Gregory J. Reigel
Serving clients throughout the U.S.
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January 18, 2019

When, If Ever, Should A Certificate Issued By The FAA Be Surrendered?

It takes a lot of work and effort to obtain certificates issued by the FAA. Once you have the certificate, you don't ordinarily want to give it up. Unfortunately, in some circumstances you are required to surrender a certificate. In other circumstances you may not be required to surrender a certificate, but it may be something you want to do anyway. But how do you know?

Well, for a discussion of situations when a certificate may or may not be surrendered, and when it must be surrendered, please read my latest article on the subject: When, If Ever, Should A Certificate Issued By The FAA Be Surrendered?.

Posted by Greg

January 04, 2019

Tips For Renting Your Aircraft

If you own an aircraft and are not utilizing it as much as you would like or if you would like to try and recover some of the cost of owning the aircraft, you may have thought about renting your aircraft to other pilots. As a practical matter, that makes some sense. But before you actually rent your aircraft to another pilot, here are a few things you should consider.

Aircraft Owners May Rent Their Aircraft To Third Parties

It is important to understand that the FAA does not prohibit aircraft owners from renting their aircraft. In fact, the regulations specifically contemplate rental arrangements. So, renting your aircraft is permitted, provided that you comply with applicable regulations. The FAA provides guidance on what is and isn't a permissible rental arrangement in Advisory Circular 91-37B Truth in Leasing (although truth in leasing requirements only apply to large civil aircraft, the general lease concepts discussed in the AC apply to leasing arrangements for all aircraft).

Make Sure Your Insurance Permits Aircraft Rental

Most aircraft insurance policies will extend coverage to other pilots who fly your aircraft provided that the pilots are either expressly identified in your policy or if they have the necessary experience/qualifications to meet the "open pilot" clause of the policy. However, if you are going to charge the pilot for use of your aircraft, you need to confirm that your policy allows you to rent or lease your aircraft to a third-party. Most aircraft policies issued to owners for personal/business flying do allow aircraft leasing, but it is important to confirm this with your insurance underwriter.

Also, rather than paying to obtain their own insurance policy or renter's insurance to cover their use of your aircraft, most renter pilots will want to be named as an additional insured under your policy as this can oftentimes be done at no cost to you or the renter pilot. In that case, renters will typically ask for a certificate of insurance that reflects not only that they are added to your policy, but that they are covered for their operation and use of their aircraft. This is important because it doesn't do the renter pilot any good if he or she is added to the owner's policy but only covered for the owner's operation of the aircraft, rather than his or her own use.

Renting Your Aircraft Can Trigger Tax Consequences

In most states, when an aircraft owner rents an aircraft to a third-party the owner is required to collect and remit sales tax on the rent paid by the third-party for the aircraft. If you are in one of those states, in order to rent your aircraft you will need to obtain a sales tax number so you can collect and remit sales tax to the taxing authority. This is the aircraft owner's obligation and the taxing authority will hold the aircraft owner responsible for any sales tax the taxing authority believes the aircraft owner should have collected and remitted, regardless of whether the renter pilot actually paid the sales tax to the aircraft owner.

Also, when you rent your aircraft many taxing authorities view that activity as commercial activity which then means your aircraft could be subject to assessment of personal property tax on the value of the aircraft, or some portion of the value based upon the pro-rata rental versus personal use of the aircraft. Although not all states assess personal property tax on aircraft, if you are in a state that does you will want to determine your potential property tax exposure before you decide to rent your aircraft.

Conclusion

Although you will also have other things to consider as you decide whether to rent your aircraft to other pilots, these three issues should be near the top of your list. And if you understand and address these issues up front that will help ensure a successful aircraft rental experience for both you, the aircraft owner, and your renter pilot.

Posted by Greg

December 28, 2018

Arguing Aggravating And Mitigating Circumstances In Civil Penalty Cases

When the FAA assesses a civil penalty for regulatory violations, it is required to take into account both aggravating and mitigating circumstances when it calculates the penalty. Typically the FAA focuses on aggravating circumstances to support assessment of a higher civil penalty. On the other hand, respondents argue that mitigating circumstances are present that justify a lower civil penalty. But if the case ends up going to hearing, it then becomes the administrative law judge's ("ALJ") responsibility to decide (1) whether any aggravating or mitigating circumstances are present, and (2) how/whether those circumstances may impact the civil penalty assessed by the FAA.

As an initial matter, the FAA has the burden of justifying the amount of the civil penalty. The ALJ must then look at the totality of the circumstances surrounding the violation to determine whether the civil penalty is sufficient to serve as a deterrent to both the respondent and the industry as a whole. As guidance, the ALJ may consider the following factors the FAA is supposed to consider per FAA Order 2150.3C FAA Compliance and Enforcement Program:
  • The nature of the violation;

  • Whether the violation was inadvertent or not deliberate. This is typically a mitigating factor, and the absence of inadvertence isn't automatically an aggravating factor;

  • If the respondent is a certificate holder, the certificate holder's level of experience;

  • The attitude or "compliance disposition" of the respondent;

  • The degree of hazard posed by the violation;

  • Any action taken by an employer or other authority;

  • The respondent's use of a certificate;

  • The respondent's violation history, if any. This is only an aggravating factor. A violation-free history is expected and is not a mitigating factor;

  • Decisional law;

  • The respondent's financial ability to absorb a sanction;

  • Consistency of sanction;

  • Whether the respondent reported the violation voluntarily; and

  • What, if any, corrective action the respondent may have taken as a result of the violation.

If you are facing a proposed civil penalty or appealing an assessed civil penalty, you should definitely determine whether any of the circumstances of your situation support any of these mitigating factors and then argue those facts to the FAA or ALJ to try and reduce the civil penalty. You can find read a good example of how this works in a recent case - In re Star Helicopters.

On the other hand, if any of your circumstances could be characterized as aggravating factors, you will also want to identify those facts, because you know the FAA will. You can then determine how best to argue against and minimize the impact those aggravating circumstances may have on the civil penalty.

Posted by Greg

December 21, 2018

'Tis The Season - For Aircraft Closings

As we get to the end of the year, many aircraft purchasers and sellers are trying to get their deals closed. Whether for tax or other reasons, year end is a busy time for aircraft transactions. Many transactions are closed using escrow agents located in Oklahoma City, Oklahoma (home of the FAA Aircraft Registry). If you have never been involved in an aircraft transaction, you may wonder what happens at an aircraft closing.

In a typical (if such a thing exists) aircraft closing, here are the steps an escrow agent takes to help aircraft sellers and purchasers close a transaction once all of the necessary funds and documents are in escrow:
  • The escrow agent will pay off any liens, mortgages, security interests or other interests held by third parties against the aircraft ("Liens");

  • The escrow agent will disburse to the seller the purchase price, plus any unpaid amounts due from purchaser to seller for flight costs associated with moving the aircraft to the inspection facility or the delivery location, and less one-half of the escrow agent's fee;

  • Once the seller confirms receipt of the funds, the escrow agent (a) dates and files with the FAA releases of any Liens the FAA Aircraft Bill of Sale (FAA Form 8050-2), the Aircraft Registration Application (FAA Form 8050-1) and statement in support (for example, if the purchaser is a limited liability company); and (b) dates and releases the Warranty Bill of Sale and Assignment of Warranties and Other Rights (if applicable) out of escrow to purchaser;

  • Purchaser executes and delivers the delivery receipt to the seller which confirms the aircraft is in the delivery condition and is accepted by the purchaser;

  • If the aircraft is subject to the Capetown Convention, the escrow agent, as purchaser’s professional user entity, registers the sale of the aircraft to the purchaser with the International Registry; and

  • The escrow agent, as the seller’s professional user entity, discharges any registration by seller with the International Registry of any international interest or prospective international interest registered with respect to the aircraft, and consents to the registration of the sale of the aircraft to the purchaser.

The seller and purchaser usually intend that each of these actions is interdependent with each of the others, but that upon completion they are considered to have occurred simultaneously. When all of these steps are completed, the seller delivers physical possession of the aircraft to the purchaser at the closing location.

This closing process may occur via a telephone call with all of the interested parties on the line, or simply after each of the interested parties has provided authorization (usually via e-mail) for the escrow agent to perform these steps and close the transaction. And, of course, depending upon the transaction, these steps may vary. But this is generally how the process occurs.

If you ever have questions or need assistance with a closing, I would be happy to help. And in the meantime, Happy Holidays.

Posted by Greg

December 14, 2018

Getting An Aircraft Deal Done In Spite Of A Government Shut-Down

If you have been following the news you know that, once again, a government shut-down is being used as leverage in connection with political demands. But what happens when you are trying to get an aircraft transaction closed and the government shuts down before closing? Well, when the government shut-down back in 2013 many aircraft buyers and sellers found themselves in this unenviable position. And, unfortunately, they were out of luck.

At that time, the FAA Aircraft Registration Branch (the "Registry") was closed during the shut-down. As a result, it was impossible to file aircraft bills of sale, releases, security agreements, applications for registration etc. So deals didn't get closed. And then when the shut-down ended and the Registry was re-opened it had a huge back-log of transactions to handle, which further delayed transactions while the Registry worked through the back-log. Not a good situation.

Now that we may be facing another shut-down should we be worried that deals will come to a screeching halt? Fortunately the answer to that question is "no". When the FAA Authorization was passed back in September, 2018, it included a provision that will prevent this same situation from occurring again. Section 518 of the FAA Reauthorization Act of 2018 states:
The Administrator shall designate employees of the Aircraft Registry Office in Oklahoma City, Oklahoma as excepted employees in the event of a shutdown or emergency furlough to ensure that the office remains open for the duration of the lapse in Federal Government appropriations to the Federal Aviation Administration.
As a result, even if a government shut-down occurs now, during one of the busiest times of the year for closing aircraft transactions, the Registry will remain open for accepting filing of transaction documents. So, if you are in the middle of a transaction and hoping to get it closed in the near future, fear not - the Registry will be open and waiting when it is time for you to close and file your transaction documents.

Posted by Greg

October 31, 2018

When Is An Aircraft "Destroyed" Versus "Repairable"?

Unfortunately, these terms are not defined anywhere in the regulations. But, as you might expect, the FAA has a policy/opinion about what these terms mean. In fact, the FAA has issued Order 8100.19, Destroyed and Scrapped Aircraft which spells out what these terms mean and how they are to be applied by FAA inspectors. If an aircraft is capable of being repaired and returned to service after it was unserviceable due to wear and tear, damage, or corrosion then it is "repairable." But this means that when the repair is complete the aircraft to returned to service in "its original (or properly altered) condition that conforms to its type design."

The FAA clarifies further that an aircraft is only eligible for repair if it has at least one primary structure around which a repair can be performed. According to the FAA, it "considers an aircraft’s primary structure to be the structure that carries flight, ground, or pressurization loads, and whose failure would reduce the structural integrity of the aircraft." If only some, but not all, of the major structures of an aircraft are replaced, then that would still be considered a repair.

However, if all of an aircraft's primary structures must be replaced then the FAA does not consider the aircraft to be "repairable." Rather, in that situation the aircraft is being "replaced" after being "destroyed." And if the identification plate from the original aircraft was then placed on the "destroyed" aircraft that would violate 14 CFR § 45.13(e) ("No person may install an identification plate removed in accordance with paragraph (d)(2) of this section on any aircraft, aircraft engine, propeller, propeller blade, or propeller hub other than the one from which it was removed.”)

In order to comply with Section 45.13(e), the primary structure must be identifiable and traceable to the particular aircraft and its identification plate. As an example, if a heavily damaged aircraft is repaired by performing many major repairs on its fuselage and replacing all other primary structures that may be destroyed such as the wings and the empennage, that aircraft would not be considered destroyed because the fuselage is repairable. But if the fuselage of that aircraft also needed to be replaced along with the other primary structures, then the aircraft would be considered destroyed.

The Order also provides the following examples for use in determining if an aircraft is destroyed:
  1. All primary structures of an airplane or glider, including the fuselage, all wings, and empennage are beyond repair.

  2. The fuselage and tail boom of a rotorcraft are beyond repair.

  3. Only the aircraft identification plate is reusable.

How is this determination made by FAA inspectors? Well, according to the Order, "FAA accident investigators will apply their specialized knowledge and expertise and follow the guidelines in this order when evaluating aircraft wreckage to determine whether an aircraft is repairable or should be declared destroyed."

Fortunately an aircraft owner can dispute a determination that an aircraft is destroyed by providing the appropriate FAA FSDO or ACO with a repair process that explains how the damaged aircraft can be repaired provided that at least one primary structure of the aircraft is capable of being repaired rather than requiring replacement. If you are faced with a situation where it is unclear whether an aircraft has been "destroyed" or is still "repairable", you will definitely want to consult the Order, as well as the aircaft's maintenance manual.

Posted by Greg

October 01, 2018

Using A "Fly-Away" Exemption To Avoid Paying Sales Tax On An Aircraft Purchase

When buying an aircraft, one of the issues a buyer must determine is whether the buyer will have to pay any sales tax on the transaction. As you may know, most states charge sales tax on the purchase of tangible property, including aircraft. In some cases, a buyer may be able to take advantage of an exemption such as a "fly-away exemption" to avoid having to pay sales tax to the state where the buyer takes delivery of the aircraft.

As an example, Texas provides a fly-away exemption when an aircraft is sold/delivered in Texas state for use and registration in another state before any use of the aircraft is made in Texas. Texas Tax Code ("TTC") Section 151.328(a)(4) exempts from sales tax aircraft "sold to a person for use and registration in another state or nation before any use in this state other than flight training in the aircraft and the transportation of the aircraft out of the state."

Use

In order to take advantage of this exemption, an aircraft sold in Texas may not be "used" in Texas after the buyer takes delivery of the aircraft. Unfortunately, the Texas Tax Code applicable to sales tax does not define what it means to "use" an aircraft in the state. However, TTC Section 151.011(a), which relates to the "use tax" in Texas, defines "use" as “the exercise of a right or power incidental to the ownership of tangible personal property over tangible personal property… ."

Additionally, TTC Section 151.011(f)(1) provides that "[n]either 'use' nor 'storage' includes the exercise of a right or power over or the keeping or retaining of tangible personal property for the purpose of: (1) transporting the property outside the state for use solely outside the state." So, at least in Texas, a buyer may be permitted limited post-closing use of the aircraft in Texas for the purposes of (i) training, (ii) maintenance, repairs, completion etc., or (iii) to fly the aircraft out of Texas.

Registration

The Texas fly-away exemption also requires that the aircraft be registered in another state or nation, but not Texas. So, while the transfer of ownership will be filed with the FAA, in order to satisfy the statute the aircraft also needs to registered in another state or country after it is removed from Texas.

To claim the fly-away exemption, the buyer must give the seller a Form 01-907, Texas Aircraft Exemption Certificate Out-of-State Registration and Use (“Exemption Certificate”). Both the buyer and the seller must sign the Exemption Certificate and the seller must send a copy to the Texas Comptroller’s office within 30 days of the sale’s occurrence in Texas. And in the event of a dispute with the Comptroller, the buyer has the burden of proving by clear and convincing evidence that the aircraft was not subject to Texas sales tax per TTC Section 151.328(a)(4).

It is important to know that, at least in Texas, each case is unique and even though it may appear that the buyer has satisfied all requirements of the fly-away exemption, the Comptroller could take a different view of the case. Although this may not be the case in all states, it is prudent for aircraft buyers in all states to work with their aviation and tax counsel to properly structure their transactions in a way that complies with/satisfies any requirements for taking advantage of a fly-away or any other type of exemption.

Posted by Greg

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