Three Errors That Can Ground Your Aircraft Transaction
With Aviation Attorney Greg Reigel
If you are purchasing an aircraft, you need to plan up front to avoid errors and ensure a smooth and successful transaction. Here are three areas that require special attention to avoid errors with your aircraft transaction before it even takes off.
Incomplete Purchase Agreement.
An aircraft purchase agreement should be used to provide a flight path for the transaction. It should, at a minimum, identify:
- The parties;
- The aircraft;
- The financial terms for the transaction (e.g., purchase price, deposit, any other financial considerations);
- The documents required to close the transaction;
- The scope of the pre-purchase inspection;
- Warranties, if any;
- Remedies in the event of a default; and
- Any other requirements for the transaction that are important for one or both parties.
Without a complete purchase agreement, the parties could end up in a dispute over errors that could have/should have been addressed in the purchase agreement.
Inadequate State Tax Planning.
An aircraft purchaser must properly plan for and address sales and use tax that may be imposed that may be imposed upon the purchaser as a result of the transaction, including any applicable exemptions and their requirements (e.g., fly-away, sale for resale, commercial use, casual/occasional/isolated sale, etc.).
The purchaser should also determine whether the state in which the aircraft is to be located or operated post-closing 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.
Improper Use of an LLC.
Although an aircraft purchaser may be able to benefit by using an LLC for ownership of an aircraft, the aircraft purchaser also needs to be aware of the regulatory issues that may result from this ownership structure. One of the primary regulatory concerns may arise when an aircraft is purchased by, and operated from, what is commonly referred to as a “flight-department company.” In this scenario, the purchaser, which may be an individual or a business, purchases an aircraft. Intending to limit personal liability, the purchaser forms a separate LLC to own the aircraft. The LLC then operates the aircraft for the purchaser under FAR Part 91.
Unfortunately, if this arrangement is not structured properly, the FAA could view the LLC’s operation of the aircraft on behalf of the purchaser as a commercial operation requiring an air carrier certificate. Accordingly, any operation of the aircraft by the LLC on behalf of the purchaser or others 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.
Similarly, depending upon how this arrangement is structured, the Internal Revenue Service could 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 purchaser.
ABOUT GREG REIGEL
Greg Reigel is an aviation attorney who represents clients throughout the country in aviation and business law matters. He has more than two decades of experience working with airlines, charter companies, fixed base operators, airports, repair stations, pilots, mechanics, and other aviation businesses in aircraft purchase and sales transactions, regulatory compliance including hazmat and drug and alcohol testing, contract negotiations, airport grant assurances, airport leasing, aircraft-related agreements, wet leasing, dry leasing, and FAA certificate and civil penalty actions.
For assistance, call 214-780-1482 email: greigel@shackelford.law, or Twitter: @ReigelLaw