Owner Personal Liability for Illegal Charter Ops see more
NAFA member David G. Mayer, Partner with Shackelford Law, discusses illegal charter operations, personal liability and LLCs.
It’s an unfortunate reality that private aircraft accidents occur all too often and cause fatalities, personal injuries, and significant property damage. In the first half of 2019, fatalities in private aircraft accidents soared to 47 people, an all-time high for comparable periods. Families who experience these losses usually hire lawyers to seek compensation from aircraft limited liability companies (LLCs), members, owners, operators, manufacturers, and others.
Many aircraft owners believe that, if an LLC holds title to their aircraft, the LLC will protect the owners, as LLC members, from personal liability arising from any accident. This belief extends to any accident that occurs during illegal charter operations.
However, their belief may be wrong. As discussed below, just one prevalent type of illegal charter operation may occur if an LLC operates flights only for the owners/members, using the owner/member’s cash, paid into the LLCs for aircraft operating costs. Though surprising to many people, the LLC becomes a “flight department company” operation that not only is functioning illegally but also may be exposing the owner/members’ personal wealth to the FAA civil penalties and other claims.
Looking into a Real Fatal Accident
On March 8, 2019, a tragic aircraft accident occurred in Florida that killed five people when the twin-engine Piper Aztec in which they were flying hit the surface of a lake on approach to Palm Beach County Glades Airport (KPHK), Pahokee, Florida. Although yet to be officially determined, the initial facts suggest that the passengers hired the pilot who conducted an illegal charter for unspecified compensation. Though he was certified for commercial flights, the pilot’s required second-class medical certificate lapsed on Nov. 30, 2018, more than three months before the deadly flight. As a result, the pilot could not legally conduct the flight. For more on pilot operations, read my article titled Should Aircraft Owners Worry About Their Pilots?, AvBuyer (Dec. 22, 2017).
In addition, the aircraft owner, L-Holding LLC, apparently did not meet the certification requirements under Part 119 of the Federal Aviation Regulations (FARs). Further, it did not hold an operating certificate under FARs Part 135 to lawfully conduct the Piper Aztec's on-demand commercial flight under Part 135.
The Florida accident raises important questions for LLCs and their members that conduct illegal charter operations: Will the LLC, if properly formed, shield the members’ liability from occurrences like the Florida accident or civil penalties imposed by the FAA? In a case like the Florida accident, will the LLC’s insurance provide a defense to civil lawsuits and pay for money judgments? Will insurance respond to FAA civil penalties against the LLC, its members, or the pilot?
Perhaps the most fundamental question for these members or their LLCs is whether, in today’s heightened enforcement environment discussed below, conducting illegal charter operations is worth risking personal wealth to pay a claimant, the FAA, or the Department of Justice (DOJ), and significant legal costs? A similar question exists for any pilot who may lose his or her pilot’s certificate resulting from illegal flight operations.
Structuring LLCs to Mitigate Personal Liability Risk
When properly formed and used, an LLC can maintain the shield afforded to members under various state laws. The laws generally limit the members’ personal liability from the LLC's debts, obligations, and liabilities. Although it is difficult, in the Florida accident or comparable situation, it is reasonable to expect that the claimants will try to penetrate the LLC shield to reach members’ personal assets. This may especially be true in the Florida accident if the families confirm the pilot or the LLC operated the aircraft as an illegal charter.
Spotting Illegal Charters
Illegal charters come in many forms as discussed by the NBAA's The Risks of Flying With Illegal Charter Operators. Three examples deserve emphasis here: a Part 135 operator does not comply with the FARs’ safety standards, illustrated by the apparent lapse of the pilot’s medical certificate before the Florida accident; a Part 91 operator enters into multiple timesharing or leasing arrangements that constitute disguised, sham charter operations that should be operated as Part 135 flights; or an often misunderstood or ignored infraction under Part 91 where members provide cash for flight operations in flight department companies.
Flight department companies, typically created in the form of LLCs, exist and function for the single purpose of owning and operating their own aircraft for the benefit of their members and their guests. Owners pay for the aircraft operating costs through members capital contributions or other cash transfers into the LLC.
These cash infusions fundamentally convert such an LLC into an illegal “commercial operator.” The FAA defines a commercial operator as one that operates an aircraft carrying persons or property “for compensation or hire.” Under a flight department company structure, any payment into the LLC constitutes illegal “compensation.”
If a flight department company and/or its owner let people know that those people can use the aircraft, operated by the company, in exchange for any cost reimbursement to the company, the second fundamental violation likely occurs. The company is likely illegally holding the aircraft out for “hire.”
Perhaps surprising to many owners/members, unless and until the companies obtain a Part 135 air carrier certificate, both these operations “ for compensation or hire,” simply put, constitute illegal charter operations.
For example, think of an LLC member who (1) pays money into the LLC for that member’s flights in order supposedly, in part, to create a liability shield for the benefit of the members; (2) offers a friend that she or he is welcome, at the friend’s expense, payable to the LLC, to “borrow” the LLC’s aircraft, including its pilots, for a weekend college visit; (3) collects fuel costs from a passenger to ride along on the owner/sole member’s ski trip; or (4) flies several golfers to a location for a business meeting but charges passengers non-pro-rata shares of the operating costs.
Some owner/members don’t realize they have created a flight department company or that the normal functions of the company violate the FARs. Others who do know or receive good advice from aviation counsel about the prohibition under the FARs simply ignore or refuse to obey the rules.
I have heard of comments such as: “I have been running the airplane reimbursements and flights through my LLC for many years without any issues and don’t plan to change;” or “My friend has used his LLC to operate his aircraft without any FAA problems;” or “The LLC ownership is a good way to block personal liability, and these rules won’t be a problem for me or my company.”
These Illegal charter operators should appreciate that, in addition to the FAA’s own increased enforcement actions, the FAA has powerful industry allies like the National Air Transport Association (NATA), including NATA’s Air Charter Committee, and the NBAA. NATA’s website, titled Avoid Illegal Charter, provides significant resources to explain illegal charter operations and educate consumers, among others, on the dangers of illegal charter operations. NATA also helps the FAA focus enforcement actions against illegal charter operations while promoting the Illegal Charter Hotline, (888) 759-3581, so anyone can report illegal charter operators.
Aircraft owners and operators can significantly mitigate their risks by asking knowledgeable aviation counsel to conduct a compliance checkup. In completing this task, aviation counsel can confirm that the LLC ownership structure and operations comply with the FARs or, if not, restructure the LLC and/or operations to bring them into compliance.
In addition, counsel should examine the structuring of the LLC under state law to maximize the protection of the members with special attention on the exposure of a single member in LLCs.
Imposing Personal Liability for Illegal Charters
The best structured LLC may not be enough to protect its members from personal liability arising out of illegal charter operations. If members believe the FAA won’t find them, they should take heed; the FAA and the business aviation industry have intensified their scrutiny of, and the FAA has ramped up civil and criminal enforcement actions against, illegal charter operations. For more, see my blog titled AINsight: FAA Actively Pursues Illegal Flight Ops.
Owners who believe insurance will cover them regardless of violations should think again. Insurance policies will likely not cover civil or criminal penalties assessed by the FAA or other governmental agencies. Further, as underwriters continue to increase insurance premiums to curb their losses on claims payouts, they also may reserve rights not to insure a non-compliant charter business or flight department company or their members. They may also look for policy provisions, such as warranties and coverage exclusions, to deny policy claims involving illegal charter operations.
Pursuing Assets of LLC Members for Illegal Charters
As occurs in all aircraft accidents, the FAA and the National Transportation Safety Board (NTSB) launch investigations into the cause(s) of the accident and regulatory aspects of the flight operation associated with the occurrence. If the FAA imposes civil penalties on the LLC or its members exceeding $50,000, the DOJ enters the fray to enforce those civil penalties under FAA Order 2150.3C. And, as noted above, most families file lawsuits against aircraft owners, operators, and others to secure compensation for their losses.
Even if insurers defend the insured, violators can still expect to pay significant legal fees in the defense of the claims or FAA/DOJ actions. A recent Texas case may provide the FAA and DOJ with an additional tool for assessing civil penalties directly against the LLC members; in other words, they allow the FAA and DOJ to pierce the LLC shield that prevents members from incurring personal liability for the LLC’s debts, obligations, and liabilities.
My blog, titled AINsight: Piercing the Aircraft LLC Veil, discussed a 2018 Texas Supreme Court case, Texas v. Morello, in which a Texas water agency sued the sole member-employee of an LLC and the LLC for their failure to comply with an environmental clean-up plan relating to the Texas Water Code. The agency imposed punitive damages and fines on the member for approximately $1 million. After my blog published, Mr. Morello asked the U.S. Supreme Court to hear his argument that the Texas agency did not justify the fines imposed on him personally, thereby piercing the LLC shield. On November 19, 2018, the U.S. Supreme Court refused to hear Mr. Morello’s case.
Given the U.S. Supreme Court decision, the FAA, the DOJ, and other regulatory agencies could use Morello as a legal basis to tap into personal assets of LLC members to pay for civil penalties as happened to Mr. Morello in Texas. Private claimants might also use Morello to sue members based on legal concepts of negligence per se (liability for violations of statutes and regulations that cause harm), reckless disregard for passenger safety or other similar theories of liability under the state laws that govern the case.
The objective is the same in all cases – to pierce the LLC shield and collect money damages from individual members. As a Texas state case, Morello may not be a game-changer nationally. However, the FAA and DOJcould potentially use Morello to impose personal liability of members for illegal charter operations, especially when the members flagrantly, expansively and continuously disregard the FARs.
In conclusion, flight department companies and other illegal charter operators should promptly change course to comply with Part 91, Part 119 and Part 135. The idea is simple: Get certified for charter operations and play by the rules. If they fail to do so, members and their companies not only undermine the regulatory framework designed by the FAA to ensure safety in aviation but also snub the business aviation industry, which expects all operators to do what is right.
This article was originally published on AINonline on July 12, 2019.
FAA Plans To Modernize Its Outdated Civil Aviation Registry Systems, but Key Decisions and Challenges RemainFAA Plans To Modernize Its Outdated Civil Aviation Registry Systems, but Key Decisions and Challenge see more
FAA plans to modernize its outdated Civil Aviation Registry Systems, but key decisions and challenges remain.
Requested by the Chairman of the House Transportation and Infrastructure Committee and its Subcommittee on Aviation and the Chairman of the Senate Committee on Commerce, Science, and Transportation
Federal Aviation Administration | AV2019052 | May 8, 2019
What We Looked At
The Civil Aviation Registry (The Registry) processes and maintains ownership information on approximately 300,000 private and commercial aircraft and records on almost 1.5 million airmen. The Registry is critical for ensuring aircraft are legally owned, maintained, and operated, and many users in law enforcement, safety, the aviation industry, and the public rely on the accuracy and timeliness of its data. The Chairman of the House Transportation and Infrastructure Committee and its Subcommittee on Aviation requested that we assess FAA’s overall management of the Registry and public access to certain Registry elements. We received a similar request from the Chairman of the Senate Committee on Commerce, Science, and Transportation. Our audit objective was to assess FAA’s management of the Civil Aviation Registry. Specifically, we assessed FAA’s
(1) progress in modernizing the Registry and (2) policies for providing public access to Registry-related activities.
What We Found
The Registry’s systems are outdated, and FAA has yet to develop a detailed plan for modernization. The Registry’s current systems cannot support online access outside of the Registry’s offices in Oklahoma City, OK. While FAA is in the early stages of developing plans to modernize the Registry’s systems, the Agency has not yet made key decisions regarding the system. Consequently, the cost and timeframes for Registry modernization remain uncertain, even though FAA is mandated to complete Registry upgrades by October 2021. In addition, the regulations that govern aircraft registration do not reflect current technology or business practices, and FAA will likely need to conduct a rulemaking in conjunction with Registry modernization. If FAA does not complete the rulemaking in coordination with the development of the new system, the Agency risks spending resources on a system that lacks key capabilities.
Due to the current system’s limitations, users who need to access aircraft registration information in real time must access the system through the use of Government-owned computer terminals located at the Registry’s Public Documents Room (PDR) in Oklahoma City. For users who cannot or do not want to travel to Oklahoma City, they can obtain aircraft information online, but that information is updated once a day, rather than in real time. Moving towards a more efficient process hinges on modernizing the Registry, but FAA has not yet developed a plan for allowing real-time access to aircraft information.
FAA concurred with all four of our recommendations and proposed appropriate actions and completion dates.
All OIG audit reports are available on our website at www.oig.dot.gov.
For inquiries about this report, please contact our Office of Congressional and External Affairs at (202) 366-8751.
Click here to read the full report.
This report was originally published by the U.S. Department of Transportation, Office of the Inspector General on May 8, 2019.
Private Aviation Case Study: Transitioning from a Business to Personal Fractional Share see more NAFA member, H. Lee Rohde, III, President and CEO of Essex Aviation, shares a private aviation case study.
As a privately held, family-run company with a substantial global footprint, the client had realized some time ago that relying on commercial airlines was an impractical way to conduct business.
For more than 15 years, the family-run business enjoyed the benefits of fractional aircraft shares for their business travel requirements. They started with a small executive aircraft, which made business travel so efficient that they found themselves increasing their fractional shares. With four family members utilizing the aircraft, 75% of their fractional ownership travel hours went towards business while the remaining 25% was spent on personal use.The Challenge
In 2017, the family sold their business to a group of investment companies. While they no longer needed to travel for business, the family decided they would like to continue flying privately for their personal needs. As part of the acquisition of the business, the buyers also purchased the fractional share the company owned as part of the transaction.
Although the family had a decade-long relationship with their fractional provider for business use, transitioning to personal fractional share required a different strategy to meet their future travel requirements.The Solution
The family’s attorney recommended they consult with Essex Aviation to evaluate their options. As a qualified aviation consulting firm, Essex performed a full analysis of the transition, which included:
- Identifying the type of aircraft that would satisfy their aviation needs.
- Determining any potential conflicts in scheduling.
- Helping the family understand the financial benefits of each option.
The family worked with Essex to review the options available from their then current fractional provider and also received proposals from other providers. Essex worked with the family to review and identify their best options and, for a variety of reasons selected, to go with a new provider.
The family started with a 75-hour fractional share which they leased and later transitioned into a 150-hour share per year to accommodate their increased personal travel requirements.
Essex was able to use their expertise and industry knowledge to perform an initial evaluation and holistic review of all the available options for the family. They also assisted the client with navigating through all of the necessary negotiations and final contract process.
Essex continues to provide thorough aviation consulting services to assist the family whenever they need to add more hours to their contract, explore new options or negotiate the most practical solution.
To download the full case study, click here.
This case study was originally published on Essex Aviation's blog.
What to Consider When Selecting Your Aircraft Management Company see more
NAFA member, Tom Mitchell, Executive Vice President of Essex Aviation Group, Inc. highlights what to consider when selecting your aircraft management company.
When acquiring your first aircraft, one of your first decisions will be how the aircraft will be managed and operated. Some owners opt to run their own flight department, but many seek out a third-party aviation management company. These companies have decades of experience managing aircraft of all types and sizes and their purpose is to make your ownership as seamless as possible.
When considering the various management company options available, you can be certain that they are all quite different as to what they can offer. Depending upon your specific needs and requirements, you will find many of the options may not be the best fit for your specific needs and requirements.
Types of Aviation Management Companies
In the private aircraft management industry, there are three (3) primary types of aircraft management companies:
Within each category are differences in the scope of resources offered, and several factors should be considered and evaluated to determine which type of organization is best for your needs. Always assess each management company’s safety culture, research their incident and accident history and learn about and understand their operational experience and reputation.
Aircraft Management Services
Although every aircraft management company offers different management services, there are certain basic services you should expect to receive such as crew recruitment, accounting, flight coordination, and a well-organized charter department. We recommend that clients who are evaluating a management company consider the following:
Things to look for: Make sure you understand the aircraft management company’s key operations, maintenance, crew management and administrative functions. All of these factors will directly impact your relationship with the company and your use of the aircraft.
Also, keep in mind the geographic location where you intend to base your aircraft. Some aircraft management companies may base all the aircraft they manage at one central location requiring that your aircraft be positioned to your desired departure airport for your trips or for maintenance. Other management companies are able to support your aircraft based at any airport you choose that supports your aircraft’s operational requirements.
Your Requirements for an Aircraft Management Company
A good first step is to outline and prioritize your goals as a private aircraft owner, in order to define what would make an ideal relationship. Be sure to allow sufficient time to review and receive proposals from a range of aircraft management companies and compare their differences. If you begin the selection process with an honest self-assessment, the relationship you build with your aviation management company will be that much better.
Things to look for: Chartering your aircraft to third parties can be a way to generate revenue when you aren’t using your aircraft. If you plan to charter, there are many things you’ll require from your aircraft management company. First and foremost, make sure your management company can operate your aircraft under their own Federal Aviation Regulation (FAR) Part 135 charter certificate.
Allowing your aircraft to be utilized for third-party charter can generate revenue to reduce the owner’s overall operating costs and can also make your aircraft attractive to outside aviation management companies. You should, however, not get false hopes about covering your overall operating costs. “There’s almost never a break-even point,” said Kyle Slover, COO of Volo Aviation “The better way to think of it is, ‘what does it do to my (the owner’s) occupied hourly rate?’ Discuss with your management provider what the financial metrics are that you are trying to reach.”
If internal or third-party Part 135 charter is one of your goals it is prudent to engage the assistance of an independent and knowledgeable industry consultant or advisor to facilitate the ownership structure.
Private aircraft management companies of varying sizes will provide certain advantages and limitations when it comes to chartering. Regardless of who you choose, you’ll want to be sure they’re equipped to handle all aspects of chartering and aviation management.
- Supporting varying flight destinations and times of travel
- Managing all ground services, details and security
- Negotiating discounts on your behalf
As you make your final selection, be sure to choose a private aircraft management company that can meet not only your current but also your future needs. Whichever company you choose, you can and should expect it to partner with you to meet your travel needs, your budget and any charter revenue requirements.
What you should know about using 100% bonus depreciation for private aircraft. see more
Deducting the price tag of a private aircraft under the new 100 percent bonus depreciation rules is an intriguing idea, but it takes some effort. Planned correctly, a prospective aircraft owner can pocket a meaningful amount of cash related to purchasing almost any size and model of aircraft, whether new or pre-owned, including a fractional share of an aircraft.
Knowing About the Source of the Depreciation Benefit
The 100 percent bonus depreciation benefit arises under the Tax Cuts and Jobs Act of 2017, H.R. 1, enacted on Dec. 22, 2017, (the Act), and is now integrated into the Internal Revenue Code (IRC). The Act temporarily allows 100 percent bonus depreciation starting Sept. 27, 2017, and ending Dec. 31, 2022. Bonus depreciation will then phase down 20 percent per year for five years to a zero bonus. The IRS issued proposed regulations for 100 percent bonus depreciation on Aug. 8, 2018. When final, the regulations should help provide some clarity around certain ambiguous provisions in the Act.
Understanding Depreciation for Business Aircraft
Depreciation is an allowance Congress enacted to encourage businesses to purchase tangible personal property, including private aircraft. Depreciation allowances provide that business taxpayers may claim an annual tax deduction to recover the cost or other tax “basis” (adjusted cost) of the property for its wear and tear, deterioration or obsolescence.
Aircraft owners can depreciate an aircraft’s cost or other basis by using the straight-line depreciation method under the Alternative Depreciation System (ADS) or by using the Modified Accelerated Cost Recovery System (MACRS). MACRS is used to recover the cost or other basis of most business and investment property and recovers the cost of eligible property faster than under the straight-line method.
Straight-line depreciation divides up the aircraft cost or other basis in equal parts each year during the prescribed write-off period (called the “recovery period”) of the aircraft until the aircraft has been fully depreciated. The primary use of the aircraft determines the applicable recovery period.
For an aircraft used only by the owner privately, the recovery period is six years under the ADS compared to five years for aircraft and certain helicopters under MACRS. For commercial use aircraft, including aircraft used to fly charters, the recovery period is 12 years under the ADS compared to seven years under MACRS.
An aircraft that qualifies for MACRS should be eligible for 100 percent bonus depreciation in the year in which the taxpayer places the aircraft in service. Even if the aircraft is eligible for 100 percent bonus depreciation, the aircraft owner can still elect straight-line depreciation under the ADS, regular accelerated MACRS according to a schedule prescribed by the IRC (excluding the “bonus”), and 50 percent bonus depreciation – but only for aircraft acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018. The increase to 100 percent bonus depreciation applies to property placed in service after Sept. 27, 2017.
Qualifying for Bonus Depreciation
The IRC imposes certain requirements on private aircraft use to qualify for MACRS and, by extension, 100 percent bonus depreciation. The IRC includes private aircraft in a special category called “listed property” along with certain other property, like vehicles and computers, that an owner can use personally and for business. To qualify for 100 percent bonus depreciation, the owner must “predominantly” operate the aircraft in “qualified business use.”
Predominant use is a critical element that refers to using the aircraft 50 percent or more of flight time. Qualified business use, in general, refers to the aircraft owner (an entity or individual) flying its aircraft in a “trade or business.” Also a critical aspect of tax planning, “trade or business” generally refers to a business enterprise conducted regularly and continuously for income or profit – such as operating a manufacturing plant. The IRC establishes a complicated calculation to achieve the status of qualified business use, which merits careful analysis.
Among other requirements, the aircraft owner must not use the aircraft predominately outside the U.S. – an important restriction for large cabin aircraft that travel globally. Also, the owner must not have used the aircraft before acquiring it or acquire the aircraft from a related party, such as a family member.
Illustrating the Use and Loss of Eligibility for Bonus Depreciation
To illustrate one type of situation, consider that, in 2018 “Fast Food Co.” makes $5 million of ordinary income, which is reported on Form 1120S, an S-Corporation tax return. Fast Food Co. buys a $2 million aircraft in December 2018 to travel between multiple cities. Assuming the aircraft is eligible for 100 percent bonus depreciation, Fast Food Co. issues a federal tax Form K-1 to the sole owner/stockholder, who may then deduct $2 million on his tax return in 2019 for the 2018 tax year.
At a 37 percent tax rate (the highest individual tax rate under the Act), the owner can effectively reduce such taxable income by up to $2 million to a net taxable income of $3 million (not considering other tax deductions or taxes). The tax savings is approximately $740,000 cash in the owner’s pocket, thanks to 100 percent bonus depreciation ($2 million x 37 percent tax rate).
If the aircraft loses its eligibility for MACRS depreciation anytime during the aircraft ownership period, the IRS can apply “recapture” rules to add back to owner’s ordinary income an amount equal to the “excess depreciation” over straight-line depreciation. The add-back would occur in the year in which the aircraft use fails to qualify for MACRS.
At a 37 percent tax rate, the payback to the IRS on the $2 million write-off could be significant for the owner. The tax on the excess depreciation amounts to the difference between 100 percent depreciation of the cost or other basis taken in the first year and the much smaller write-off of approximately equal amounts over the aircraft recovery period between six years for private use and 12 years for commercial use (e.g., $2 million/six years = $333,333/year instead of $2 million in year one).
Using Aircraft for Entertainment and Other Personal Use
Despite planning for qualified business use, most aircraft fly for personal use reasons (e.g., entertainment, amusement or recreation). Owners cannot take depreciation deductions for the flight hours or miles devoted to such personal use, but some depreciation write-offs should remain available if the aircraft is still used predominantly for qualified business use. Aircraft owners must calculate the percentage of personal use relative to business use by noting the names of each person on board, the reason for the travel, the hours and miles of travel and other information.
These calculations determine the entertainment “disallowance” – a part of the cost or other basis of the aircraft that the owner cannot depreciate. Importantly, aircraft owners should be aware of a special rule in the IRC that minimizes the negative effect of the entertainment disallowance for owners who claim 100 percent bonus depreciation.
Planning for Use of 100 Percent Bonus Depreciation
Because each aircraft owner is likely to have a complex tax situation, each owner should engage knowledgeable tax advisors, typically an aviation tax accountant and lawyer, to propose the optimal tax plan. The advisors should analyze such factors as the taxpayer’s organizational structures (individual, S Corp, LLC or C Corp), types of qualified business use, tax rates and any net operating losses (NOLs), timing and types of income, potential for excess business losses affecting single and married taxpayers (new under the Act) and anticipated personal use of the aircraft. Ultimately, an owner’s best path may be to bypass MACRS or 100 percent bonus depreciation if the straight-line depreciation method produces a better tax result.
Further, each aircraft owner should (1) keep detailed flight and passenger records, (2) develop flight planning that conforms to the tax strategy involving the aircraft, and (3) plan for IRS challenges to flying fewer qualified business use hours than necessary to demonstrate predominant business use.
Claiming 100 Percent Bonus Depreciation in 2018
There is still enough time in 2018 to buy and place in service an aircraft or fractional share and take advantage of the 100 percent bonus depreciation. Bonus depreciation is especially valuable toward the end of the year because it’s not long thereafter until a taxpayer can file a federal income tax return and reduce its income by an amount up to the aircraft cost or other basis. However, with 100 percent bonus depreciation available until 2023, it is strongly advisable to choose an aircraft wisely rather than rush to buy the wrong aircraft just so a taxpayer can take the tax deduction in 2018.
Bonus depreciation has generated wide interest in purchasing new or pre-owned private aircraft and fractional shares. Although these purchases take time and planning to close, prospective aircraft owners understand that there is no time like the present to help boost the economy and take flight in a fully depreciated aircraft.
This article was originally posted in Money, Inc. Magazine on October 29, 2018.
The Importance of Consent and Joinder Language in Aircraft Purchase Agreements see more
NAFA member, Debbie Mercer-Erwin of Wright Brothers Aircraft Title discusses the importance of consent and joinder language in aircraft purchase agreements.
In the 15+ years we’ve been in business, we have witnessed the good, the bad, and the ugly when it comes to private aircraft purchases and sales. Whenever possible, we like to share experiences with our customers and readers to prevent you from having an unpleasant transaction.
Prior to preparing a sales agreement, there will be an offer letter. While the terms of the offer letter are not binding, pay close attention as it does represent a commitment and is often used to draw up the sales agreement. The terms of a sales agreement are binding barring a legal reason for being enforceable. It’s important that you understand what is and what is not included. Most likely, buyers and sellers are having agreements drawn up by professionals, but it is still prudent to understand what you’re signing. Surely this sounds like common sense, but it’s worth pointing out.
Before you find yourself preparing for an aircraft closing – either as a buyer or seller – we’d like to help you understand the intricacies of aircraft purchase agreements; in particular, the importance of including Consent and Joinder language.
What is the purpose of a purchase agreement?
A purchase agreement outlines the terms and conditions of the sale. It lets the seller know that you are serious about purchasing the aircraft, and if it meets all the requirements of the agreement (it’s everything it’s represented to be), the aircraft should not be sold to someone else during this time. To protect you from the unforeseen, a buyer should be sure that the deposit given when the purchase agreement is signed is refundable or the trigger for nonrefundable treatment of the deposit.
Whichever party you are in the transaction, understand that the terms are negotiable. Do not agree to or sign anything that makes you uncomfortable. Even if a contract format has worked numerous times in the past, that doesn’t mean it contends with the specific terms and conditions of the current transaction in which you are involved. What has worked in the past could be a trap for the unwary in the present. Don’t sign a contract until it’s revised to meet your needs.
Sales and Purchase problems
Consider this possible scenario without clarity as to the deposit in a purchase agreement:
A buyer puts money in escrow as a deposit on an aircraft. At this point, there are no rules guiding what the escrow agent is supposed to do with the buyer’s funds, because the escrow agent has not been made a party to the agreement.
The buyer changes his mind and decides he doesn’t want to make the purchase. He asks for his money back. Because the escrow agent who is holding the funds is not a party to any of the agreements that exist, there is no clear obligation to anyone except for the depositor of the funds.
When there’s an aircraft purchase agreement, it is often a trigger that obligates the purchaser and makes the deposit nonrefundable. Otherwise there is no direction to an escrow company that says the funds are nonrefundable.
Consent and Joinder language in a sales agreement will help guide an escrow company. It would then be up to a court to determine who gets the deposit money through an interpleader action.
Avoid Problems with Consent and Joinder Language
When aircraft purchase agreements are written or put together by either the legal counsel or the sellers or the buyers, they should include what is known as Consent and Joinder by escrow agent so that they become a party to the agreement.
If you don’t take the time to include this information, you could find yourself in an unexpected situation.
- Under what circumstances does the deposit become nonrefundable?
- What is the seller responsible for with regard to the condition of the aircraft?
- What is each party responsible to do prior to closing?
At minimum, Consent and Joinder language included in your purchase agreement should include the following:
- The Escrow Agent accepts appointment by the Purchaser and Seller hereby as document holder and stakeholder for the sale and purchase of the Aircraft
- The Escrow Agent is acting as a document holder and stakeholder only
- They are not the agent or trustee for either of the parties
- They are not liable to either of the parties for any act or omission unless it involves willful misconduct or negligence on its part.
- The deposit is held exclusively for the sale of the aircraft based on the terms of the Agreement only
These observations are merely points to consider and should not be construed as legal advice or guidance to take or refrain from a particular position. As we discussed in our blog, Can’t I Handle my own Aircraft Closing, parties to an aircraft transaction should seek the advice of legal counsel.
This article was originally published in Wright Brothers Aircraft Title Blog on July 23, 2018.
Private Aircraft Ownership - A More Productive Method of Business Travel. see more
NAFA member, PNC Aviation Finance shares the advantages of private aircraft ownership.
Private aircraft ownership can often invoke images of celebrities jet-setting to exotic locations around the world. In reality, purchasing a private aircraft can save money and offer enhanced opportunities for corporations and businesses owned by high-net-worth individuals.
High-net-worth individuals and corporate executives want to save time and travel quickly to conduct business.
Private and business aircraft ownership can have a positive impact by allowing executives to set their own schedules and grow their business without being at the mercy of commercial airlines. This advantage can save money and could potentially offset the cost of the private aircraft in terms of cost savings, the ability to generate additional business and enhanced travel opportunities.
Rather than viewing the ownership of a private aircraft simply as an expense, in the right situation, it might actually provide a competitive advantage.
Access to Underserved or Remote Locations
The ability to access locations that are “off the beaten track" and not adequately served by regular commercial airline service can be a key advantage of using private aircraft. If your company does business in these types of locations, using a private aircraft can save time wasted in airports, changing flights and renting a car to drive to your ultimate destination.
If restricted to commercial schedules, it may be difficult to justify visiting prospects, clients or company locations in these areas on a frequent basis. This can negatively impact your business and affect potential growth opportunities.
Privacy and productivity
On a private aircraft, business can continue without the presence of strangers sitting in the next seat. This appeals to high-net-worth individuals who have privacy and security concerns that can't be guaranteed on commercial flights and at bustling airports.
In some business situations, executives want to ensure their privacy if they are traveling to a sensitive business meeting involving a confidential transaction, such as a potential acquisition or opportunity with a potential new customer.
A private aircraft offers an environment conducive for working, conducting meetings with other employees or business associates who are also on the flight or transacting business via phone during flight. This additional productivity can be invaluable as preparation can enhance the chances for success in any business situation.
For business executives, the cost of the flight and related expenses to maintain the aircraft can be more than offset by the convenience of being able to fly to a meeting on your own schedule. Sometimes, just showing up can be what it takes to land a new customer.
Tax Advantages and Issues
Purchasing a private aircraft can offer tax advantages, but this acquisition can be more complex than buying a piece of capital equipment or real estate.
A key issue is the ability to justify that a private aircraft is an ordinary and necessary business expense and not just a luxury or convenience purchase.
If an argument can be made that business is normally conducted in locations that have limited or no commercial service, a private aircraft is easier to justify. It can also apply if travel often occurs at the spur of the moment or at irregular times.
Using a private aircraft to address legitimate privacy and security concerns for executives and employees can be another justification.
There can be a number of taxes, such as potential sales and use taxes, associated with private aircraft ownership, one being how the aircraft is owned. Ownership by a separate entity other than the main operating business can lead to tax implications.
Before purchasing a private aircraft, it is wise to have your tax and legal advisers conduct a thorough review in terms of the best ownership structure and the anticipated usage to ensure the best possible tax outcome.
Additionally, there are distinct rules regarding the separation of business and personal use of the aircraft. This can extend to personal use as a perk for employees and even in the case of a spouse flying on an executive plane without a business purpose.
It's important to establish rules for usage and to account for travel using a consistent process that meets both internal and external reporting requirements.
The diligent maintenance of usage records and the reason for each passenger being on each flight is critically important.
If properly structured and used, the cost of private aircraft ownership can be partially offset by tax benefits that can reduce the cost of ownership.
We Can Help
PNC Aviation Finance offers knowledgeable financing solutions to make private aircraft ownership possible and affordable.
We offer custom-tailored financing packages based on business needs and circumstances. Our experienced aviation finance team understands and has extensive knowledge regarding private aircraft ownership requirements, FAA, insurance, operating leases, etc.
We can help you look at the implications of each option and help you decide on the best option for you or your business.
Learn how PNC Aviation Finance can help you fly higher by visiting pnc.com/aviation.
This article was originally published by PNC Aviation Finance.