Business Jets — 5 Hottest Issues

By David G. Mayer & David T. Norton – reposted with permission.

Business aviation has become ever more highly regulated and complicated. David Mayer and David Norton identify five significant issues facing the industry: Residual-collateral value risk, state sales and use taxes, compliance with FAA operating rules, federal excise taxes and non-citizen trusts.

The Great Recession shocked the aircraft purchase, sale and financing markets and transformed many aspects of aircraft transactions. We recognize that, from a business perspective of financiers, price compression, transaction mortality rates and competition with cash purchasers reign at the top of your concerns. This article mainly focuses on five other hot regulatory, tax and asset issues.

1. Residual — Collateral Value Risk

During the recession, business aircraft owners experienced a “frightening downward spiral” of residual/collateral values according to a 2013 study titled: “Business Aircraft — Gaining Altitude From Recession to Recovery: Aircraft Transactions Build Momentum Despite Industry Challenges,” written by David G. Mayer, a co-author of this article. The recession changed deal approvals to a more highly controlled process under new regulations and strengthened company policies.

As a result, residual/collateral value concerns trigger complex negotiation of lease and loan provisions covering maintenance, return conditions (leases) and limitations on utilization of the aircraft. Also, astute sellers/buyers of pre-owned aircraft heavily negotiate purchase price, inspection process and repair risk regarding “discrepancies.” These elements require interdisciplinary collaboration of business, aviation, tax, legal and risk management experts.

2. State Sales and Use Taxes

Most transaction parties look for the “fly-away” exemptions from sales tax at the title transfer location, but do not always address the “mirror image” use taxes at the aircraft’s home base that applies in many jurisdictions. It is essential to do both when planning for state sales and use tax obligations.

It is naïve to take a “catch me if you can” attitude for those who believe fly-away exemptions mean zero sale/use taxes liability at home. States now search the Internet and the Federal Aviation Administration (FAA) registry to snag out-of-state purchasers to pay sales or use taxes. They may refuse to give errant taxpayers the benefit of the doubt for submitting sloppy or late paperwork. States may even apply collection pressure to raise tax revenue even if they do not stand on solid legal authority (e.g., Texas) for taxation. Knowing the ropes may save the hanging.

3. Compliance with FAA Operating Rules

Operators must juggle their operations and other obligations (e.g., Federal and state taxes) to avoid violations of FAA operating rules. One frequent violation of the Federal Aviation Regulations (FARs) stems from using a special purpose entity, such as a limited liability company (SPE), to operate a private aircraft. SPEs cannot “hold out” (i.e., market to the public) or, as more often happens, operate for the benefit of their owners or members, which the FAA considers to be operation for “compensation or hire.” If they fail to devise a compliant structure under Part 91 (private operation), with limited exceptions, the FAA can say they conduct “commercial operations” as an illegal “flight department company.” According to the study, 60% to 80% of operators violate these rules which squarely fall under the FAA’s regulatory oversight and power to impose potentially serious financial penalties (e.g., $25,000 per violation).

Most financiers should approve structures and documentation designed to comply with the FARs, such as the SPE entering into an operating agreement or a lease with the lawful operator. Ironically, absent such approval, financiers may close their deals with customers in default and exposed immediately to FAA regulatory enforcement actions. The parties should, therefore, document agreed structures before or promptly after financial closing.

4. Federal Excise Taxes

The Internal Revenue Service (IRS) has expanded its assessments of Federal Excise Tax (FET) on Part 91 management agreement payments. This action arises, in part, due to a 2012 Chief Counsel Advice (CCA) that purportedly justifies charging FET. Even though the National Business Aviation Association has successfully persuaded the IRS to stop certain audits and re-study by this CCA analysis, the IRS auditors can still assess FET where they believe the management company has “possession, command and control” of an aircraft. The key is to structure non-commercial transactions taking into account the CCA and other FET principles.

5. Non-Citizen Trusts

Only a “citizen of the United States” can register an aircraft at the FAA. However, non-U.S. citizens (NCs) can register indirectly by forming and beneficially owning non-citizen trusts (NCTs). The owner trustee, which is a U.S. citizen, holds legal title. It can, therefore, register the aircraft on behalf of NCs.

As of September 16, 2013, NCTs (as contrasted with voting trusts) must comply with a “policy clarification” issued by the FAA on June 18, 2013. The NCT clarification alters transaction structuring and filing at the FAA civil aircraft registry. It also imposes information gathering/turnover duties on owner trustees. Accordingly, the parties will likely encounter, at least in the near term, more extensive diligence, analysis, negotiation and documentation to satisfy the new NCT rules.


Purchasing and financing private aircraft triggers many intersecting and complex legal and business issues. Five of the hottest points listed above can change rapidly, but undeniably, these often spool up in private aircraft transactions.

David G. Mayer is a partner at Shackelford, Melton & McKinley. He is the author of Business Leasing for Dummies and the founder of Business Leasing and Finance News, an online newsletter published for a decade. He is known for his work in domestic and international business aviation matters as well as for his extensive equipment financing/leasing transaction experience. He can be contacted at

David T. Norton is a partner at Shackelford, Melton & McKinley. An active pilot and Certified Flight Instructor, he is known nationally for his regulatory and transactional work in the business aviation law arena, most recently completing service as the co-chair of the joint FAA/Industry RVSM LOA Process Enhancement Team of the FAA’s Performance-Based Advisory Rule Making Committee. He has an extensive background in tax, risk management and regulatory matters for private aircraft. He can be contacted at -


Great Read from Aerlex Law Group – California’s Fractional Aircraft Property Tax Law Held Unconstitutional

We thought this post from Aerlex Law Group was worth sharing with you:

An Orange County Superior Court judge has ruled that California’s controversial fractional aircraft property tax law is unconstitutional.

On November 30th, Judge William Monroe held that the imposition of property tax on the managers of fractionally owned aircraft by Senate Bill 87 is unconstitutional and unlawful. The judge gave two reasons for his ruling: (1) The right SB 87 gives counties to collect taxes retroactivity for four years dating back to 2003 is overly broad. (2) The tax is unlawfully imposed on the fractional fleet managers when, as a matter of law, they do not own, control, or possess the airplanes on which the tax is actually levied.

The California Legislature adopted Senate Bill 87 in August 2007 and county assessors in Los Angeles, Orange and Santa Barbara counties begin implementing the law in 2008 by demanding that fractional aircraft providers NetJets, Flexjet, Flight Options and Citation Shares collect, collate and furnish information on every fractional flight flown to and from California from 2003 on. However, all of the fractional operators filed lawsuits challenging the constitutionality of the legislation and SB 87 has been ensnared in ongoing litigation ever since. The parties eventually agreed to have all of the cases heard by Judge Monroe who listened to oral arguments in October and issued his ruling last week.

The judge’s decision does not necessarily resolve the dispute once and for all. Some of the fractional providers began imposing charges on customers for every flight into and out of California in anticipation of the possibility that they might eventually have to remit the taxes to county tax collectors and the ruling makes no provision for what will happen to the money collected thus far. The State of California has not yet announced whether it will appeal Judge Monroe’s decision. There is also the possibility that lawmakers will attempt to craft new legislation that fixes the constitutional problems with SB 87 when the Legislature reconvenes in January 2011.

The Aerlex Law Group represents many fractional interest aircraft owners and will continue to monitor this situation and report to its clients as new facts emerge.

Aerlex Law Group provides a wide range of services to all sectors of the aviation industry, representing the needs of business and corporate aviation, manufacturers, airlines, and airports. Aerlex attorneys provide expert assistance with whole aircraft purchases and sales, leasing, financing and management, fractional jet ownership, regulatory issues, and tax, corporate, real estate, employment and litigation issues. – Post reprinted with permission.

Diane Levine-Wilson

Bill Quinn on being a successful Broker

During this past week, I have participated in a lively e-mail exchange with several very smart and experienced professionals in the re-sale marketplace. The following is, what I think to be, a very concise and accurate assessment of where we are today. It was written by Bill Quinn (contact information follows) as a response to an earlier e–mail calling for the increased use of financing experts to assist in transactions.

Your comments are welcome.

“ Beginning in 2003 I think we, as an industry, started down the path of what I would characterize as the new order of things.  There was a day when having good sales and marketing skills was all you needed to be a successful aircraft broker.  In today’s world you still need to understand the sales and marketing piece, the technical aspects of the products and market dynamics, but you also need to know enough about finance, aircraft operations, management, taxes and a bevy of other disciplines in order to provide your clients with the necessary advice and counsel they want and need.  I am not suggesting we need to be financial advisors, attorneys, tax advisors, aircraft managers or HR people, but we do need to know enough about these all important subjects to advise our clients when it’s time to bring in the right expertise and talent. Many of the folks on this email list are multi-skilled players in this industry who understand that in today’s world to buy, sell or broker aircraft you need to have a strong working knowledge of the overall fabric of our industry and a lot more expertise or disciplines to offer you clients. If you don’t have the background, knowledge and experience to work through these all important aspects of our business then you should fill your quiver with enough arrows (expertise) to use when you get to the point where you need to demonstrate the overall value you have to offer your clients.  Getting the best price for an aircraft, whether you are buying or selling is still paramount, but it’s no longer enough to carry the day.”

William J. Quinn, Jr.
Chairman & Founder
Aviation Management Systems, Inc.
155 Fleet Street
Portsmouth, NH 03801
603 431-6600 (office)
603 957-1064 (mobile)
603 457-0094 (Efax)

Please visit the AMS website to learn more about the company and it’s services.