When Michael Thibodeau contacted the California Board of Equalization (BOE) in search of advice, he thought he was taking a prudent action, one that would ascertain whether he could bring a recently acquired aircraft into the Golden State before the 90-day waiting period was up--and still qualify for a use tax exemption. Thibodeau never dreamt that the advice he got would lead to a ruinous tax bill.

"Michael was a typical victim of a relationship that is often very adversarial," explains Tom Alston, President of Aero & Marine Tax Professionals, a Sacramento, CA-based consultancy that specializes in advising purchasers of aircraft and marine vessels on state sales and use tax exemptions. "People like Michael, and even attorneys, CPAs and financial planners, often learn hard lessons when it comes to defending themselves against the perspectives and findings of the BOE--even though they are seeking legitimate exemptions that are designed as incentives to promote California business."

Thibodeau, a 30-year veteran pilot-for-hire and aviation management consultant, handled the acquisition of a 1981 Citation CE-550 for three California-based corporations in March of 2000. Possession of the aircraft took place in Reno, NV. In order to qualify for the California state use tax exemption, which would amount to $177,000, the aircraft was delivered in Reno, and would be based there.

Throughout the due diligence and transaction processes, Thibodeau addressed all questions concerning California use tax, the exemption and other matters to the same official at the BOE’s Consumer Use Section. "I thought it would be advantageous to talk with the same person, that it would establish a relationship so that we wouldn’t have to start from scratch...," he explains. "Of course, I had read the BOE regulations concerning the sale and exemption ... But it was my first transaction of this type, and I wanted to make sure that I verified all matters concerning the BOE--and that I got it from the horse’s mouth."

It was then that the nightmare began. After hearing from a friend that it might be permissible to bring the Citation into California for the sole purpose of service--without disrupting the use tax exemption situation--Thibodeau decided to call his usual contact at the BOE.

"My only intention was to get the service work at the Sacramento facility over with," he says. The three new owners, who employed a "substantial number" of California workers, made frequent business trips to western Canada, Mexico and throughout the western U.S.

The BOE official told Thibodeau that it was permissible to bring the aircraft into California and still qualify for the exemption, as long as the trip was for service only. However, after doing so, when he filed for the exemption at the end of 90 days, the sale was held to be taxable.

"... I was told by my contact that he did not recall the conversation regarding the service trip to Sacramento. I eventually talked to his supervisor, who told me that I had no proof of my conversations with the official, that I had nothing in writing. So here I am, trying to do the right thing, to go through the prescribed process, and now I’m facing a tax bill for $177,000."

Thibodeau then contacted Tom Alston. Highly experienced in aircraft tax matters concerning California’s BOE, Alston felt sure that Thibodeau qualified for an exemption, but that it was a different one.

"So, we eventually filed the tax return, taking the alternate exemption. But in the middle of the filing process, the lead counsel for the BOE changed one of the definitions of a legal concept that’s integral to that particular exemption," says Alston. "I had dozens of cases that were based on the original definition, so I argued against the change of interpretation. But the BOE attorney declared that the definition had always been that way."

The definition used by the BOE attorney alluded to the notion that aircraft of certain types are not designed to fly. "According to the attorney, we could not support that the Citation was designed, or designated, to fly was because Michael did not fulfill the qualifications for ‘first functional use’ before the aircraft enters the state," explains Alston. "The BOE attorney was altering the definition of ‘first functional use,’ which up to that moment has always meant ‘the purpose for which the aircraft was designed.’ Aircraft are designed to fly; therefore, the minute that you flew one, you met the definition of first functional use. It’s been that way for 30-40 years. But, with the stroke of his pen, the attorney decides, ‘Nope, we’ve never done it that way.’ What he said is that any aircraft that has jet engines or turbine engines or more than 6 seats wasn’t designed to fly, it was designed to ‘carry passengers.’

So, Thibodeau found himself in a double bind where, not only did he get undocumented advice from the BOE, but the agency was altering the meaning of a critical requirement. It seemed to him that, even though exemptions were created to foster business in California--an intention that was indeed being served--the BOE was going for the throat.

Fortunately, Thibodeau indeed had a passenger on board when he flew the Citation into Sacramento, "officially making first functional use" as far as California was concerned. "This was a very fortunate coincidence," Alston says. "Lots of pilots, maybe most of them, might not have a passenger on a trip to a maintenance facility. But since there was a passenger on board, we were able to secure the exemption." Alston adds that, as fortunate as the case turned, the Citation owners were lucky. He says that the time to get a tax specialist involved is early in the deal, before the transaction is completed.

"Hiring someone early means we can guarantee results, because we can control the situation" Alston says. "However, once the transaction is complete and some complication comes into play, we can’t always guarantee the results. And that may very well cost more because there is less control and more work. In short, our clients can save a lot on fees if they get us involved at the very beginning, and they may well save their skins if the BOE is involved."

Michael Thibodeau now realizes that there is more to the tax exemption business than he thought. "I went to the wrong source when I went to the BOE," he says. "I did what the BOE expert told me to do, but he was wrong,. The next time I will talk to Tom Alston before I even get started on a deal.... I don’t feel that the BOE is the kinder, gentler group of people to do business with. Fortunately, I now have the gorillas I need to go up against them."

The next time could come soon. The owners of the Citation are considering selling it and buying a newer model. Yet, Thibodeau says he is still smarting from the experience. "It was very tough on me. I faced a devastating tax bill. Also, I had to let the owners know about the situation, and it could have made me appear incompetent. These are companies that I’ve had business relationships with since 1990. Which shows you that there was even more than $177,000 at stake."