Many businesses, large and small, restructure their ownership, management and operations. This may occur for tax or economic reasons and the corporate jet is usually not a factor when making the restructuring decision.
Industry Best Practices when there is a Restructuring
Industry best practices will include a review of the impact of any changes on the regulatory and tax compliance of the aircraft ownership and operations when there is a change of facts involving how the aircraft is owned or operated. This includes a change of entity status (the limited liability company converts to a limited partnership), a change of ownership, a change of management, or a change in the entities or individuals using the aircraft.
How Does a Restructuring Affect the Business Jet
Restructuring may initially affect the aircraft’s registration status. An aircraft may be registered in the United States only when owned by a citizen of the United States. An entity which adds a non-US citizen as its president or which increases the voting interest held by a foreign entity from 20% to 40% no longer satisfies the United States Federal Aviation Administration’s (FAA’s) definition of citizen of the United States which must be met to have a validly registered aircraft.
If an entity converts to a partnership, each partner, whether a general or limited partner, must be an individual who is a United States citizen or the partnership is not eligible to register an aircraft in the United States. Even if the corporation which is the general partner owns only three percent of the partnership, this invalidates the aircraft’s registration.
Possible Negative Impact of Re-Organization on Business Aircraft
Possible results of an invalidly registered aircraft could be FAA civil penalties, violation of loan covenants and potential insurance issues. FAA civil penalties can involve thousands of dollars per flight for violations of registration requirements. An aircraft with an invalid registration does not have a valid certificate of airworthiness. Cross-default provisions in your loan documents can trigger a waterfall effect of problems with a lender and you do not want to discover after an insurance claim has been made that your insurer will deny coverage because the aircraft was not validly registered.
Restructuring may also affect the aircraft’s operations. The restructuring activity may change the employment of the crew or the ownership of the entity which owns the aircraft. These changes can affect the compliance of the aircraft’s operations with the Federal Aviation Regulations (FARs).
The FAA does not allow aircraft operations by “flight department companies” which are organized solely to own and operate aircraft, unless the FAA and US Department of Transportation have issued an operating certificate to be a charter company or an airline. This process takes time and money so you will know if you are charter company or an airline.
FAA civil penalties for operational violations may involve thousands of dollars per flight. The IRS may determine that under the new structure the federal excise tax (currently 7.5% of the amount charged plus a per-person per-leg segment fee of $4.10) is owed, and IRS penalties for excise tax noncompliance can potentially reach a harsh 100%. State departments of revenue have also become increasingly aggressive with respect to taxes involving aircraft and the new structure may also subject the aircraft to different state taxes.
The company may face an even harsher reality if there is an accident or incident and a claim made on the insurance is denied. An insurer might try to deny coverage if the company is now owned or operated differently than that reported in the initial application, especially if the aircraft’s registration is now invalid due to restructuring or if the aircraft is being operated in violation of the Federal Aviation Regulations.
Get a Compliance Audit from your Aviation Attorney
Compliance audits of the aircraft ownership and operation before or even after any restructuring or other change in facts can be critical in avoiding future legal problems. Company operations are constantly changing. The flight department will not be aware that the voting interest held by a foreign entity increased from 20% to 40%. A periodic compliance review of the aircraft’s ownership and operations with the stakeholders can be invaluable. The flight department, legal, tax, accounting, outside aviation attorney and risk manager can each provide useful input for your periodic review. If your structure has not been reviewed in several years, contact experienced aviation counsel to help identify and work through any issues.
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 (email@example.com)