Greg Reigel Aviation Articles

Are You Using A Limited Liability Company To Own An Aircraft And Fly The Company’s Members/Guests? Be Careful.

Aircraft owners regularly use limited liability companies (an “LLC”) to hold legal title to an aircraft. An LLC can help limit an owner’s personal liability, and it may also assist an owner with his or her tax planning. But using an LLC to hold title to an aircraft may also create problems for the aircraft owner if he or she does not structure the ownership appropriately.

In order to understand the potential risks of using an LLC to own an aircraft, a brief explanation of how an LLC is viewed and organized under the law is in order. First, an LLC is a type of business entity that has distinct legal personality from its owners/members 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).

Next, LLC members each hold a membership interest in the LLC that is represented by the members’ capital accounts. The LLC members have full ownership and control of, and sole possessory interest in, their membership interests of the LLC, and not the individual assets owned by the LLC. Similar to a corporation, the LLC has managers to handle the day-to-day business of the LLC who are oftentimes also the members of the LLC. Additionally, the laws governing LLC’s require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records etc.). LLCs should not be construed to be alter egos of their members, even when they are structured as closely held companies.

Thus, when an LLC owns an aircraft, the LLC’s members do not actually own an interest in the aircraft. Rather, the aircraft is an asset of the LLC and is managed by the managers of the LLC, on behalf and in the best interest of the LLC. So, while the LLC members may own the LLC, they do not have a direct interest in the aircraft that is owned by the LLC. This is an important distinction that is often misunderstood by LLC members.

You might be wondering then whether an LLC may be operated under 14 C.F.R. § 91.501(b)(4) for the personal transportation of its members and their guests. Under Section 14 C.F.R. § 91.501(b)(4), the operator of an aircraft may conduct flights “for his personal transportation, or the transportation of his guests when no charge, assessment, or fee is made for the transportation.”

However, in the context of this regulation the FAA views the term “operator” as applying to the personal use of an individual or his or her guests, the term “operator” would not apply to an LLC that is a business entity existing for “business purposes” rather than “personal purposes.” Additionally, even if the LLC does not directly charge the members or guests for the flight(s), if the members make capital contributions to the LLC to pay the cost of ownership and operation of the aircraft, that would constitute “compensation” (in the FAA’s broad interpretation of that word) for the personal transportation of the member and its guests. As a result, Section 14 C.F.R. § 91.501(b)(4) would not be available to the members of the LLC.

Rather, in these situations the FAA takes the position that the LLC is the actual operator of the aircraft. The FAA would consider the LLC to be a “flight-department company” that is conducting commercial operations requiring an air carrier certificate under 14 C.F.R. Part 119. As such, any operation of the aircraft by the LLC on behalf of the members or their guests without an air carrier certificate could subject the pilot(s) actually flying the aircraft to an FAA enforcement action and subject the LLC that owns and operates the aircraft to a civil penalty action. The Internal Revenue Service could also view the LLC’s operation of the aircraft as a commercial operation requiring the collection and payment of Federal Excise Tax on any flights performed on behalf of the LLC’s members or guests.

Does this mean you can’t use an LLC to own your aircraft? No, not at all. However, each situation is unique and must be analyzed to confirm that the aircraft owner will actually receive the benefits expected and that the ownership arrangement will comply with the regulatory requirements anticipated by the aircraft buyer for operations under 14 C.F.R. Part 91.

With the appropriate use of a dry lease or use agreement, and pilot agency and service agreement, it is possible to structure the ownership and operation of your aircraft to comply with the regulations, and to also satisfy the FAA’s operational control and other concerns. If you want to use an LLC to own and hold title to an aircraft, contact us and we will work with you to ensure that the transaction is structured appropriately to meet the regulatory requirements applicable to your particular situation.

Tax Considerations When Buying An Aircraft

Among the many factors aircraft buyers need to evaluate when they are considering purchasing an aircraft, one of the most important may be tax. Frequently aircraft buyers tell me they want to purchase an aircraft BUT they don’t want to pay any tax on the purchase. Unfortunately, while it certainly may be possible to reduce an aircraft buyer’s tax liability, it isn’t always possible to completely avoid all tax liability associated with the purchase of an aircraft.

Sales Tax

As you may know, most states charge sales tax on the purchase of tangible property, including aircraft. Ordinarily the seller is required to collect and remit sales tax to the taxing authority. So, one of the first tax issues an aircraft buyer must address is whether the state in which the buyer intends to take delivery of the aircraft has any applicable exemptions from that state’s sales tax. In the absence of an exemption, sales tax would otherwise be due on the purchase/sale with either the seller collecting and remitting the sales tax or the buyer paying the sales tax directly. And since a seller does not want to be responsible for the sales tax, the seller will require the buyer to provide satisfactory proof of an applicable exemption, usually in the form of a signed exemption certificate.

But keep in mind that in some states, such as South Carolina, the sales tax assessed on an aircraft transaction may be so minimal that it may not make sense to relocate the aircraft for delivery in another state with an acceptable exemption. Rather, it may be more economical and convenient to simply pay the sales tax on the transaction.

However, that is not the case, here are a few examples of sales tax exemptions an aircraft buyer may be able to use to avoid paying sales tax in the delivery state. But be aware that all states do not allow for all of these exemptions. So, an aircraft buyer will need to evaluate the tax laws for each state to determine what exemptions may be available.

Fly Away Exemption. One example of an exemption from sales tax on an aircraft purchase is the “fly away exemption.” If the purchased aircraft is sold/delivered in one state for use and registration in another state before any use of the aircraft is made in the delivery state then the purchase is exempt from sales tax. Some states with a fly away exemption will permit limited post-closing use of the aircraft in the delivery state for the purposes of (i) training, (ii) maintenance, repairs, completion etc., or (iii) to fly the aircraft out of the delivery state. However, each state has its own unique requirements to take advantage of the fly away exemption, including the acceptable documentation to support the exemption (which a savvy seller will require).

Sale for Resale Exemption. Many states also allow for a “sale for resale” or “purchase for resale” exemption from sales tax. This exemption applies to a buyer’s purchase of an aircraft for the purpose of leasing, rental, or reselling the aircraft to another person. Here again, states applying this exemption may have specific requirements in terms of what is considered a “sale” or “leasing”, as well as the qualifications of the buyer (e.g. requiring the buyer to have a valid sales and use tax permit). Additionally, although the buyer may avoid paying sales tax on the purchase price of the aircraft, the buyer would then be required to collect and remit sales tax on either the lease or rental price, or the sale price of the aircraft to another person (unless an exemption applies to that transaction).

Commercial Use Exemption. Other states provide an exemption from sales to air carriers that purchase an aircraft. This would include persons certificated by the FAA under 14 C.F.R. Parts 121, 125, 133 and/or 135 to operate an aircraft to transport persons or property. The exemption may also apply to the air carrier’s leasing of the aircraft as a lessee. In order to qualify for the exemption, and to satisfy the seller, the air carrier needs to issue an applicable tax exemption certificate detailing its status and tax-exempt use of the aircraft at the time of the transaction.

Casual/Occasional/Isolated Sale Exemption. This exemption applies to transactions in which the seller’s sale of the aircraft is a “casual” or “occasional” sale. A common form of “occasional sale” with respect to an aircraft is one made by a person who does not habitually engage in the business of selling taxable items (of any kind, not just aircraft) and who sells no more than two such taxable items during the preceding twelve-month period.

To document an exemption of this type, a purchaser should ask the seller to provide a signed statement that the transaction qualifies for the occasional sale exemption as defined by the delivery state’s statutes or regulations. However, buyers need to be careful. Oftentimes this exemption applies to sellers who habitually engage in business of selling taxable items of any kind, NOT just aircraft. So a seller that doesn’t habitually engage in the sale of aircraft but does sell other taxable items would likely not qualify for this exemption.

Use Tax

Use tax, which is different from sales tax (although often assessed at the same rate), is imposed by a state for use of any material, including aircraft, in that state. The tax applies to out-of-state purchases in transactions where sales tax is not collected, or is collected but is underpaid compared to the sales tax that would be paid in-state. In the aircraft scenario, use tax is assessed by a state into which the aircraft is relocated post-delivery when sales tax was either not paid, or under paid, in the delivery state.

When an aircraft is brought into a state and a nexus is established by basing the aircraft in that state or otherwise operating the aircraft within the state for a minimum amount of time or trips/departures, then use tax is imposed. For example, some states require that the aircraft be operated within the state for a minimum amount of time. Other states look to the percentage of operation within the state. The specific rules in each state must be analyzed to determine the state’s requirements for establishing that nexus.

Practical Application

So, how does an aircraft buyer take advantage of these exemptions to minimize or avoid paying tax on the purchase of an aircraft? Well, the buyer will need to consider a number of factors including where the aircraft’s pre-purchase inspection will be performed, where the buyer may want to take delivery, where the aircraft will be operated post-delivery, by whom it will be operated and in what manner. Based upon the answers to those questions, the buyer will then need to review the tax laws for the relevant states to determine what exemptions may be available. Let’s look at a couple of examples using Texas law:

Example 1 - An aircraft buyer takes delivery of an aircraft in a state with a fly-away exemption (so no sales tax is collected or remitted) and then relocates the aircraft to Texas. If the buyer can show that in the following 12 months the aircraft’s non-Texas (out-of-state) departures are more than 50% of the total departures, then no use tax would be assessed against the aircraft. (In this scenario it is wise for the buyer to add an extra stop on trips outside the state to meet the 50% requirement on an ongoing basis in order to prevent getting stuck at the end of year if the aircraft is down for maintenance and unable to “catch-up” on out-of-state departures.)

Example 2 - An aircraft buyer takes delivery of an aircraft in a state using a Texas sale for resale exemption (again, no sales tax is collected or remitted) and then relocates the aircraft to Texas. If the buyer leases the aircraft to one or more lessees, no use tax would be assessed against the aircraft. However, the buyer would need to collect and remit sales tax on the lease/rental rate, unless the leasing was exempt from sales tax (e.g. a lease to a Part 135 air carrier).

One other tax issue an aircraft buyer will also want to consider is whether the state in which the aircraft is to be located or operated will assess personal property or ad valorum tax on the aircraft. In some states this tax is assessed and paid on annual basis. It may be separately assessed by the state or county, or it may be included along with an aircraft’s annual registration. However, as with sales and use tax, some states also provide exemptions from personal property tax depending upon location and use of the aircraft.

Conclusion

Although taxes are a fact of life, in aircraft transactions they can be a very significant fact when a buyer is spending millions of dollars on an aircraft. Aircraft buyers need to analyze their situations to identify the strategies and exemptions that may allow them to minimize or avoid assessment of tax on their aircraft acquisitions. Buyers should also work with their aviation and tax counsel to properly structure their transactions in a way that accomplishes their goals and complies with applicable laws and regulations.


The Latest Lycoming Engine Airworthiness Directive: What You Need To Know

Are you one of the estimated 778 unfortunate aircraft owners affected by the latest Lycoming airworthiness directive (“AD”)? If you are, I am hopeful this article will help you navigate your current situation.

The Airworthiness Directive

On August 4, 2017 Lycoming issued a “Mandatory Service Bulletin” requiring inspection, and potentially replacement, of connecting rod bushings in certain Lycoming engines that had been overhauled or repaired using replacement parts. The MSB identified the potentially affected engines and replacement parts, and it also included instructions for completing the inspection as well as the installation of replacement connecting rod small end bushings. It also indicated that the inspection and/or replacement be performed within the next 10 hours of engine operation.

As we know, although a manufacturer may state that its service bulletin is “mandatory,” for most operators flying their aircraft strictly under Part 91, service bulletins are not, in fact, mandatory. So, when it was issued, the MSB wasn’t mandatory for most Part 91 operators.

Unfortunately, the FAA received 5 reports of uncontained engine failures and in-flight shut downs due to failed connecting rods on certain Lycoming engine models identified in the MSB. Based upon its evaluation of the information available to it, the FAA determined that an unsafe condition existed or could develop in products of the same type design. As a result, on August 10, 2017 the FAA issued the AD with respect to the Lycoming engines requiring compliance with the MSB in order to prevent uncontained engine failure, total engine power loss, in-flight shut downs, and possible loss of the aircraft.

And, as we also know, an airworthiness directive is mandatory, regardless of the particular regulations under which you are operating. So, if your aircraft’s Lycoming engine is one of those specified in the MSB/AD you have no choice but to comply with the AD if you want your aircraft to be airworthy.

Cost of Compliance

According to the AD, the FAA anticipates that initial compliance with the AD (the inspection of the connecting rod small bushings) will cost engine owners approximately $1,425 in parts and labor. If connecting rod replacement is required, the FAA estimates the additional parts and labor costs will range from $2,170.00 for a four cylinder engine up to $6,850.00 for an eight cylinder engine. Of course, these are just estimates and they do not take into consideration any warranty coverage or variations in the costs of parts or labor.

Fortunately, this AD isn’t as extensive, or expensive, as the 2006 Lycoming crankshaft airworthiness directive. That airworthiness directive required replacement of the crankshaft in approximately 3,774 engines to the tune of about $16,000 per engine.

So, what are your options if your options if this AD applies to your engine?

Warranty Coverage

One option is to pursue a warranty claim with Lycoming. Lycoming has several types of warranties: New and Rebuilt Engine Warranty; New Non-Certified Warranty; Overhauled Engine Warranty; and Replacement Parts Warranty. You will need to determine which warranty applies to your engine and then file a claim with Lycoming. Lycoming will then determine whether you have coverage and, if so, to what extent. Although I haven’t reviewed Lycoming’s various warranty programs, the coverage typically includes parts only. And it certainly does not cover loss of use or other losses an engine owner may suffer as a result of the AD.

Litigation

If you don’t have warranty coverage, or if you are unsatisfied with the warranty coverage applicable to your engine, you could also consider suing Lycoming to try and recover the costs of complying with the AD and any other losses you suffer as a result of the AD. However, given the anticipated cost of compliance, unless you have other significant losses as a direct result of the AD, the cost of litigation would likely exceed your losses with no guaranty of recovery. (Although given the number of affected engines, I wouldn’t be surprised if some owners attempted a class action lawsuit against Lycoming).

Also keep in mind that manufacturer’s warranties typically include language making the warranty your sole remedy and excluding your ability to pursue other claims for recovery against the manufacturer. So I would anticipate that Lycoming would raise this and other legal defenses in responding to any lawsuits. But litigation is certainly an option, although not necessarily a practical or preferred option.

As you may recall, the Lycoming crankshaft airworthiness directive resulted in numerous lawsuits brought by engine owners against Lycoming. Of course the cost of compliance for that airworthiness directive was significantly higher than the current AD, which certainly made the economic analysis for litigation more attractive in that situation. Some lawsuits were brought by engine owners in their individual capacities, and others sought class action status on behalf of all affected engine owners. Lycoming also sued its crankshaft manufacturer, although it ultimately lost the case.


Conclusion

The bottom line for most engine owners affected by this AD is that they will need to comply in order for their aircraft to remain airworthy. How or whether they are able to recover their costs of compliance will initially depend upon how Lycoming handles the warranty issues. If Lycoming doesn’t treat its customers fairly, I would anticipate at least some litigation. However, whether such litigation will be successful is hard to say at this point in time.

What Should You Do If ATC Asks You To Call?

If you ever find yourself in this position, it is important to understand that you do not have to make that call. You are under no legal obligation (regulation or otherwise) to place the call. The request is not an ATC instruction under FAR §91.123. So, if you don't want to call you don't have to. But just because you don't have to call, that doesn't mean you shouldn't call. You need to analyze your situation and understand the pros/cons of making the call before you decide to simply ignore ATC's request.

Why does ATC want you to call?

For starters, ATC wants to obtain your personal information so they know who was flying the aircraft. Although ATC may have the aircraft's registration number, it may not know who was flying the aircraft. This is especially true if the flight was a VFR flight without a flight plan. Also, if the aircraft is a rental or club aircraft available to multiple pilots, ATC won't necessarily know which of those pilots is actually flying the aircraft. So, ATC wants to identify the pilot and obtain his or her information. And if you make the call, you will be providing the FAA with the connection between the aircraft operation and you, the pilot.

ATC may also want to discuss what happened. Depending upon the circumstances, it is possible that providing ATC with an explanation of what happened will resolve the situation. If the situation resulted from a simple mistake or flawed procedure, ATC may provide some informal counseling to ensure that you don't end up in the same situation in the future, and that will be the end of it. Under the FAA's new compliance philosophy, this would be considered a "compliance action." However, if the situation was more complicated or severe (e.g. an intentional deviation that resulted in loss of separation) that isn't the type of situation that would be handled as a compliance action. In that case, you may not want to make the call.

What happens to the information you provide during the call?

If you decide to make the call, you need to understand a couple of key points. First, the call will be recorded. So, the FAA will have a record of what you say during the call. Second, the FAA will use the information you provide to determine how it is going to handle the situation. That could be good for you or it could be bad, depending upon what happened and what you say. If it is bad, the FAA will not hesitate to use the information you provided against you in an enforcement action.

Should you make the call?

If you are asked to contact ATC after a flight you need to answer a number of questions to determine whether it makes sense to make the call:

  • What happened?
  • Why did it happen? Did it result from a simple mistake, flawed procedure etc.?
  • Is ATC able to connect you, the pilot, with the flight operation?
  • Is it the type of situation that the FAA should handle as a "compliance action"?

When you are considering these questions, it may make sense to discuss the matter with an aviation attorney. He or she should be able to help you analyze the situation to determine whether calling ATC will help or hurt you and, if it makes sense, what you should and shouldn't say if you do decide to make the call. You should also make sure to file your ASRS Form with NASA so you can potentially benefit from the FAA's Aviation Safety Reporting Program.

The good news is that the FAA's new compliance philosophy is resulting in fewer enforcement actions in cases of simple pilot deviations where the pilot does decide to make the call. The bad news is that you now have more to consider before you decide whether you should or should not make the call. If you find yourself in this situation, make sure you think things through and get the advice you need BEFORE you make the call.

Whose Letter Of Authorization Is It Anyway?

A scenario I see more regularly than I would like involves an aircraft management company that manages a turbojet aircraft and provides pilot services to multiple users of the aircraft. Since the managed aircraft is capable of flight up to and beyond flight level 41,000, the aircraft needs FAA approval to operate in the Reduced Vertical Separation Minimum (“RVSM”) flight levels from 29,000 feet to 41,000 feet. For reasons that are not always clear to me, the management company applies for and obtains an RVSM letter of authorization (“LOA”) in its own name for the aircraft, but then operates the aircraft on behalf of the operators. And, unfortunately, by doing so it has exposed not only itself, but also the operators to the wrath of the FAA for violations of the regulations.

In order to understand why this is the case, we need to first look at why an LOA, or its counterpart letter of deviation authority (“LODA”), is necessary. LOAs and LODAs are issued to Part 91 operators to provide authority to operate in a particular manner. An LOA authorizes an operator to engage in a particular activity, such as operation in RVSM airspace. A LODA permits an operator to deviate from a regulatory requirement with which the operator would otherwise be required to comply, such as permitting an instructor to operate an experimental aircraft for hire for the purposes of type-specific training. LOAs/LODAs are generally only applicable to Part 91 operators. (Operators under Parts 121, 133, 135 etc. receive similar authority in the form of operations specifications or waivers.)

LOAs and LODAs are “voluntary” and are issued by the FAA based on certain specific situations. That is, an operator doesn’t have to request an LOA or LODA unless the operator wants to do something that requires FAA authorization. In the RVSM context, if a Part 91 aircraft operator wants to operate in RVSM airspace, the operator will need to obtain the necessary LOA. But the aircraft operator is also free to avoid operating in RVSM airspace, in which case the operator would not need an RVSM LOA.

A Part 91 operator is the party who has “operational control” of the aircraft for a particular flight. What does that mean? Well, 14 C.F.R. 1.1 states “[o]perational control, with respect to a flight, means the exercise of authority over initiating, conducting or terminating a flight.” Thus, the FAA takes the position that the true operator of the aircraft is the party who has operational control for a particular flight.

Why does operational control matter when we are talking about LOAs and LODAs? Because LOAs/LODAs must be issued to the “operator” of the aircraft, i.e., the party that exercises operational control during the flight. And the party with operational control may not necessarily be the owner or manager of the aircraft.

For example, when we are looking at operation in RVSM airspace, 14 C.F.R. §§ 91.180 and 91.706 state in part:

“ . . . no person may operate a civil aircraft (of U.S. registry) in airspace designated as Reduced Vertical Separation Minimum (RVSM) airspace unless:

  1. The operator and the operator’s aircraft comply with the requirements of appendix G of [Part 91]; and

  2. The operator is authorized by the Administrator to conduct such operations.”

Thus, identifying the party who is the operator of the aircraft is critical because that dictates who must have the authorization.

So, who should apply for and be issued an LOA/LODA? Registered owners who are conducting personal or business flights under Part 91 for their non-air-transportation use; and parties assuming operational control under “dry” lease or use agreements such as Part 91 and Part 135 operator lessees conducting operations under Part 91. Keep in mind that if multiple parties are operating the aircraft, multiple LOAs/LODAs may be required!

Who should not apply for or be issued an LOA/LODA? “Flight Department Companies” (e.g., holding companies/single purpose entities); Owner Trustees (e.g. where a trust is the registered owner of the aircraft but the aircraft is operated by the party holding the beneficial interest in the trust); and Part 91 aircraft management companies that simply assist aircraft owners and Part 91 operators with their ownership and/or operation of the aircraft.

What can you as an operator do to make sure you have the necessary authority you may need or want from the FAA? First, do your research! Make sure you understand both your and the FAA’s obligations in the LOA/LODA process. Next, when you are applying for an LOA/LODA ensure that your application is as complete and correct as possible. (Remember, garbage in = garbage out). If necessary, ask for meeting with FAA personnel to submit your application in person. And finally, follow-up with the FAA on a regular basis to confirm the status of your application and whether the FAA has questions or needs additional information to process the application.