for NetJets. Sargus rejected a claim by the company that it deserved a $219.5 million refund plus interest on taxes already paid because its services were not "taxable transportation."

NetJets specializes in "fractional" aircraft ownership, which lets individuals and companies buy shares of private jets. Omaha, Nebraska-based Berkshire bought the company in 1998.

The dispute arose from a series of IRS and federal court decisions over nearly two decades, on when and how Columbus-based NetJets should pay federal excise taxes.

NetJets had been collecting and remitting these taxes on "occupied hourly" fees it charges customers. These are per-hour flight fees plus aircraft operating costs, including fuel.

But the IRS later said taxes should also have been collected on monthly management fees, which include aircraft ownership costs such as crew salaries and insurance, and "variable" surcharges imposed when fuel prices rise higher than expected.

In his decision, Sargus said NetJets should not be penalized now for having relied "in good faith" on the IRS' 1992 guidance.

"No doubt the IRS may retroactively change an earlier interpretation of law, even when a taxpayer relied on that earlier interpretation to his detriment," Sargus wrote. "But courts repeatedly have held that the IRS must follow its own procedural rules in doing so. And, the IRS did not."

An IRS spokesman had no immediate comment on Tuesday.

In a statement, NetJets said it was pleased with the decision on the $500 million IRS claim, and would review whether to appeal the portion concerning the tax refund.

Buffett is the world's third-richest person, according to Forbes magazine. He has said he has flown on NetJets flights hundreds of times.

The case is NetJets Large Aircraft Inc. v. U.S., U.S. District Court, Southern District of Ohio, No. 11-01023.

(Reporting by Jonathan Stempel in New York; Editing by Kevin Drawbaugh)