Be Aware of FAA Regulations to Reduce Risk of Non-Compliance
Corporations which own or operate business jets want to minimize liability and protect the rest of the corporate assets from liability due to aircraft ownership and operation. There are options to help achieve this goal, and becoming aware of applicable regulatory requirements, will help avoid creating additional risk. There are many agencies that impose regulations on the ownership and operation of business aircraft, including the Federal Aviation Administration (FAA), Internal Revenue Service (IRS), State Department of Revenue, and your insurance company.
A Sole Purpose Entity Should Not Operate the Aircraft
First, avoid inadvertently increasing your risk due to regulatory non-compliance. Owning a plane is not the same as owning a car. Trying to isolate jet liability by creating an entity solely for the purpose of owning and operating the aircraft and providing flights to a parent corporation, subsidiary, individuals, or other entities, violates the Federal Aviation Regulations (FARs). What initially seems like an easy solution can create a world of problems.
Aircraft Operations Must Comply with FAA Regulations
The FARS do not allow an aircraft owner to provide flights to others for consideration, unless the aircraft owner has obtained an operating certificate from the FAA and Department of Transportation (DOT). An entity that only operates the aircraft and provides flights to others is violating the FARs. FAA civil penalties may exceed $11,000 per flight for providing transportation not permitted by the FARs.
The IRS looks at Aircraft for Federal Excise Tax
The IRS may determine that it is owed federal excise tax (currently 7.5% of the amount charged plus a segment fee) on the amounts the entity was paid for “transportation of persons by air”, with IRS penalties for noncompliance potentially reaching a harsh 100%.
State Departments of Revenue Know How to Pursue your Aircraft for Taxes
State departments of revenue have also become increasingly aggressive with respect to tax actions involving aircraft. A State Department of Revenue may impose additional tax, penalties and interest or file a lien on the aircraft if the aircraft’s operations do not lawfully meet the requirements under which the company claimed an exemption from tax. These liens are difficult to remove, take time to remove and likely create a default under any financing for the jet.
Do Not Violate the Terms of your Insurance Policy
Insurance policies purchased to cover standard business flights may not cover operations involving receipt of consideration for flights, especially if the operation violates the FARs. It is good practice to review the aircraft’s insurance policies to confirm that the insurance covers all of the aircraft’s operations and all of the relevant parties.
Structuring the ownership and operation of corporate aircraft can be very complex and varies greatly from one aircraft to the next, often resulting in inefficient, and sometimes illegal, operation of an aircraft. Consider addressing regulatory issues once they are identified rather than facing potentially larger issues down the road after an agency investigation, audit or accident. The use of an attorney experienced in corporate aviation can help reduce costs, ensure regulatory compliance, and add value by creating a tailored corporate aircraft operational structure.
Michelle M. Wade is a Partner with the aviation law firm of Jetstream Aviation Law, P.A. and counsel clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the US Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com. Michelle Wade (firstname.lastname@example.org)