Application of the UN Convention on Contracts for the International Sale of Goods to Business Aircraft TransactionsApplication of the UN Convention on Contracts for the International Sale of Goods to Business Aircra see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP., discusses the United Nations Convention on Contracts for the International Sale of Goods ("CISG").
In the current business aircraft sales market it is not uncommon for a transaction involving a business aircraft to have either a buyer or a seller from another country. In those situations, when the parties are drafting their aircraft purchase agreement, they should be aware that the United Nations Convention on Contracts for the International Sale of Goods(“CISG”) could apply to their transaction.
What Is The CISG?
The CISG is an international treaty that was ratified by the United States Senate in 1986. It was intended to be a uniform and fair set of rules for contracts for the international sale of goods to prevent parties to an international transaction from having to analyze the various national or international laws to determine the law applicable to the contract. One of the primary goals of the CISG is to facilitate certainty and predictability of international sales contracts. which, in theory, then decreases transaction costs.
By signing on to the CISG, a country adopts the terms of the CISG as its national law. In the case of the United States, the CISG is now part of U.S. federal law. When it applies to a transaction, the CISG generally replaces the uniform commercial code, adopted by most states within the U.S., with its own provisions regarding contract formation, obligations of the parties, breach, remedies, damages, etc.
When Does the CISG Apply?
The CISG applies to contracts for the sale of goods, including aircraft, between parties whose places of business are in different countries where both countries are contracting states under the CISG (e.g. have agreed to be bound by the CISG). (Note: the CISG only applies to transactions between businesses, not consumer transactions or sales of services). Although the CISG does not apply to the sale of an aircraft, it may apply to parts, components or other goods that are not installed on an aircraft but are otherwise being sold with the aircraft. When a dispute arises out of a contract for sale of goods between parties from contracting states the CISG will apply to the dispute unless the parties elected to exclude its application to their transaction.
Thus, the American business owner of an aircraft will be bound by the terms of the CISG if it contracts with a party whose “place of business” is in a country that is a signatory to the CISG at the time the aircraft purchase agreement was signed, unless the agreement specifically excluded application of the CISG. Since the United States is a signatory, in order to determine if the CISG applies to a business aircraft transaction an American owner must determine whether the other party’s “place of business” with the closest relationship to the aircraft purchase agreement is also within a contracting state.
Article 10 of the CISG provides, “[I]f a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time or at the conclusion of the contract.” The “place of business” determination requires analysis of where the communications about the contract or representations about the product originated, as well as when those communications occurred. This means the communications relating to the entire transaction, including the offer and acceptance as well as performance of the contract. And for those who may be thinking along the lines of where the business is incorporated or where its home office is located (the analysis required for exercise of jurisdiction over a business), that isn’t the case under the CISG. Rather, a location is only relevant if it has the closest relationship to the contract and its performance.
Why Does It Matter?
If application of the CISG applies and has not been specifically excluded in the purchase agreement, then the parties to a business aircraft transaction may be stuck with CISG provisions that may or may not be consistent with the state law otherwise selected or preferred. For example, in the event of a dispute the applicable CISG remedies or damages provisions may be more limited than what would otherwise be provided under state law. Or the CISG’s incorporation of INCOTERMS may be beyond applicable state law. And this is especially true where U.S. courts have either failed to recognize the CISG’s existence in applicable cases or misapplied the body of law to the transaction.
What Can You Do?
If the CISG would otherwise apply to a business aircraft transaction but you do not want it to apply, you must affirmatively opt-out of its application. To do that, you can specifically disclaim or exclude application of the CISG by including language in your aircraft purchase agreement. Merely including choice of law language in an agreement is not considered clear intent of opting-out. Rather, opt-out language should be similar to the following:
“The parties agree that the 1980 United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement.”
So, if you are more comfortable with state law, or you are unfamiliar with the provisions of the CISG and don’t want to take the chance on whether the CISG will beneficial or unfavorable, you will want to include disclaimer language in your aircraft purchase agreement. Inclusion of disclaimer language relieves the parties of having to determine exactly what Article 2 does or does not cover, especially since the CISG’s exclusions must be interpreted narrowly. Otherwise, if you enter into an aircraft transaction to which the CISG applies and do not include disclaimer language, you may be in for a surprise if a dispute arises from the transaction.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. in April 2019.
YYZlaw Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. – Feb. 5, 2019 – National Aircraft Finance Association (NAFA) is pleased to announce that YYZlaw has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add YYZlaw to our association,” said Ford von Weise, President of NAFA.
YYZlaw (formerly Clark & Company) is a corporate and regulatory law practice with an emphasis on the aviation and travel industries. Their main clients are scheduled and charter international airlines flying into Canada, domestic air carriers, Canadian aerospace companies, aviation and travel trade associations, tour operators, aircraft lessors, financial institutions and a variety of other organizations and professionals related to the aviation and travel industries.“With our decades of experience serving the regulatory and transactional needs of business aircraft financiers and their clients, YYZlaw is excited to continue to further the growth of our industry by supporting NAFA’s mandate,” said Bill Clark, Managing Partner at YYZlaw.
The company provides legal counsel services to foreign and domestic corporations conducting aviation and travel businesses under the laws of Canada, including: regulatory advice on all aviation matters, the travel and tour operator industries; commercial and transactional advice on aircraft leasing, acquisitions and financing; commercial advice to aviation and travel companies in regard to laws of general application relating to labor, immigration, real estate and taxation; andadvice regarding the Cape Town Convention, including assistance with forming and maintaining accounts on the International Registry. “We pride ourselves on providing cost-effective, timely and sensible legal advice because we understand the real-life demands present in the business aviation sector,” said Ehsan Monfared, Legal Counsel at YYZlaw.
Much like NAFA, YYZlaw fosters strong client and business relationships with their expanding network of specialized professionals. YYZlaw and NAFA provide the knowledge and dedication necessary for continued development in the aviation industry.
For more information about YYZlaw, visit www.yyzlaw.com.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
The Air Law Firm Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. - January 23, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that The Air Law Firm has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Air Law to our association,” said Ford von Weise, President of NAFA.
The Air Law Firm LLP is a boutique aviation law practice providing international legal services to the aviation industry. Their practice model sustains a bespoke and focused service from an agile and responsive team who can react quickly to the changing demands of a business environment. Air Law’s services are partner-led and proactive, with lawyers who are recognized internationally as being experts in their fields.
The practice has in-depth knowledge and understanding of the global aviation industry including aircraft finance and leasing, acquisitions and sales, litigation, regulatory advice and aviation insurance.The Air Law Firm’s international lawyers are qualified in various jurisdictions, routinely handling and managing transactional and commercial work, claims and litigation around the world on behalf of a multitude of clients – from individuals to the largest airlines.
The Air Law Firm understands the cultural aspects and nuances of international business. The group is adept at helping to strategize, finding solutions for clients as business people and legal partners rather than a last resort. They often resolve clients’ disputes privately through mediation and arbitration and provide counsel as a respected and trusted advisor, consistently delivering practical advice and adding real value.
“We at the Air Law Firm are delighted to join NAFA and look forward to sharing experience, opportunities and information with NAFA members. We are avid supporters of doing everything possible to enhance the experience of buyers and lessees of corporate and private aircraft to ensure seamless and professional transactions,but also with a view to investigating where improvements and innovative products can be discussed. NAFA presents us with an excellent forum for this and we welcome the interaction with other members,” stated Aoife O’Sullivan, Partner at the firm.
Much like NAFA, The Air Law Firm is passionate about aviation and upholding the highest standards in client service. Air Lawand NAFA foster strong business relationships and global networks in the aviation industry, with the knowledge and dedication to support continued development.
For more information about The Air Law Firm, visit www.theairlawfirm.com.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
Cassels Brock & Blackwell LLP Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. – Aug. 28, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that Cassels Brock & Blackwell LLP (Cassels Brock) has recently joined its professional network of aviation lenders.
“NAFA members form a network of aviation finance services who diligently and competently operate with integrity and objectivity throughout the world. We’re excited to welcome Cassels Brock to our growing organization as we head to our 50th anniversary,” said Jim Blessing, President of NAFA.
Cassels Brock is a Canadian law firm focused on serving the transaction, advocacy and advisory needs of the country’s most dynamic business sectors. As one of the largest business law practices in Canada, they serve multinational, national and mid-market entities.
The firm’s multidisciplinary aviation practice has the expertise and experience to help clients achieve their goals in complex national and multi-national aviation law and aircraft finance transactions, including personal and business aviation needs. Cassels Brock designs, implements and manages the transaction scenarios that best match clients' goals and the available legal framework (working within the international law, common law and civil law systems).
Cassels Brock is dedicated to serving the needs of both the Canadian and International aviation industries. They can advise, negotiate and draft all relevant documentation in English and French, and have a working knowledge of Spanish, enabling them to provide enhanced support to international clients.
The firm prides itself on understanding the unique business and legal challenges clients face along with the intricate business and regulatory environment in which they operate. Their clients include high net worth individuals, aviation manufacturers and aviation financiers, including aircraft and engine manufacturers, aircraft and engine leasing companies and advisors, government export credit agencies, international banks, hedge funds and other investors.
Much like NAFA, Cassels Brock provides timely, responsive, proactive and practical advice and joins NAFA in exceeding expectations in the aviation industry through teamwork and strong leadership.
For more information about Cassels Brock & Blackwell LLP, visit nafa.aero/companies/cassels-brock-blackwell-llp.
The National Aircraft Finance Association (NAFA)is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit NAFA.aero.
Innovative Private Aviation Options see more
NAFA member, Amanda Applegate, Partner at AERLEX LAW GROUP, discusses innovative private aviation options.
In 1986, when Richard Santulli created NetJets, it was considered revolutionary. NetJets opened up private aviation to a new segment of customers. Flexjet followed in 1995. The pool of potential private aircraft users was made even greater with the advent of Marquis Jet in 2001. Now more than 15 years after the launch of Marquis Jet, there are over 200 jet card products, private aviation membership programs, co-ownership and fractional programs in existence.
The private aviation market, particularly the charter market, remains fragmented. Because of the fragmentation, many consumers find there is not just one solution that fulfills all of their private aviation needs. More than ever, we are seeing consumers use several solutions to meet their range of private aviation needs. Many of my clients own a whole aircraft and supplement their ownership with a membership program, fractional share and/or utilize the charter market. Often each category is sourced with a different provider, which adds unwanted complexity and inefficiencies to scheduling and tracking the multiple private aviation providers.
We have seen some consolidation in recent years. OneSky, LLC, part of Directional Aviation Capital, has acquired Flight Options, Flexjet, Sentient Jet and most recently PrivateFly. PrivateFly is a digital booking service for private jet charters and the company plans to use PrivateFly along with its current digital on-demand charter broker, Skyjet. Further recent consolidation was announced with Vista Global acquiring XOJET, an on-demand business aviation company in North America with 43 aircraft. Vista Global will position XOJET as its entry level product into private aviation. Vista Global is attempting to eliminate the need to use multiple private aviation providers by offering a variety of products.
While most agree that further consolation is needed, there is also a need to leverage technology. Arranging charter is often a manual process, with paper charter request forms for each charter segment and without an efficient payment system. The private jet charter market is not searchable on one software platform, mostly due to the number of Part 135 operators who haven’t yet found a system to consolidate all of their data, thus customers have to search multiple sources to evaluate their options. There are many companies working towards digitalizing the charter market, but until there is more consolidation of current, up to date data, inefficiencies will persist.
In addition to consolidation of fragmented private aviation solutions and the implementation of new technologies to create efficiencies and grow the market, we will also see new product offerings continuing to emerge. Recently I attended revolution.aero, a conference organized by Corporate Jet Investors. This two day conference highlighted the vision of the future of aviation. Billions of dollars have already been invested this year in new aviation solutions. While many have likely heard of Uber Elevate, an urban aerial ridesharing solution currently in development, there are hundreds of other aviation solutions, software programs and aircraft currently in development. The solutions in development are focusing not only on urban mobility, but also the transportation of goods, including important medical needs like the movement of organs and blood. Within the next several years many new solutions, software programs and aircraft will be developed that could significantly change the way we use air transportation on a daily basis.
This article was originally published in BusinessAir Magazine, October 2018, Vol. 28, No. 10.
FAA Actively Pursues Illegal Flight Ops see more
NAFA member, David G. Mayer with Shackelford Law discusses unauthorized air charter and the FAA.
Unauthorized air charter—often called gray charter and even “Part 134 1/2” operations—has long been illegal. Yet some aircraft operators still flout or inadvertently violate the FARs involving proper on-demand or charter operations. Continuing to operate such disguised charters with impunity or in obscurity might be short-lived, however, as the FAA has recently ramped up its investigations and enforcement actions against such offenders.
These illegal operations frequently occur when an operator with one or more aircraft holds itself out for hire or receives any compensation (not just monetary) for carrying people or property without the required certification or other approvals from the FAA and the U.S. DOT. As a result, the offender might fail to meet the operations criteria under FAR Part 135 and the certification requirements under FAR Part 119.
To illustrate, the FAA might probe companies that operate flights without the required certificates; operate aircraft for charter where the aircraft has not been placed on the operator’s Part 135 operating specifications as required; or enter into a sham dry leasing arrangement, purporting to lease an aircraft with no crew when, in reality, the lessor enters into a prohibited commercial wet lease since the lessor actually insisted the customer use its crew and aircraft.
Determined by a complex matrix, “Order 2150.3C-FAA Compliance and Enforcement Program” allows the FAAand Department of Justice (DOJ) to impose high-dollar civil penalties, including approximately $33,333 per incident for flight operations in violation of the FARs. The FAA has many tools to carry out its mission of “promot[ing] safe flight of civil aircraft,” including the ability to investigate any aircraft use, propose civil penalties and revoke Part 119 operating certificates.
Even though an operator assumes he or she has put proper lease, timeshare, or other agreements in place, the FAA can, and will, make its own decision (substance over the form) on whether the operator has conducted a lawful or disguised charter business. It does take into account specific and complex exemptions in Section FAR91.501 and Part 119 that allow certain commercial operations.
The FAA identifies offenders, in part, using information supplied by legal Part 135 operators, FAA personnel, and others. And the National Air Transportation Association (NATA) and NBAA publish a hotline phone number and other information that facilitates contacting the FAA and educates customers, operators, and other industry participants to recognize and conform their operations to Part 135 or Part 91, as appropriate.
Powerful allies help the FAA deter and punish offenders, including the DOJ and the FAA’s own version of SWATcalled Special Emphasis Investigations Team (SEIT). SEIT has interagency partners, including multiple law enforcement agencies, to take and coordinate enforcement actions against offenders. Although the FAA has wide prosecutorial discretion, Order 2150.3C, issued on September 18, guides the FAA’s actions.
Last year, the FAA and DOJ sent a message loud and clear to illegal charter offenders and to the business and general aviation industries—not in words—but in the following, diverse enforcement cases, among many others:
• Timesharing Violations. In a June 29 press release, the FAA announced a proposed $3.3 million civil penalty, its largest ever for a private company, against The Hinman Co. of Portage, Michigan, operating through its wholly owned subsidiary Hincojet LLC. Hincojet allegedly conducted 850 commercial aircraft operations in violation of the FARs by using timesharing agreements involving six unrelated third persons.
The FAA alleged that Hincojet overcharged customers, invoicing for more than the specific costs allowed for timesharing agreements in Part 91; failed to operate flights under Part 135 as a commercial operation; failed to meet the FAA’s Part 135 requirements for recordkeeping, including pilot records and load manifests, for each flight; had no Part 135 pilot training program; did not possess proper certification under Part 119 or economic authority from the DOT; and used pilots to operate flights without authorization to conduct the flights under Part 135. Importantly, the FAA has also investigated the pilots with a view toward commencing enforcement actions against them.
On October 4, the DOJ filed an enforcement lawsuit against Hinman for alleged illegal charter activity with fines of up to $11,000 per violation. Order 2150.3C dictates such a referral to DOJ when the proposed civil penalty exceeds $50,000. Hinman is a clear example of the FAA looking beyond the form of the arrangements to the actual substance of the operation.
• Gray Charter Violations. In a December 4 press release, the FAA announced a proposed $624,000 civil penalty against Steele Aviation of Beverly Hills, California, for allegedly conducting 16 customer-carrying jet flights “for hire” when the company did not have the air carrier certificate required for these operations and allegedly used unqualified pilots. The case illustrates how the FAA will pursue charter operations that appear normal but blatantly fail to qualify for charter services under Parts 135 and 119.
• Leasing Violations. In a November 13 press release, the DOJ announced that James Johnson of Oklahoma City and his company, Interstate Helicopters Inc., pleaded guilty to failing to report to the FAA under the “Truth in Leasing” requirements from 2014 to 2016. This case is important because it shows how the FAA will investigate and prosecute operators under civil and criminal laws for not complying with the Truth-in-Leasing disclosure to lessees (under Advisory Circular 91-37B)-opening a back door to investigating leasing arrangements generally.
Offenders should not look to insurance as a safety net, because insurance rarely, if ever, pays government penalties or related costs, including attorneys’ fees, which can run sky high. An insurer could refuse to cover claims that involve an unqualified pilot. If the aircraft owner is a limited liability company (LLC), the shield against personal liability of the LLC owner could collapse under FAA legal pressure and expose the owner to personal liability for civil monetary penalties (see AINsight: Piercing the Aircraft LLC Veil).
Overall, offenders should weigh the legal risks of engaging in a protracted and expensive dispute with the FAAand DOJ against the cost of realigning their operations to comply with the FARs. Given the heightened interest of the FAA in punishing disguised charters, it should be obvious that, on balance, every operator should opt for compliance with the FARs in consultation with knowledgeable aviation counsel.
This article was originally published by AINonline on January 10, 2019.
Private Aviation Tax Considerations for Prospective Aircraft Buyers see more
NAFA member, Essex Aviation, discusses aviation tax considerations for aircraft buyers.
Acquiring a private aircraft for personal use is an exciting experience, one that opens innumerable doors for frequent travelers — however, to ultimately realize the benefits of your investment, you must first ensure that you’ve fully accounted for all financial considerations, especially aviation taxes.
Too often, private aircraft owners aren't fully informed of certain taxes that are involved in the ownership and operation of the aircraft; which are important as it relates to their operating budget and the overall aircraft ownership experience. That’s because tax considerations should be structured not only during the initial transaction, but throughout the ownership lifecycle, and can affect how you decide to utilize your aircraft.
This article was originally published by Essex Aviation.
AINsight: Should You Finance or Lease a Bizjet? see more
NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, discusses whether a customer should consider leasing or financing a business jet.
Lenders and lessors often lament that cash is the main and most frustrating competitor for financing or leasing business jets. Lessees or borrowers often retort that these transactions cause too much “brain damage” to undertake, especially when they have cash available to buy the jet. What then should customers consider in deciding whether to lease or finance business jets—before, or even after, they close their cash purchase?
It is true that, compared with cash purchases, financing and leasing private jets require extra time, effort, professional cost, and negotiations, not to mention patience while financiers conduct diligence and obtain credit approvals. Despite the additional hassle, potential customers should not be too quick to dismiss financing or leasing, including monetizing currently owned jets in sale-leaseback and post-closing financing transactions, as these financing structures might prove to have substantial value.
Many customers have overcome any such misgivings about leasing or borrowing—and for good reason. Today’s customers range from large multinational companies to ultra-high-net-worth individuals usually represented by talented family office teams, accountants, or counsel.
Correspondingly, financiers exist that can meet the needs of virtually every qualified customer with acceptable aircraft. Importantly, lenders and lessors realize the reduction in market inventory of quality preowned jets requires them to consider somewhat older (10 to 15 years old), higher-time jets as worthy collateral or leased assets if the customers can satisfy credit and other required regulatory criteria. Some lenders are able to finance even older jets and small ticket or light aircraft, including propeller or certain turboprops.
While some clients are concerned about the costs associated with entering into an aircraft loan or lease, the transaction costs should, with exceptions, be immaterial compared to the value or cost of the jet. Further, in acquiring jets that could be eligible for 100 percent bonus depreciation, the all-in value for a customer, on an after-tax basis, might compete well against or even be superior to a cash purchase.
With leases, customers eliminate the risk of ownership because the lessor actually buys the aircraft. The lessor’s funding of the cost then preserves customer cash for working capital, reinvestment in the customer’s business, and/or funding other capital equipment. Customers can arrange a lease where a lessor purchases the aircraft from the seller and leases it to the customer.
A lessor can also monetize a jet when the customer sells the jet to the lessor and leases back. Such a sale-leaseback can occur immediately after the purchase or at such later time as meets the customer needs.
Leases also enable lessees to customize when the lessee can, during the lease term, buy the jet from the lessor or terminate the lease. A lessee may be able to obtain some benefit of 100 percent bonus depreciation from the lessor under the Tax Cuts and Jobs Act of 2017 that they might not otherwise be able to claim. The lessor can take the write-off in any direct purchase of the new aircraft from the manufacturer or, for the first time under the act, a preowned aircraft from the customer or third party seller. In addition, the customer can deduct the rent without the same limitation as interest deductions under the tax law.
To illustrate the investment aspect, suppose a company enters into a five-year lease with an aircraft cost of $10 million. The customer typically earns 18 percent on its investments and can obtain a fixed rent payment that implies a 7 percent “run” rate. By deploying the $10 million into its investments, the customer earns the 18 percent return while paying the 7 percent rent over a five-year period instead of paying $10 million up front. In its simplest form, the customer would achieve a pre-tax, net return of approximately 11 percent under this example.
Loans offer similar and other features. For the same $10 million jet, the customer would pay, depending on various factors, between 10 percent ($1 million) and 50 percent ($5 million) of the value or purchase price of the aircraft, with the lender financing the balance. The customer can take 100 percent bonus depreciation under the tax law if the aircraft is eligible for it and deduct the interest subject to limitations.
Like the lease, the customer can use the remaining cash for other investments, working capital, and/or purchases of capital equipment. Lenders can make the loan concurrent with the purchase or, like a lease, fund the loan in a “back leverage” transaction after closing the purchase.
In both loans and leases, customers with available cash to purchase an aircraft can, by executing an appropriate post-closing financing or leasing strategy, alleviate the tension of closing a loan or lease concurrently with completing a purchase.
Although one may think that, when a lender or lessor delivers its “cookie cutter” loan and lease “forms” to its customer, the negotiated deals across all customers would fit within a narrow band of final terms. Such a conclusion is far from reality.
Every negotiation differs as much as the unique personalities of the customers. Most customers ask about, if not conform to, “market” terms as a reference point in making judgments in negotiations. Lenders and lessors expect their customers to negotiate the documents, but, of course, prefer to close deals faster and easier whenever possible.
Certain parallel legal terms arise in most financing and leasing deals, which deserve attention by customers. Broadly speaking, customers should consider negotiating provisions that include unreasonably broad representations, unrealistic time limits in which to perform obligations, and no or inadequate cure rights; allow lenders or lessors to transfer the customer’s lease or loan transaction to anyone they choose without notice to, or the consent of, the customer; call for burdensome or unnecessary financial reports or establish reporting based on Generally Accepted Accounting Principles (GAAP) when the financier did not need GAAP financials for its credit approval; demand that lender or lessor consents to, or approves, business or corporate changes unrelated to the aircraft financing (taking a seat at the table for the larger business of the customer than merited by an aircraft financing); limit when, how much, and where the customers can operate their aircraft; trigger defaults for any customer acquisition, merger or corporate reorganization; grab for extra collateral unrelated to the aircraft, such as security in cash accounts or other tangible assets of the customer or guarantor; and require, solely with respect to leases, often complex and one-sided, though indispensable, federal income tax indemnification provisions in tax leases pertaining to a loss of depreciation by the lessor, including 100 percent bonus depreciation.
Negotiating these provisions, among others, might look like a daunting task for customers, but the right integrated team of business people, lawyers, risk management, tax, and other professionals can negotiate through and close a mutually beneficial transaction with minimal involvement of the true customer. The best results normally occur when the team possesses market knowledge, negotiates the customer’s material issues, and understands where financiers have little wiggle room to negotiate provisions forced into documents by internal policies and regulatory mandates.
BASIC RULES FOR A SUCCESSFUL FINANCING EXPERIENCE
Most customers enjoy good relationships with their financiers. As a customer, you can too, if you follow three basic rules:
First, your relationship with the financier does not end at closing; it begins at closing. Financiers usually like to develop relationships that lead to other business with you and build mutual trust. Your transparency, fairness, and reasonable document compliance will go a long way toward building a strong and lasting relationship.
Second, never surprise your financiers. Financiers tend to keep open minds about giving consents, which inevitably arise, work out problems, or amend documents, if you keep them informed early and often about your business or personal situations that might adversely affect the aircraft or your compliance with the transaction documents.
Third, pay your debt or rent when due, without making excuses that worry the lenders or lessors. When financiers become nervous about a non-performing transaction, their cooperation and flexibility may dissipate quickly. They tend to focus on impediments to getting paid and reporting internally about a troubled lease or loan, which may bring unwanted scrutiny on the deal team.
As easy as a cash purchase of a jet might be, the value proposition for financing or leasing it could ultimately make more sense than a cash deal. Many customers, large and small, have elected to finance or lease jets for good reasons based on their individual needs. Customers should at least consider financing or leasing a jet before they stroke a check to buy one.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing and aircraft renovations. Mayer frequently represents high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at email@example.com, via LinkedIn, or by telephone at (214) 780-1306.
This article was originally published on AINonline on November 8, 2018.
GKG Law Successful in Vacating Aircraft Liens see more
NAFA member, GKG Law, writes about their success in vacating aircraft liens.
In August 2018, GKG Law reported on the risks posed by service providers filing liens on aircraft for amounts owed for storage, repairs, maintenance or other services relating to an aircraft. In that article, we noted precautionary measures that can be taken to minimize the risks posed by such liens, and that defenses may exist to such liens. GKG Law recently was successful in vacating such liens in a case filed in the United States District Court for the Eastern District of Virginia. In the case, the service provider filed two separate liens with the Federal Aviation Administration (FAA) and with Florida regulatory authorities asserting liens for approximately $450,000. We were successful in not only having both liens vacated, but our client also was awarded almost $50,000 in damages resulting from the invalid lien filings. The result highlights the fact that although lien statues may serve a valid purpose, such as ensuring that mechanics and other aircraft service providers are compensated for services they performed at the request of the aircraft owner or operator, aircraft owners are not defenseless when such liens do not have a valid basis or when the lien filings fail to comply with statutory requirements.
GKG Law’s extensive experience in all aspects of the business aviation marketplace makes it particularly suited to aggressively protect your rights in such commercial disputes. Please contact Brendan Collins at GKG Law if you would like to discuss any potential aircraft related disputes. Brendan may be reached by telephone at (202) 342-6793 or by email at firstname.lastname@example.org.
The original article was published by GKG Law on October 2, 2018.
FAA Reauthorization Act Confirms Pre-emptive Effect of Statute Protecting Aircraft Lessors see more
The FAA Reauthorization Act of 2018, enacted on Oct. 5, 2018,1 has clarified and confirmed the pre-emptive effect of the federal statute intended to shield from liability owners, lessors and secured parties not in operational control of an aircraft for injuries to persons on board an accident aircraft. This clarification comes by way of an amendment to the federal statute, 49 U.S.C. §44112(b).
The Federal Statute Prior to Amendment
Prior to the amendment, 49 U.S.C. §44112(b), provided, in relevant part:
Liability.-- A lessor, owner, or secured party is liable for personal injury, death, or property loss or damage on land or water only when a civil aircraft, aircraft engine, or propeller is in the actual possession or control of the lessor, owner, or secured party, and the personal injury, death, or property loss or damage occurs because of --
(1) the aircraft, engine, or propeller; or
(2) the flight of, or an object falling from, the aircraft, engine, or propeller.
The majority of courts had held, or suggested in dicta, that the statute provided immunity to owners, lessors and secured parties not in actual possession or control of the aircraft for state law claims arising out of injuries to persons, regardless of whether or not they were on board the accident aircraft.2
Courts in a minority of jurisdictions, however, had limited the pre-emptive effect of the statute depending on whether the injured party was on the ground or a passenger on board the aircraft. Most notably, in Vreeland v. Ferrer, the Florida Supreme Court found that the "limitation on liability would apply only to individuals and property that are underneath the aircraft during its flight, ascent, or descent."3 Under the Vreeland approach, there was no pre-emption for claims made by or on behalf of persons on board the accident aircraft.
The FAA Reauthorization Act Amends 49 U.S.C. §44112(b)
Section 514 of the FAA Reauthorization Bill, titled "Aircraft Leasing," removes any uncertainty cast by Vreeland and its progeny. It amends 49 U.S.C. §44112(b) by striking "on land or water" and inserting "operational" before "control." As a result, the statute now reads:
Liability.-- A lessor, owner, or secured party is liable for personal injury, death, or property loss or damage only when a civil aircraft, aircraft engine, or propeller is in the actual possession or operational control of the lessor, owner, or secured party, and the personal injury, death, or property loss or damage occurs because of --
(1) the aircraft, engine, or propeller; or
(2) the flight of, or an object falling from, the aircraft, engine, or propeller.
The effect of the amendment is twofold. First, the deletion of "on land or water" abolishes the minority view expressed in Vreeland that there is a distinction based on the location of the injured persons. A court will no longer be able to subscribe to the Vreeland approach that the injured person must be "underneath" the aircraft. Second, the addition of "operational" before "control" serves as a further bar to arguments that certain types of activities by owners, lessors or secured parties – other than operation of the aircraft – could be deemed "control."
The amendment furthers the full purpose and original objectives of Congress in enacting a statute limiting liability for financiers, owners and long-term lessors4 of aircraft. The amendment ensures a uniformity of result by confirming that in all instances the pre-emptive scope of the statute is very broad, subject only to the express limitation of "actual possession or operational control."
1 H.R. 302, Pub.L. 115-254, Oct. 5, 2018, 132 Stat 3186.
2 See, e.g., Matei v. Cessna Aircraft Co., 35 F.3d 1142 (7th Cir. 1994) (predecessor statute to 49 U.S.C. §44112 and Illinois bailment law precluded liability against aircraft owner because owner did not retain possession or control of aircraft and did not have knowledge of alleged defects); In re Lawrence W. Inlow Accident, 2001 WL 331625 (S.D. Ind. Feb. 7, 2001) (49 U.S.C. §44112 precluded liability of sublessor of helicopter following death of passenger hit in head with rotor while disembarking); Mangini v. Cessna Aircraft Co., 2005 WL 3624483 (Conn. Super. Dec. 7, 2005) (49 U.S.C. §44112 pre-empted negligence claims on behalf of deceased passenger against owner whose aircraft made emergency landing and crashed); Esheva v. Siberia Airlines, 499 F. Supp. 2d 493, 499 n.4 (S.D.N.Y. 2007) (stating indictathat aircraft lessor would be "absolutely immune for such liability in the United States" for claims of derivative liability brought on behalf of passengers of airplane that crashed); Escobar v. Nevada Helicopter Leasing LLC, 2016 WL 3962805 (D. Haw. July 21, 2016); Lu v. Star Marianas Air, Inc., 2015 WL 2265464 (D.N.Mar.I. May 12, 2015).
3See Vreeland v. Ferrer, 71 So. 3d 70 (Fla. 2011), reh'g denied (Sept. 13, 2011), cert denied, 132 S. Ct. 1557 (U.S. 2012); see also Storie v. Southfield Leasing, Inc., 282 N.W.2d 417 (Mich. Ct. App. 1979), aff'd sub nom. Sexton v. Ryder Truck Rental, Inc. 320 N.W. 843 (1982).
4 49 U.S.C. §44112(a) defines "lessor" as "a person leasing for at least 30 days a civil aircraft, aircraft engine, or propeller."
This article was originally published by Holland & Knight on October 31, 2018.
2018 Aircraft Transactions - Final Quarter Countdown! see more
NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses the top 10 items to consider if your aircraft transaction closes in 2018.
As we approach the last quarter of 2018, analytical data and industry experts are predicting a quarter that will be extremely busy with both aircraft purchases and sales. Personally, I have a number of clients who are ready to proceed immediately with a purchase or sale once either the right inventory can be sourced or once a buyer is found for the aircraft that is listed for sale. Assuming the right aircraft can be found for buyers or the right buyer can be found by sellers, as transaction volumes increase those providing support services such as aircraft consultants, insurance agents, escrow companies and pre-buy inspection facilities may start to see the stress of the demand. As always, having a well-established acquisition or sales team and a process plan can help insure that nothing gets missed, that the closings go as planned and are completed in the 2018 calendar year. Ten items to consider to help closing occur in 2018:
1. If you are considering selling in 2018, list the aircraft for sale as soon as possible to allow enough time for the sales process to conclude before the end of the year.
2. If you are considering buying in 2018, you should already be looking for the right aircraft. Inventory is lower in many aircraft categories than it has been for years. Therefore sourcing the right aircraft is taking longer than it has in the past and may require expanding the search to outside of the United States.
3. Many inspection facilities have long wait times to schedule a pre-buy inspection. As soon as an aircraft is sourced or a buyer is found (or perhaps even before), look for a pre-buy slot and try to hold it if possible. As a seller, if certain inspections are coming due, perhaps scheduling these in conjunction with a potential pre-buy inspection may help with reserving a slot.
4. If you have an existing aircraft and plan to replace it, consult your tax team early in the process. Your tax team may recommend that both transactions occur in the same year since 1031 like-kind exchanges are no longer available.
5. If you are seeking depreciation in 2018 (bonus or straight-line), then the aircraft being purchased needs to be placed into service and used for business (preferably exclusively for business if closing is near the end of the year) before the end of the year.
6. When support service providers are busy, checklists and a team leader become imperative. There must be one person leading the team who is checking to make sure all aspects of the transaction are completed prior closing (i.e. assignment of mx. programs, insurance, funds, lender agreements, management agreements, international registry account set up, etc.).
7. The last day of the year in 2018 is on a Monday. In the past, the FAA registry has closed early on holidays and also for weather. It is recommended that 2018 closings be completed no later than December 28, 2018 in order to allow time for the aircraft to be placed into service before year end and avoid any unexpected closings delays that could occur.
8. Lenders are starting to require all ancillary documents be in place prior to funding. If the aircraft is going to be managed, chartered or on maintenance programs, the lender may require all of these documents be in place along with its own consent agreements, prior to closing. It is likely that these documents will not be allowed to be done as post-closing items, so plan enough time to get all relevant documents in order prior to year-end. Alternatively, consider paying cash and arrange financing after closing.
9. If the transaction is a cross-border transaction, make sure all parties are realistic on the amount of time the import/export process will take.
10. Having upgrades done at the same time as the pre-buy inspection often saves downtime on the aircraft for the buyer. However, it may also push the closing into 2019. Therefore, if a 2018 closing is important a close review of the calendar should be made to make sure the upgrades can be completed and the aircraft returned to service prior to the end of the year.
Please contact Amanda Applegate at 310-392-5200 or email@example.com.
Taxing Leases - When the FAA and IRS do not agree see more
NAFA member, Nel Stubbs, Vice President of Conklin & de Decker, writes about when the FAA and IRS do not agree about taxing leases.
The recent spotlight on illegal charter and who has operational control of an aircraft is generating new interest in leases: not finance leases, but “wet” and “dry” aircraft operating leases.
The FAA defines a “wet” lease as “any leasing arrangement whereby a person agrees to provide an entire aircraft and at least one crewmember.” Leasing an aircraft without the crew normally is a “dry” lease, and the lessee has operational control of the aircraft. With a “wet” lease, the lessor retains operational control.
The IRS imposes the commercial Federal Excise Tax (FET) on wet leases, and the noncommercial Federal fuel tax on dry leases. But the distinction is not simple. While passing the test for FAR Part 91 (owner use only), a wet lease operation might be considered a commercial activity (Part 135) for FET purposes.
The most common non-financial leasing arrangements and their tax ramifications are:
CHARTER – Conducted under FAR Part 135, the operator must hold a commercial operating certificate. Charter is always considered a wet lease, as the aircraft is provided with crew. “Commercial” for both FAA and IRS purposes, the FET is due, less catering, flight phones, ground transportation, etc., listed separately on the invoice. A credit or refund is allowed for tax paid on the fuel for that flight.
TIMESHARING – FAR Part 91.501 permits timesharing, a form of wet lease, which allows the owner to provide the aircraft and crew to a lessee, and charge up to twice the direct operating costs for any flights. The IRS considers this a commercial activity, and the FET is due on the amounts paid and a credit or refund is allowed for the tax paid on the fuel consumed during the trip(s).
INTERCHANGE – When “… a person leases his airplane to another person in exchange for equal time, when needed, on the other person’s airplane and no charge, assessment or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating and maintaining the two airplanes,” it also is a wet lease, as the aircraft and crew of one company is exchanged for another’s aircraft and crew. So for FET purposes, it’s a commercial operation, and tax is due on the fair market value of any difference between the operating costs of the two aircraft. Again, a credit or refund is allowed for the tax paid on fuel. Two fair market values must be considered: the IRS’ and yours.
A “True” Dry Lease offers the aircraft without crew. Typically, the lessee hires the crew and has operational control of the aircraft. The lease is considered noncommercial, and neither lessee nor lessor are required to hold an FAA-issued charter operator’s certificate, as long as the lessee does not carry persons or property for compensation or hire. The IRS and FAA agree that no FET is due on dry lease payments.
A “Sham” Dry Lease (or “Damp” Lease) may be a purposeful attempt to confuse the issue of who has control of the aircraft. Typically, the lessor provides the aircraft under a dry lease and also provides the crew under a separate agreement. Or, the lessor leases the aircraft, but you as lessee must get your crew from the lessor or a lessor-specified source. In each case, the aircraft and the crew are too closely connected, and the FAA may determine that the lessor should hold a commercial operating certificate. The IRS likely would consider the lessor to have “possession, command and control,” and the lessee would owe FET on the lease and pilot service payments.
It’s in everyone’s best interest to understand what type of lease arrangement you are entering. Don’t be caught unaware by either the FAA or the IRS.
The original article was published in Business Aviation Advisor on August 31, 2018.
Charting New Directions in the Life Cycle of Private Aviation Usage see more
When I began my career in the aviation industry 20 years ago, the “life cycle” of private aviation consumers was fairly straightforward and predictable: first, they sampled non-commercial aircraft travel by chartering, then they moved into fractional ownership and, eventually, whole aircraft ownership if the demand existed. Later in the life cycle, when the consumer’s travel decreased, they moved back into fractional ownership and
eventually returned full circle to charter. Typically, a consumer would rely on a single provider at a given time until that provider could no longer satisfy their requirements.
For a variety of reasons, this conventional life cycle of the private aviation buyer no longer exists. There has been a revolution in private aviation options and platforms, creating many new alternatives that did not exist 20 years ago. This has led to a decrease in brand loyalty by private aviation users. Also, many first-time aircraft buyers have not flown privately for an extended period of time and often skip the fractional ownership step. Additionally, many private aviation consumers have become much savvier and depend on a combination of multiple aviation solutions to fulfill their various travel needs.
WHY IS THIS IMPORTANT?
When a private aviation buyer finds herself in any one or more of the following scenarios: considering private aviation for the first time, looking for an alternative option to a current provider, contemplating whole aircraft ownership, or resolving dissatisfaction with a current service provider, there is no standard answer as to what program or option would be best. There are many factors to consider when selecting one or more private aviation products and the consumer does not often have the time to fully explore the multitude of available options. Here are some key considerations to keep in mind:
- Number of hours flown per year
- Importance placed on the age of the aircraft
- Length of flight segments
- Ratio of roundtrip vs. one-way travel
- Number of passengers
- Peak time traveler or business week traveler
- Acceptable service level (on time performance, working entertainment systems, interior condition and amenities)
Given the complexities of the offerings in today’s aviation market and the limited research time available to most consumers, it is often advisable to hire a consultant who charges by the hour (not on commission). The consultant can help the buyer consider the key factors mentioned, explore the various options and evaluate the solution that makes the most sense for the customer’s mission. When selecting the consultant, it is important to confirm that they do not receive any referral fees or other types of compensation by referring one program over another. The buyer must be sure the consultant is making their recommendation based solely upon the client’s best interests.
It seems that almost monthly there is a new aviation program or offering that I am hearing about for the first time or a new permutation on an old program. It is sometimes exhausting to keep up with all of the changes that are occurring in the marketplace. However, even if you read all of the marketing literature, you can’t truly understand a program, the “enhancements” it offers and the performance of the provider unless you place multiple users into a specific program on a regular basis. That is why an experienced consultant can bring tremendous value to a buyer evaluating private aviation solutions. And as I always remind my private aviation clients, please don’t simply select the program that your friend uses unless your friend has the exact same travel needs and service level expectations. You may be setting yourself up for a costly disappointment.
There is no longer a typical life cycle pattern for the consumer of private aviation. Take the time to evaluate all the options available and chart your own path based on the solutions that best suit your unique travel needs.
The original article was published on March 28, 2018 in BusinessAir Magazine, March 2018, Volume 28, No. 3.
AINsight: Piercing the Aircraft LLC Veil see more
NAFA member, David Mayer, of Shackelford, Bowen, McKinley & Norton, LLP, discusses the recent Texas Supreme Court ruling regarding special purpose LLCs.
Aircraft owners who form limited liability companies (LLCs) typically believe that this structure will shield them from personal liability. However, that reasonable expectation could be incorrect given a recent Texas Supreme Court decision in Texas v. Morello (Morello).
In Morello, the sole member of an LLC found that his LLC did not protect him from personal liability for his and its violations of the Texas Water Code. While unrelated to aviation, this ruling also could affect members and others standing behind LLCs that own aircraft. Morello could hand the FAA, as well as other state and federal governmental agencies, a powerful tool to levy fines and penalties on LLCs, their pilots, members, and other officials for violations of the Federal Aviation Regulations (FARs).
This point is illustrated by referring to one of the most common violations of the FARs: illegal operations of an aircraft in an LLC that is a “flight department company,” meaning a company formed solely to own and operate an aircraft without any other business function. Perhaps of greater concern, people who make claims for personal injury, death, or property damage related to aircraft might consider how to leverage Morello as part of a litigation strategy in which they make high-dollar liability claims against members, managers, pilots, and others behind the LLC.
As background, LLCs statutes exist in all U.S. states. An LLC affords its members and managers a “shield” against personal liability for the LLC's debts, obligations, and liabilities. Each state statute differs in some ways, but all of them make LLC members personally liable for their wrongful actions under a principle referred to as “piercing the corporate veil” (or here, the “LLC shield”). Certain LLC statutes create significantly fewer barriers to piercing the LLC liability shield, such as those in Maryland, Massachusetts, and California. Ironically, Texas adopted an LLC law that strongly shields members.
Two long-existing methods to pierce the LLC shield highlight ways to incur personal liability. First, members or managers might be held individually liable for their “tortious” conduct (a legal term that means a “wrong” committed by the individual). Torts include defrauding an aircraft buyer, even if the conduct was undertaken or condoned by the member while acting individually or in his or her official capacity as an agent for the LLC.
Second, a court can pierce the LLC shield and impose personal liability on a member when he or she treats the LLC as the member’s “alter ego.” An alter-ego structure can sometimes be identified when the single member figuratively puts the LLC “on the shelf,” ignoring LLC formalities and, among other elements, commingles his/her money with LLC funds—as if the LLC did not exist. Fortunately, few courts impose personal liability on members just for failing to follow the formalities.
But the Morello case seems to provide a third and apparently new way to hold an LLC’s members and others personally liable. Although plaintiff Morello conducted all business of the LLC, he argued that the robust LLCshield under the Texas statute protected him from personal liability for the regulatory violations by his LLC.
The court rejected Morello’s arguments and found him personally liable for civil penalties levied by the Texas environmental agency, even though he acted in his official capacity as an agent (employee) of his LLC. In a technical interpretation of the Water Code, the court refused to let Morello hide behind his LLC when the violated statute contemplated that a “person” could be held directly liable for the violation.
In the context of the highly regulated private aviation industry, it is a short step for the FAA to apply the court’s approach to violations of the FARs, at least in Texas, especially where a “person” in the FARs generally includes individuals and LLCs in an analogous manner to Morello.
To illustrate, consider the following common flight department company scenario. An individual (member) creates a single-purpose LLC—let’s call it Owner LLC—to own and operate a business aircraft. The member exclusively manages and owns Owner LLC and bypasses all LLC formalities. He personally makes all decisions about the aircraft, pilots, operations, and maintenance. He transfers cash into the LLC to pay costs of ownership and operation of the Owner LLC aircraft.
In this situation, taking a page out of Morello’s playbook, the FAA could pierce the LLC shield and levy civil fines/penalties on both the LLC and its member for operating a flight department company in violation of the FARs. The violations consist, in part, of the LLC failing to hold an appropriate air carrier certificate and for unlawfully “compensating” the LLC for illegal charter/commercial flights.
In these actions, the member risks personal liability under Morello whether he or she acts individually or in an official capacity for the LLC. Further, the wrongful acts of the true owner/member, who treats the LLC as an alter ego, could also increase the potential exposure of the member. The violations might encourage others, if the facts seem right, to seek damages for personal injury or property damage based in part on the FAR violations.
An LLC owner might suggest that the remedy for these risks is buying liability insurance. However, it is rare that insurance covers fines or civil penalties, and a serious violation of the FARs could even cause an insurance company to disclaim coverage or reserve its rights not to pay for liability or property damage claims. In short, LLCmembers, managers, and pilots should have no illusions that, under Morello, they could potentially face personal, uninsured liability for violations of the FARs, without even considering pre-existing personal liability theories.
LLC members typically don’t worry about personal liability if an LLC owns their private aircraft. And they need not be overly concerned about Morello or the FAA relating to the LLC personal liability exposure if, in general, they do not treat their LLCs as alter egos, avoid tortious behavior, and comply with the FARs, including structuring LLCfunctions properly to avoid flight department company status.
But a regulatory compliance audit now might save an LLC owner from stinging FAA civil fines/penalties for operating a flight department company or violating other FARs, not to mention exposure to liability claims for personal injury or property damage. It should not be too hard to get the compliance right, but getting it wrong or ignoring compliance could take LLC members into an expensive and avoidable morass.
Note: The LLC issues covered in this blog do not constitute, and should not be relied on or construed as, legal advice of any kind. Most cases and LLC structures require extensive legal analysis. Each person should consult knowledgeable counsel in all matters covered by, or related to, this blog.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing and aircraft renovations. Mayer frequently represents high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at firstname.lastname@example.org, via LinkedIn or by telephone at (214) 780-1306.
The original article was posted to AINsight Blog on September 14, 2018.
AINsight Blog: Tax Reform a Deal Changer for Bizav see more
If the Tax Cuts and Jobs Act of 2017, H.R.1, aimed to simplify federal taxes in the U.S., it missed the mark for business aviation. However, it did include significant tax benefits and other changes worth considering before a prospective business/taxpayer enters into an aircraft purchase, sale, lease, or management arrangement. Changes include full expensing of aircraft cost until 2023, repeal of like-kind exchanges, an exemption of aircraft management fees from federal excise taxes (FET) and continuing incentives for tax leasing.
H.R.1 should boost new and preowned aircraft acquisitions and sales because it offers buyers immediate cash savings on purchases of aircraft. It does so by increasing “bonus depreciation” on business aircraft purchases from 50 percent to 100 percent starting Sept. 27, 2017, and ending in 2023. After that, it phases down 20 percent per year to zero.
A business can, therefore, “fully expense” the aircraft cost in the year the business places the aircraft in service in its “trade or business,” meaning it must use the aircraft for more than 50 percent business use. Previously, bonus depreciation applied only to new aircraft, but H.R.1 extends bonus depreciation to preowned aircraft. If the business does not use the aircraft in its trade or business, this benefit does not apply.
The cash value of full expensing helps offset the disappointing repeal of IRS section 1031 like-kind exchanges. To illustrate, assume a business purchases a preowned, “replacement aircraft” for $5 million in 2018 and sells its fully depreciated, old, “relinquished aircraft,” for $4 million that same year. The business receives $4 million in ordinary income from the sale of the relinquished aircraft and fully expenses the $5 million purchase price of the replacement aircraft.
At the new corporate tax rate under H.R.1 of 21 percent, down from a previous 35 percent maximum, the business saves $840,000 in taxes on its $4 million sale. Before H.R.1, it would have deferred the taxable income under IRC section 1031 rather than achieve immediate tax savings. Importantly, as bonus depreciation phases down, income taxes will likely increase on proceeds of aircraft sales that a like-kind exchange could otherwise have continued to defer.
In a change that provides some relief for business aviation, H.R.1 seems to protect management companies and their customers from FET on “aircraft management services.” This new term refers to a broad range of flight, administrative, and support services provided by management companies to aircraft owners and lessees.
The key to structuring non-FET management arrangements appears to be simple: only aircraft owners and certain lessees may pay for flights of their managed (owned or leased) aircraft, even if they are not on the flight. This rule should ease the concern about IRS imposition of FET and provide a reliable basis for structuring management and leasing transactions.
One key feature of H.R.1 arises from what it does not include. H.R.1 omits any reference to “possession, command, and control” (PCC) of aircraft, its controversial Chief Counsel opinion in 2012. There, it sanctioned the imposition of FET on management company fees largely because it found that the management companies exercised PCC.
The absence of that factor in H.R.1 should insulate owners and certain lessees from IRS intrusion based on specious PCC arguments. Nevertheless, owners, lessees, and other operators should scrutinize existing and new aircraft lease and management documentation to align the provisions closely to applicable provisions in H.R.1.
Management companies beware: H.R.1 does not change the imposition of FET on parties engaged in “transportation by air” under IRS Section 4261 for commercial operations/charter. Further, H.R.1 does not alleviate the existing ambiguity in categorizing private and commercial operations caused, in part, by the IRS’s persistent disregard of FAR Parts 91 and 135.
Stated differently, the FAR and IRS apply different standards to identify private and commercial flights. Still, this disconnect should not interfere with the practical applications of H.R.1 or the FARs.
Finally, H.R.1 alters the tax dynamics for leasing. Businesses already use leases, as lessees, to shift residual value risk to owner-lessors and achieve favorable pricing. Although higher pre-H.R.1 tax rates encouraged tax leasing, H.R.1 should nonetheless support tax leasing by lessees that lack a sufficient tax liability to use full benefit of 100 percent bonus depreciation, loan interest, and state income tax deductions.
A lessor can help reduce its lessee’s after-tax cost of capital when using the tax benefits available to it on acquiring aircraft. By purchasing an aircraft, a lessor with an adequate tax appetite should use tax benefits efficiently and share its reduced tax burden by lowering rents payable by its lessee.
H.R.1 should help lift the volume of business aviation transactions, but businesses must properly structure deals to make the most of it. As with any tax or legal matter, always consult your own expert to properly address your personal situation.
David G. Mayer is a partner in the global Aviation Practice Group at the Shackelford Law Firm in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing and aircraft renovations. Mayer frequently represents high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at email@example.com, via LinkedIn or by telephone at (214) 780-1306.
This article was originally published on AINonlnie on January 11, 2018.