As you explore whether you want to utilize a non-commercial aircraft operation (private aircraft operation) for business and personal travel, make sure what you think is a non-commercial aircraft operation is operated under the FAA’s regulations for non-commercial aircraft operations.
What is a Commercial Operation in Aviation?
Commercial operation with a business jet is an operation that is for compensation or hire. Make sure you know the FAA’s definition of the phrase “compensation or hire”. Some focus on only a portion of the definition (e.g. the “hire” portion) and assume that since they are not advertising flights to the general public their aircraft operation is not a commercial operation. Many assume that since they are not making a profit, but are merely covering costs, that their aircraft operation is not a commercial operation. The FAA has a very broad definition of compensation, which includes cash and non-monetary considerations and is not limited to whether the party providing transportation is making a profit. The general guiding rule for a non-commercial aviation operation is that there is no consideration.
Exceptions to General Rule – When is Consideration Allowed in a Non-Commercial Aircraft Operation
There are a limited number of exceptions allowing consideration in a non-commercial operation and each exception is very narrow. One of these exceptions is in Federal Aviation Regulation 91.321, which involves accepting compensation as required by law from candidates for public office. Other exceptions allowing consideration in a non-commercial operation are in FAR 91.501 (Federal Aviation Regulation 91.501), such as joint ownership, timeshare, and interchange.
FAR 91.501 exceptions are limited to U.S. registered large (over 12,500 pounds, maximum certificated takeoff weight) airplanes and turbojet-powered multiengine civil airplanes in operations not involving common carriage. Smaller aircraft and helicopters may be able to utilize the NBAA Exemption (Exemption No. 7897) to utilize a FAR 91.501 operation.
Joint ownership involves more than one registered joint owner of an airplane and generally, each of the registered joint owners pays a share of the charges specified in the joint ownership agreement. All joint owners should be listed on the aircraft’s registration.
A time sharing agreement is an arrangement where a person leases his airplane with flight crew and the only charges are those specified in FAR 91.501(d). Additional expenses that are not listed in FAR 91.501(d) cannot be charged and in the past few years proposed a $3.3 million civil penalty for a company accused of overcharging for timeshare flights in violation of the FAA regulations. As one company knows after being sued in a federal lawsuit brought by the United States Attorney identifying precisely what can and cannot be charged is important.
An interchange agreement is an arrangement where you lease your airplane to another person in exchange for equal time, when needed, on the other person’s airplane. There is to be no charge, assessment, or fee, except for a charge not to exceed the difference between the cost of owning, operating, and maintaining the two airplanes.
Sole Purpose Entity Should Not Operate Aircraft
In a non-commercial aircraft operation, remember that a sole purpose entity can own an aircraft, but the FAA does not permit a sole purpose entity to operate an aircraft. At this time, the FAA may not have a specific checkpoint to stop this type of operation, but the FAA is looking at non-commercial aircraft operation operations that violate the Federal Aviation Regulations and multi-million dollar penalties may be proposed. There is also the risk of additional taxes and denial of coverage if any claim is made on the insurance. After an accident has occurred is not the time you want to discover that your “liability-proof” sole purpose entity that is operating your aircraft violated the FARs and that its operations may not be covered by the aircraft’s insurance.
Do Not Inadvertently Become a Fractional Program
Another pitfall to avoid is creating an inadvertent fractional program. Yes, Berkshire Hathaway owns NetJets, a large fractional program, but unless you do the work to obtain FAA approval of management specifications and approval to become a fractional program, you want to stay outside the FAA’s definition of a fractional program. A fractional program generally includes management services by a program manager, two or more aircraft with one or more owners per aircraft, a dry-lease exchange arrangement, and multi-year program agreements.
Example of Inadvertent Fractional Program
- You own an aircraft
- Bob owns an aircraft
- You and Bob each sell an interest in your respective aircraft to Susie
- You and Suzie enter into a joint ownership agreement for your jointly owned aircraft
- Bob and Suzie enter into a joint ownership agreement for their jointly owned aircraft
- You, Bob, and Suzie all sign interchange agreements
- You all hire Bob to manage both aircraft
With the above facts, you may have an inadvertent fractional program. You may fall within the definition of a program that is to follow the FAA regulations of Part 91, Subpart K for fractional programs.
Leasing an Aircraft
If you own an aircraft and want to lease it to other business owners, make sure you provide a dry lease, that the flight crew are not provided with the aircraft and that you limit the number of leases. A “package deal” that either requires the lessee to utilize your crew or makes it nearly impossible or impractical for the lessee to use any other crew can violate the FARs. With respect to the number of leases, fifty dry leases do not look like a non-commercial aircraft operation, but three dry leases might.
On April 28, 2020, the FAA issued 8900.1 CHG 703 which provides FAA personnel guidance to determine if an aircraft lease complies with Title 14 of the Code of Federal Regulations, Part 91, Section 91.23 (14 CFR 91.23). The FAA previously issued Advisory Circular 91-37B in 2016 to guide lessees of aircraft. There is an industry expectation that the FAA will focus on stamping out private jet operations that violate the FAA regulations.
The FAA does not follow the IRS “Disregarded Entity” Concept
The operating company (WidgetsCo) owns 100% of an LLC which was formed solely to own the aircraft (Plane, LLC). The LLC is disregarded for federal tax purposes. Many operators assume they do not need a lease from Plane, LLC to WidgetsCo because the LLC is disregarded for federal tax purposes. However, the FAA does not follow IRS rules (the FAA made this statement in an FAA interpretation in 1993) so it does not matter if the IRS treats the LLC as disregarded. For FAA purposes, Plane, LLC is a separate legal entity and if Plane, LLC does not lease the aircraft, then Plane, LLC is operating the aircraft and the operation violates the FAA regulations.
What Happens if I violate the FAA Regulations for Non-Commercial Aircraft Operations
Violations of the FAA regulations, even inadvertent ones, can be expensive as they are frequently calculated on a per-flight basis. If you fly for 18 months while in violation of the Federal Aviation Regulations, the civil penalty proposed by the FAA can be significant. Violations of the FARs can result in multi-million-dollar civil penalties and even criminal charges.
Michelle M. Wade is a partner with the law firm of Jetstream Aviation Law and counsels clients on the acquisition, financing, and operation of corporate jets operated under Part 91 and Part 135 of the Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.