Gregory J. Reigel
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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."


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.


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

September 21, 2018

Operation Safe Pilot All Over Again, But This Time FAA Cross-Checks Pilots With The VA Disability Database

As some of you may know, the Department of Justice recently issued a Press Release announcing that it had indicted four pilots for lying on their medical applications. In each case, the airman failed to disclose that he was receiving Veterans Administration ("VA") benefits for a medical condition that would likely have either disqualified the airman from receiving a medical certificate, or would have certainly subjected the airman to additional scrutiny and/or testing requirements by the FAA's Office of Aerospace Medicine.

The airmen were "caught" when the FAA cross-checked its database of airmen holding medical certificates with the VA's disability benefits database. This is reminiscent of the FAA's 2002 Operation Safe Pilot in which it performed a similar cross-check, but with the Social Security Administration's ("SSA") disability database. Operation Safe Pilot resulted in prosecution of forty pilots who were receiving SSA disability benefits for conditions that would have either disqualified the airmen from receiving a medical or would have triggered further inquiry by the FAA.

After Operation Safe Pilot, the FAA revised the application for medical certificate to include language that specifically authorizes it to conduct this type of cross-check with SSA and VA. When an airman signs the medical application, he or she is agreeing that the FAA can perform this type of search.

Since the DOJ Press Release was issued, I have received multiple calls from airmen who believe they may be in a similar situation, but have not yet been "discovered" or received any notice from the FAA. In each call the airman is, perhaps justifiably, concerned regarding his or her liability exposure for criminal prosecution. Fortunately, options, albeit not great options, are available provided the airman is not yet in the FAA's cross-hairs.

Depending upon the circumstances, airmen have at least two options for dealing with the situation:
  1. An airman can contact the FAA via letter and disclose the previously omitted information regarding both the medical condition and the receipt of disability benefits. It is also helpful to provide an explanation for the non-disclosure, to the extent that the airman has a reasonable explanation for failing to disclose the information. This may persuade the FAA that the failure to disclose was not intentional, but merely a misunderstanding etc.; or

  2. The airman can apply for a new medical certificate and disclose the medical condition and receipt of benefits on the application. Then when the airman goes to his or her aviation medical examiner ("AME") for the medical examination the airman can explain the situation to the AME.

In either instance, the airman will want to have all of his or her VA medical/disability records available to provide to the FAA. However, an airman should keep in mind that any information he or she provides to the FAA could be used against the airman in a criminal prosecution. So it is important for the airman to be very careful about what he or she says to the FAA or AME.

Although pursuing one of these two options does not guarantee that the FAA will not prosecute the airman, coming clean and correcting the record before the airman is "caught" may convince the FAA that prosecution is unnecessary. However, even if an airman is not prosecuted, it is quite likely that the FAA will follow its standard playbook and revoke all of the airman's certificates as a sanction for falsifying the airman's medical application(s).

If you find yourself in this situation, please call and I will be happy to help you through the process.

Posted by Greg

September 14, 2018

If You Want To Be A Part 135 Check Airman Or Instructor In A Simulator, You Have To Fly The Plane

In a recent Legal Interpretation, the FAA reaffirmed its position that an individual acting as a check airman or flight instructor in a simulator must fly at least two flight segments for the type aircraft involved within the 12-month period preceding the performance to comply with 14 C.F.R. § 135.337(f). The Interpretation responded to an inquiry from a Part 142 Training Center asking whether a Part 135 check airman/instructor conducting turbine aircraft flight checks/flight instruction in a simulator could use a multi-engine piston aircraft to satisfy the requirements of §§ 14 C.F.R. § 135.337(f) or 14 C.F.R. § 135.338(f). Both sections require that the check airman/instructor
  1. Fly at least two flight segments as a required crewmember for the type, class, or category aircraft involved within the 12-month preceding the performance of any check airman or flight instructor duty in a flight simulator; or

  2. Satisfactorily complete an approved line observation program.

In its request the training center explained that it was either cost prohibitive or simply not feasible for a training center or contract check airman/flight instructor to be able to satisfy these requirements in an actual turbine aircraft. On the other hand, accomplishing the flight segments or line observation in a multi-engine piston aircraft was not only more economical, but was actually feasible given the availability of multi-engine piston aircraft for rent.

In response, the Interpretation states that
recency of experience in a light piston engine would not satisfy the recency requirements for serving as a check airman or instructor in an aircraft of a different type, class, or category aircraft. Because the purpose of the requirements is for experience in a similar aircraft, the aircraft type must be the same. If the aircraft does not have a type rating, then the class and category, in that order, must be the same.
So, if you are a conducting Part 135 flight checks or instruction in a simulator, you will need to make arrangements to obtain the required currency experience in a similar aircraft. Unfortunately, this will make it more difficult, and more expensive, for training centers to either obtain or maintain qualified check airmen/instructors.

Posted by Greg

September 07, 2018

If You Are Unhappy With Your ASAP Program, Suing DOT Won't Help.

An airman found this out the hard way in a recent case in Michigan. In Mark v. U.S. Dep't of Transportation the plaintiff was a flight engineer working for Kalitta Chartes II, LLC, an air carrier. During one particular flight, the captain nearly crashed the aircraft in what the Court characterized was a "nearly-disastrous unstable landing approach" which left the plaintiff "understandably shaken."

Shortly after the flight, the plaintiff failed a simulator proficiency exam and claimed his failure was the result of the post-traumatic stress disorder ("PTSD") he was suffering from the previous flight. The Plaintiff then filed a report under Kalitta's Aviation Safety Action Program ("ASAP") detailing his physical and mental condition which was then provided to the Event Review Committee ("ERC"). As you may know, ASAP programs are established via a memorandum of understanding ("MOU") between an air carrier and the FAA which detail procedures for participating in the program. The MOU establishes the ERC which includes a representative from each of the air carrier and pilot's union, as well as an FAA inspector.

In this case, the plaintiff alleged that the MOU required the ERC to report his medical issue to the FAA Regional Flight Surgeon and then comply with any instructions received in response to the report. However, the ERC did not follow this procedure, but simply determined that the plaintiff was fit to fly. Based upon this determination, the plaintiff submitted to another simulator proficiency check which he also failed, and he again claimed the failure was caused by his PTSD. After the second failure, the plaintiff's employment was terminated.

The plaintiff sued the Department of Transportation alleging that he would not have lost his job if the FAA inspector on the ERC had reported the plaintiff's medical condition to the Regional Flight Surgeon as required by the MOU. The plaintiff asserted claims against the DOT for ordinary negligence grounded in the alleged unlicensed practice of medicine by the FAA inspector and intentional infliction of emotional distress. The DOT then moved to dismiss the plaintiff's claims.

The Court agreed with the DOT and held that the plaintiff's claims were barred by the doctrine of sovereign immunity. The Court determined the plaintiff's allegations that the FAA inspector's alleged failure to comply with the MOU and the resulting termination of plaintiff's employment were really contract claims which are expressly barred by sovereign immunity and not covered under the Federal Tort Claims Act (which does permit some tort claims against the government). It also observed that the plaintiff had provided no evidence or case law to support his claims for unlawful practice of medicine or intentional infliction of emotion distress.

So, I think the takeaway from this case is that any disputes arising from an ASAP program are probably best pursued with the air carrier rather than the DOT. Although the government can be sued in tort (e.g. the plaintiff's negligence and intentional infliction of emotion distress claims), the burden is high to assert facts and precedent to support those claims. And as this case shows, contract cases against the government are, for the most part, completely barred.

Posted by Greg

August 31, 2018

The IRS May Disregard Your LLC, But You Shouldn’t.

As you may know, an aircraft owner may use a limited liability company (“LLC”) to register and hold title to the owner’s aircraft. An LLC is formed by filing articles of organization with Secretary of State (or equivalent) in the state in which the LLC is organized. The LLC has members who hold/own membership interests in the company that are represented by the members’ capital accounts. The LLC may be managed by managers or it may be managed by the LLC member(s).

An LLC is a type of business entity that has distinct legal personality from its owner(s)/member(s) and managers. An LLC is treated as a separate “person” in the eyes of the law with an independent existence from its members. Thus, if the owner/member of an LLC dies, the entity continues to exist (although an LLC needs to specifically elect to have this continuity of existence).

However, once set up, the laws governing LLCs require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records, filing annual renewals/registrations etc.). If the LLC does not comply with those formalities, it is possible that the law will not recognize the LLC as a separate “person” and will look to the LLC’s members or managers to personally honor the LLC’s obligations. This is called “piercing the corporate veil.” Not only is this a bad situation for the LLC members, this concept is frequently confused with the Internal Revenue Service’s treatment of an LLC as a “disregarded entity.”

Although an LLC is a “legal entity”, the Internal Revenue Service (“IRS”) does not treat an LLC as a “tax entity.” Rather, the IRS “disregards” LLCs for federal tax purposes as if the entity does not exist. Most LLCs with a single member are taxed as a sole proprietorship, while a multi-member LLC is usually taxed as a partnership. In some cases, the LLC can elect to be treated as an “S” corporation if the LLC satisfies certain criteria.

As a disregarded entity, a single-member LLC does not file an income tax return or report income, loss, deduction, or credit. Instead, the LLC member incorporates these tax items into the member’s tax return. Similarly, a multi-member LLC’s members and the members of an LLC that has elected “S” corporation tax status would report on their respective tax returns.

If you are using an LLC to own an aircraft, keep in mind that the IRS’s disregard of your LLC for tax purposes does not relieve you of your responsibility to comply with the formalities required by the laws applicable to LLCs. Failure to comply with the formalities can negate the personal liability protection otherwise afforded to an LLC’s members, and can also render the aircraft’s registration invalid. So, it is important to pay attention to both the tax and the legal aspects applicable to your LLC to take advantage of the benefits of owning an aircraft with an LLC.

Posted by Greg

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