Greg Reigel Aviation Articles

Avoiding Drug And Alcohol Testing "Gotchas"

Avioding Drug and Alcohol Testing Gotchas in Aviation Law

The drug and alcohol testing requirements of 14 C.F.R. Part 120 and 49 C.F.R. Part 40 continue to cause issues for aviation employers. An initial decision in a recent civil penalty action, In the Matter of Regency Air, LLC, highlights two areas of potential confusion and risk faced by an aviation employer.

In Regency the FAA assessed a civil penalty of $17,400 against the employer for alleged violations of drug and alcohol testing regulations in connection with its hiring and use of mechanics. As you may know, aircraft maintenance is a “safety-sensitive function” that may only be performed by an employee who is included in the employer’s drug and alcohol testing program. Regency appealed the FAA’s order and a hearing was held before a Department of Transportation Administrative Law Judge (“ALJ”) which highlighted several drug and alcohol testing “gotchas.”

In one instance, Regency argued that the mechanic performed his work as a favor to Regency and since Regency did not compensate the mechanic for the work, the mechanic was thus not an employee subject to drug and alcohol testing. However, the ALJ rejected that defense stating that an "employee is an individual who is hired, either directly or by contract, to perform a safety-sensitive function for an employer”, and an individual is “hired” for a safety-sensitive function when he or she is retained “as a paid employee, as a volunteer, or through barter or other form of compensation.” Thus, even though the mechanic was a volunteer working without compensation, he was still considered an employee when he was performing safety-sensitive functions on behalf of Regency.

Another issue in the case arose from a mechanic’s employment by two separate employers. Although the mechanic was included in the first employer’s drug and alcohol testing program, Regency had not added the mechanic to its program. In analyzing the issue, the ALJ initially observed that “an employer may use a contract employee without including the contract employee in its own drug and alcohol testing program if: (1) the contract employee is subject to testing under the contractor’s drug and alcohol testing program, and (2) the work is performed on behalf of that contractor. The ALJ then determined that the mechanic performed the work in question it was performed on behalf of the first employer as a contractor for Regency, and as a result, the mechanic did not need to be included in Regency’s drug and alcohol testing program.

Drug and alcohol testing regulations can be tricky and complicated. However, misunderstandings and/or non-compliance with the regulations are serious and potentially very expensive. If you have questions about the regulations or whether you are complying with the regulations please contact me and I will be happy to help or any professional aviation law attorney, but don't wait until it is too late.

Greg Reigel
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
E-mail:  greigel@shackelford.law
Website:  www.shackelford.law
Twitter:  @ReigelLaw

Arguing Aggravating And Mitigating Circumstances In Civil Penalty Cases

When the FAA assesses a civil penalty for regulatory violations, it is required to take into account both aggravating and mitigating circumstances when it calculates the penalty. Typically the FAA focuses on aggravating circumstances to support assessment of a higher civil penalty. On the other hand, respondents argue that mitigating circumstances are present that justify a lower civil penalty. But if the case ends up going to hearing, it then becomes the administrative law judge's ("ALJ") responsibility to decide (1) whether any aggravating or mitigating circumstances are present, and (2) how/whether those circumstances may impact the civil penalty assessed by the FAA.FAA

As an initial matter, the FAA has the burden of justifying the amount of the civil penalty. The ALJ must then look at the totality of the circumstances surrounding the violation to determine whether the civil penalty is sufficient to serve as a deterrent to both the respondent and the industry as a whole. As guidance, the ALJ may consider the following factors the FAA is supposed to consider per FAA Order 2150.3C FAA Compliance and Enforcement Program:

  • The nature of the violation;

  • Whether the violation was inadvertent or not deliberate. This is typically a mitigating factor, and the absence of inadvertence isn't automatically an aggravating factor;

  • If the respondent is a certificate holder, the certificate holder's level of experience;

  • The attitude or "compliance disposition" of the respondent;

  • The degree of hazard posed by the violation;

  • Any action taken by an employer or other authority;

  • The respondent's use of a certificate;

  • The respondent's violation history, if any. This is only an aggravating factor. A violation-free history is expected and is not a mitigating factor;

  • Decisional law;

  • The respondent's financial ability to absorb a sanction;

  • Consistency of sanction;

  • Whether the respondent reported the violation voluntarily; and

  • What, if any, corrective action the respondent may have taken as a result of the violation.

If you are facing a proposed civil penalty or appealing an assessed civil penalty, you should definitely determine whether any of the circumstances of your situation support any of these mitigating factors and then argue those facts to the FAA or ALJ to try and reduce the civil penalty. You can find read a good example of how this works in a recent case - In re Star Helicopters.

On the other hand, if any of your circumstances could be characterized as aggravating factors, you will also want to identify those facts, because you know the FAA will. You can then determine how best to argue against and minimize the impact those aggravating circumstances may have on the civil penalty.

Tips For Renting Your Aircraft

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

Tips for Renting your aircraftIt 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.

Conclusion

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:

Greg Reigel
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
E-mail:  greigel@shackelford.law
Website:  www.shackelford.law

Closing Aircraft Purchase/Sale Transactions

 

Aircraft Purchase/Sale Transactions

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:

Greg Reigel
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
E-mail:  greigel@shackelford.law
Website:  www.shackelford.law

The IRS May Disregard Your LLC, But You Shouldn’t.

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. Aircraft OwnershipAn 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.

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