The “Standard” Management/Charter Agreement Should be Reviewed for Business Terms & Legal Risks
Topics to Review
Determining which charter or management company should be hired to charter and manage the company jet or the CEO’s jet can be confusing. You can analyze the numbers and compare charter rates and conformity inspection costs. Follow the tips in this article to help avoid other hazards which will arise when you receive the “standard form” agreement to execute.
Determining who will contract with the charter company is important. This initial decision will be affected by FAA regulatory, state tax and federal tax issues. Although an aircraft can be owned by a sole purpose entity (SPE), the Federal Aviation Regulations (FARs) do not allow an SPE to operate the aircraft. Therefore the SPE should not be the party to an agreement which provides crew to the SPE to operate the aircraft.
Scheduling priority for the aircraft is another issue to address. Does the owner want to maximize charter revenue or does the owner want to help cover its costs with third party charter?
It is common for charter companies to obtain discounts on pilot training and fuel and the owner will want to request that the discounts be passed through to the aircraft owner. Compare the budget you received to your agreement. Any assumptions supporting the budget should be included in the agreement.
Tax Issues to Review
State Taxes – Sales Tax & Personal Property Tax
Consult with your tax advisor and be aware of the state taxes which affect the owner’s net proceeds. An agreement to allow the charter company to use the aircraft for charter flights is generally considered a lease. The quote from the charter company is generally inclusive of any state sales and use taxes on that lease so the state tax payments can significantly reduce the amount retained by the owner.
Federal Taxes – Excise Tax
Federal tax issues also need to be considered. Federal excise taxes for charter to third parties should be collected and remitted to the IRS by the charter company. Credit for fuel taxes paid by the owner for charter flights which are used to offset the FET owed for those charter flights should also be addressed in your agreement.
The IRS’ 2012 Chief Counsel Advice (CCA) has been a concern since 2012, as it indicates that Federal Excise Tax (FET) applies to management company fees and other amount paid to the management company by the owner (ex. cost of maintenance and pilots). The IRS’ position is based on the management company’s “possession, command, and control” over the aircraft, and thus providing transportation services, which are subject to FET. The CCA is not legally a precedent, however, it is heavily relied upon by IRS auditors. There was virtually no guidance on this issue, but owners could take steps to avoid being subject to the FET on management company fees and other amount paid to the management company by the owner. Fortunately, the Tax Cut and Jobs Act, effective December 23, 2017, provides that certain payments made by an aircraft owner (in certain instances, a lessee) related to the management of aircraft are not subject to FET. The NBAA and NATA, on May 24, 2018 requested guidance from the IRS on many of the questions raised by the Tax Cut and Jobs Act.
What is the Charter Company Doing for You
Consider what affirmative obligations the charter company undertakes in its agreement. Does the agreement state they will be responsible for certain items or are they merely advising the owner. Do they provide fireproof storage for paper records? The owner will want the management company to be responsible for duplicating any lost records. Missing or inaccurate records will significantly affect an aircraft’s value upon resale.
The charter company should agree to operate the aircraft only within the geographic area allowed in the insurance policy. An owner will also want the charter company to be responsible for any fines incurred during operations by the charter company. Consider obtaining copies of the insurance policies and endorsements for your aircraft in addition to the standard insurance certificate. You will want to confirm that the correct parties are named as insureds and additional insureds. Are the workers employees or independent contractors? Are they covered by workers compensation insurance? Is there general liability insurance in place? Is there hangarkeepers insurance and insurance for the tug operator?
An owner should consider periodically requesting confirmation that certain amounts have been paid. Did the charter company accept money from you for an invoice for an insurance premium, but fail to pay the insurance company? Did the charter company not pay the fuel bill for which they invoiced you and which you paid? A mechanic’s lien could be filed against your aircraft and you will be required to address the lien.
What if there is a Default or Termination of the Charter Agreement
When there is any default or termination of the agreement, the owner will want the aircraft and logbooks to be promptly returned. The owner does not want the aircraft or logbooks held hostage to force an unreasonable settlement of any dispute over outstanding amounts at the end of the agreement. An aircraft owner will not want the charter company to have the right to place a lien on the aircraft for any unpaid amounts. Consider adding a clause requiring the charter company to reasonably cooperate with transferring the aircraft to a different charter or management company.
Financing Terms May Affect the Charter Agreement Terms
If the aircraft is financed, the lender may need to approve or at least be notified of the existence of the charter/management agreement. The lender may require a collateral assignment of this agreement.
Ask for Help
It is helpful to have an understanding of the issues which can arise with the operation of business aircraft. Consider involving an attorney with business aviation experience to help you understand and address issues involved with structuring ownership and operation of a corporate aircraft.
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)