If you own an aircraft and are not utilizing it as much as you would like or if you would like to try and recover some of the cost of owning the aircraft, you may have thought about renting your aircraft to other pilots. As a practical matter, that makes some sense. But before you actually rent your aircraft to another pilot, here are a few things you should consider.
Aircraft Owners May Rent Their Aircraft To Third Parties
It is important to understand that the FAA does not prohibit aircraft owners from renting their aircraft. In fact, the regulations specifically contemplate rental arrangements. So, renting your aircraft is permitted, provided that you comply with applicable regulations. The FAA provides guidance on what is and isn't a permissible rental arrangement in Advisory Circular 91-37B Truth in Leasing (although truth in leasing requirements only apply to large civil aircraft, the general lease concepts discussed in the AC apply to leasing arrangements for all aircraft).
Make Sure Your Insurance Permits Aircraft Rental
Most aircraft insurance policies will extend coverage to other pilots who fly your aircraft provided that the pilots are either expressly identified in your policy or if they have the necessary experience/qualifications to meet the "open pilot" clause of the policy. However, if you are going to charge the pilot for use of your aircraft, you need to confirm that your policy allows you to rent or lease your aircraft to a third-party. Most aircraft policies issued to owners for personal/business flying do allow aircraft leasing, but it is important to confirm this with your insurance underwriter.
Also, rather than paying to obtain their own insurance policy or renter's insurance to cover their use of your aircraft, most renter pilots will want to be named as an additional insured under your policy as this can oftentimes be done at no cost to you or the renter pilot. In that case, renters will typically ask for a certificate of insurance that reflects not only that they are added to your policy, but that they are covered for their operation and use of their aircraft. This is important because it doesn't do the renter pilot any good if he or she is added to the owner's policy but only covered for the owner's operation of the aircraft, rather than his or her own use.
Renting Your Aircraft Can Trigger Tax Consequences
In most states, when an aircraft owner rents an aircraft to a third-party the owner is required to collect and remit sales tax on the rent paid by the third-party for the aircraft. If you are in one of those states, in order to rent your aircraft you will need to obtain a sales tax number so you can collect and remit sales tax to the taxing authority. This is the aircraft owner's obligation and the taxing authority will hold the aircraft owner responsible for any sales tax the taxing authority believes the aircraft owner should have collected and remitted, regardless of whether the renter pilot actually paid the sales tax to the aircraft owner.
Also, when you rent your aircraft many taxing authorities view that activity as commercial activity which then means your aircraft could be subject to assessment of personal property tax on the value of the aircraft, or some portion of the value based upon the pro-rata rental versus personal use of the aircraft. Although not all states assess personal property tax on aircraft, if you are in a state that does you will want to determine your potential property tax exposure before you decide to rent your aircraft.
Although you will also have other things to consider as you decide whether to rent your aircraft to other pilots, these three issues should be near the top of your list. And if you understand and address these issues up front that will help ensure a successful aircraft rental experience for both you, the aircraft owner, and your renter pilot.
Greg can be reached at:
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
As we get to the end of the year, many aircraft purchasers and sellers are trying to get their deals closed. Whether for tax or other reasons, year end is a busy time for aircraft transactions. Many transactions are closed using escrow agents located in Oklahoma City, Oklahoma (home of the FAA Aircraft Registry). If you have never been involved in an aircraft transaction, you may wonder what happens at an aircraft closing.
In a typical (if such a thing exists) aircraft closing, here are the steps an escrow agent takes to help aircraft sellers and purchasers close a transaction once all of the necessary funds and documents are in escrow:
The escrow agent will pay off any liens, mortgages, security interests or other interests held by third parties against the aircraft ("Liens");
The escrow agent will disburse to the seller the purchase price, plus any unpaid amounts due from purchaser to seller for flight costs associated with moving the aircraft to the inspection facility or the delivery location, and less one-half of the escrow agent's fee;
Once the seller confirms receipt of the funds, the escrow agent (a) dates and files with the FAA releases of any Liens the FAA Aircraft Bill of Sale (FAA Form 8050-2), the Aircraft Registration Application (FAA Form 8050-1) and statement in support (for example, if the purchaser is a limited liability company); and (b) dates and releases the Warranty Bill of Sale and Assignment of Warranties and Other Rights (if applicable) out of escrow to purchaser;
Purchaser executes and delivers the delivery receipt to the seller which confirms the aircraft is in the delivery condition and is accepted by the purchaser;
If the aircraft is subject to the Capetown Convention, the escrow agent, as purchaser’s professional user entity, registers the sale of the aircraft to the purchaser with the International Registry; and
The escrow agent, as the seller’s professional user entity, discharges any registration by seller with the International Registry of any international interest or prospective international interest registered with respect to the aircraft, and consents to the registration of the sale of the aircraft to the purchaser.
The seller and purchaser usually intend that each of these actions is interdependent with each of the others, but that upon completion they are considered to have occurred simultaneously. When all of these steps are completed, the seller delivers physical possession of the aircraft to the purchaser at the closing location.
This closing process may occur via a telephone call with all of the interested parties on the line, or simply after each of the interested parties has provided authorization (usually via e-mail) for the escrow agent to perform these steps and close the transaction. And, of course, depending upon the transaction, these steps may vary. But this is generally how the process occurs.
If you ever have questions or need assistance with an aircraft transaction or closing, I would be happy to help. And in the meantime, Happy New Year.
Greg can be reached at:
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
As you may know from my previous articles, an aircraft owner may use a limited liability company (“LLC”) to register and hold title to the owner’s aircraft. An LLC is formed by filing articles of organization with Secretary of State (or equivalent) in the state in which the LLC is organized. The LLC has members who hold/own membership interests in the company that are represented by the members’ capital accounts. The LLC may be managed by managers or it may be managed by the LLC member(s).
An LLC is a type of business entity that has distinct legal personality from its owner(s)/member(s) and managers. An LLC is treated as a separate “person” in the eyes of the law with an independent existence from its members. Thus, if the owner/member of an LLC dies, the entity continues to exist (although an LLC needs to specifically elect to have this continuity of existence).
However, once set up, the laws governing LLCs require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records, filing annual renewals/registrations etc.). If the LLC does not comply with those formalities, it is possible that the law will not recognize the LLC as a separate “person” and will look to the LLC’s members or managers to personally honor the LLC’s obligations. This is called “piercing the corporate veil.” Not only is this a bad situation for the LLC members, this concept is frequently confused with the Internal Revenue Service’s treatment of an LLC as a “disregarded entity.”
Although an LLC is a “legal entity”, the Internal Revenue Service (“IRS”) does not treat an LLC as a “tax entity.” Rather, the IRS “disregards” LLCs for federal tax purposes as if the entity does not exist. Most LLCs with a single member are taxed as a sole proprietorship, while a multi-member LLC is usually taxed as a partnership. In some cases, the LLC can elect to be treated as an “S” corporation if the LLC satisfies certain criteria.
As a disregarded entity, a single-member LLC does not file an income tax return or report income, loss, deduction, or credit. Instead, the LLC member incorporates these tax items into the member’s tax return. Similarly, a multi-member LLC’s members and the members of an LLC that has elected “S” corporation tax status would report on their respective tax returns.
If you are using an LLC to own an aircraft, keep in mind that the IRS’s disregard of your LLC for tax purposes does not relieve you of your responsibility to comply with the formalities required by the laws applicable to LLCs. Failure to comply with the formalities can negate the personal liability protection otherwise afforded to an LLC’s members, and can also render the aircraft’s registration invalid. So, it is important to pay attention to both the tax and the legal aspects applicable to your LLC to take advantage of the benefits of owning an aircraft with an LLC.
Note from Publisher: If you are in need of professional aviation legal services please reach out to Greg. With over 20 years of service in the corporate and general aviation services Greg can help to make sure you are protected in any applicable laws in the aviation industry.
Unfortunately, the terms "destroyed" and "repairable" are not defined anywhere in the regulations. But, as you might expect, the FAA has a policy/opinion about what these terms mean. In fact, the FAA has issued Order 8100.19, Destroyed and Scrapped Aircraft which spells out what these terms mean and how they are to be applied by FAA inspectors. If an aircraft is capable of being repaired and returned to service after it was unserviceable due to wear and tear, damage, or corrosion then it is "repairable." But this means that when the repair is complete the aircraft to returned to service in "its original (or properly altered) condition that conforms to its type design."
The FAA clarifies further that an aircraft is only eligible for repair if it has at least one primary structure around which a repair can be performed. According to the FAA, it "considers an aircraft’s primary structure to be the structure that carries flight, ground, or pressurization loads, and whose failure would reduce the structural integrity of the aircraft." If only some, but not all, of the major structures of an aircraft are replaced, then that would still be considered a repair.
However, if all of an aircraft's primary structures must be replaced then the FAA does not consider the aircraft to be "repairable." Rather, in that situation the aircraft is being "replaced" after being "destroyed." And if the identification plate from the original aircraft was then placed on the "destroyed" aircraft that would violate 14 CFR § 45.13(e) ("No person may install an identification plate removed in accordance with paragraph (d)(2) of this section on any aircraft, aircraft engine, propeller, propeller blade, or propeller hub other than the one from which it was removed.”)
In order to comply with Section 45.13(e), the primary structure must be identifiable and traceable to the particular aircraft and its identification plate. As an example, if a heavily damaged aircraft is repaired by performing many major repairs on its fuselage and replacing all other primary structures that may be destroyed such as the wings and the empennage, that aircraft would not be considered destroyed because the fuselage is repairable. But if the fuselage of that aircraft also needed to be replaced along with the other primary structures, then the aircraft would be considered destroyed.
The Order also provides the following examples for use in determining if an aircraft is destroyed:
All primary structures of an airplane or glider, including the fuselage, all wings, and empennage are beyond repair.
The fuselage and tail boom of a rotorcraft are beyond repair.
Only the aircraft identification plate is reusable.
How is this determination made by FAA inspectors? Well, according to the Order, "FAA accident investigators will apply their specialized knowledge and expertise and follow the guidelines in this order when evaluating aircraft wreckage to determine whether an aircraft is repairable or should be declared destroyed."
Fortunately an aircraft owner can dispute a determination that an aircraft is destroyed by providing the appropriate FAA FSDO or ACO with a repair process that explains how the damaged aircraft can be repaired provided that at least one primary structure of the aircraft is capable of being repaired rather than requiring replacement. If you are faced with a situation where it is unclear whether an aircraft has been "destroyed" or is still "repairable", you will definitely want to consult the Order, as well as the aircaft's maintenance manual.
As some of you may know, the Department of Justice recently issued a Press Release announcing that it had indicted four pilots for lying on their medical applications. In each case, the airman failed to disclose that he was receiving Veterans Administration ("VA") benefits for a medical condition that would likely have either disqualified the airman from receiving a medical certificate, or would have certainly subjected the airman to additional scrutiny and/or testing requirements by the FAA's Office of Aerospace Medicine.
The airmen were "caught" when the FAA cross-checked its database of airmen holding medical certificates with the VA's disability benefits database. This is reminiscent of the FAA's 2002 Operation Safe Pilot in which it performed a similar cross-check, but with the Social Security Administration's ("SSA") disability database. Operation Safe Pilot resulted in prosecution of forty pilots who were receiving SSA disability benefits for conditions that would have either disqualified the airmen from receiving a medical or would have triggered further inquiry by the FAA.
After Operation Safe Pilot, the FAA revised the application for medical certificate to include language that specifically authorizes it to conduct this type of cross-check with SSA and VA. When an airman signs the medical application, he or she is agreeing that the FAA can perform this type of search.
Since the DOJ Press Release was issued, I have received multiple calls from airmen who believe they may be in a similar situation, but have not yet been "discovered" or received any notice from the FAA. In each call the airman is, perhaps justifiably, concerned regarding his or her liability exposure for criminal prosecution. Fortunately, options, albeit not great options, are available provided the airman is not yet in the FAA's cross-hairs.
Depending upon the circumstances, airmen have at least two options for dealing with the situation:
An airman can contact the FAA via letter and disclose the previously omitted information regarding both the medical condition and the receipt of disability benefits. It is also helpful to provide an explanation for the non-disclosure, to the extent that the airman has a reasonable explanation for failing to disclose the information. This may persuade the FAA that the failure to disclose was not intentional, but merely a misunderstanding etc.; or
The airman can apply for a new medical certificate and disclose the medical condition and receipt of benefits on the application. Then when the airman goes to his or her aviation medical examiner ("AME") for the medical examination the airman can explain the situation to the AME.
In either instance, the airman will want to have all of his or her VA medical/disability records available to provide to the FAA. However, an airman should keep in mind that any information he or she provides to the FAA could be used against the airman in a criminal prosecution. So it is important for the airman to be very careful about what he or she says to the FAA or AME.
Although pursuing one of these two options does not guarantee that the FAA will not prosecute the airman, coming clean and correcting the record before the airman is "caught" may convince the FAA that prosecution is unnecessary. However, even if an airman is not prosecuted, it is quite likely that the FAA will follow its standard playbook and revoke all of the airman's certificates as a sanction for falsifying the airman's medical application(s).
If you find yourself in this situation, please call and I will be happy to help you through the process.