Gregory J. Reigel
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February 16, 2018

The Importance Of An Aircraft Pre-Purchase Inspection

In most aircraft transactions, the buyer should have a pre-purchase inspection performed on the aircraft. Why? To make sure the buyer knows what the buyer is getting before the buyer closes on the purchase. The pre-purchase inspection allows the buyer to confirm that:
  • The aircraft is in an airworthy condition;

  • The aircraft has a current, valid, and effective standard category airworthiness certificate issued by the FAA (FAA Aeronautical Center Form 8100-2) without restriction or limitation;

  • The aircraft is in compliance with its type certificate;

  • All of the aircraft's airframe, engine and/or propeller logbooks, as well as the maintenance records, are original and complete;

  • The aircraft's engine(s) and all other systems and installed equipment are operating in a manner that is consistent with the standard specifications, limitations and requirements of the applicable maintenance and/or operations manual;

  • All of the aircraft's calendar, cycle and hourly inspections per the manufacturer’s recommended maintenance program are completed and current with no extensions or deferrals, and with no non-standard or recurring inspections required outside of the standard manufacturer’s recommended maintenance program;

  • All mandatory service bulletins (or equivalents) and airworthiness directives applicable to the aircraft have been completed and/or are in compliance and current, without recurring incident if such terminating action is available;

  • The aircraft doesn't have any undisclosed history of material damage;

  • The aircraft doesn't have any corrosion outside of manufacturers’ in-service limits;

  • All aircraft and engine maintenance and/or warranty programs are current and fully paid;

The purchase agreement (which should be used in all aircraft transactions) can specify who will perform the inspection, what qualifications that individual must possess and where the inspection will take place. Although the buyer is usually responsible for the expenses associated with a pre-purchase inspection, the agreement should address which party is responsible for what expenses related to the inspection.

Also, the buyer should make the agreement contingent upon the buyer’s satisfaction with results of the inspection. If the pre-purchase inspection discloses that the aircraft isn't as represented by the seller or as expected by the buyer, then the buyer should have options to either get out of the transaction or to require that the seller correct any discrepancies. It is much better to discover discrepancies before the buyer pays for the aircraft than it is to find out at a later time when the buyer's recourse may be limited.

So, if you are an aircraft buyer and you want to make sure you are getting everything for which you are paying, make sure you have a pre-purchase inspection performed by a mechanic or repair station you trust. It is worth the expense.

Posted by Greg

February 09, 2018

Aircraft Management Services Are Now Exempt From Federal Excise Tax

When the 2017 Tax Cuts and Jobs Act (the "Act") became law, its provisions immediately and significantly impacted business aircraft owners and operators in a number of ways. One of the key provisions of the Act resolved an issue between the IRS and aircraft management companies. Prior to the Act, the IRS was taking the position that fees paid for aircraft management services were subject to Federal Excise Tax ("FET"). Of course, the business aviation community objected to the IRS's position. As a result of the ongoing dispute (and discussions aimed at obtaining guidance from the IRS and/or changing its position), although the IRS had audited aircraft management companies and assessed FET, it was not attempting to enforce those assessments.

The Act addressed this situation and now provides a specific exemption to FET for aircraft management services. The following amounts paid by an aircraft owner for management services related to maintenance and support of the owner’s aircraft or flights on the owner’s aircraft are exempt from FET:
  • Payments for support activities related to the aircraft itself (e.g. storage, maintenance, and fueling);

  • Payments for the aircraft’s operation (e.g. hiring and training of pilots and crew);

  • Payments for administrative services (e.g. scheduling, flight planning, weather forecasting, obtaining insurance, establishing and complying with safety standards); and

  • Payments for other services as are necessary to support flights operated by an aircraft owner.

It is important to keep in mind that these payments are exempt from FET only to the extent that they are attributable to flights on an aircraft owner’s own aircraft. Payments for services that apply to other aircraft in addition to the aircraft owner’s aircraft are still subject to Federal excise tax. Also, to the extent that monthly payments are allocated to flights on the aircraft owner’s aircraft and other non-owned aircraft, then FET must be collected on the portion of the payment attributable to flights on the non-owned aircraft.

But, you might be wondering, what about the many aircraft owned by single-purpose entities and leased to operating companies who operate the aircraft in connection with their businesses? How does the Act affect the operating company lessees? Well, with respect to aircraft lessees, the Act considers an aircraft lessee to be an aircraft owner to which the exemption is available provided that the lease is for a term of more than thirty one (31) days and the aircraft is not leased from the aircraft management company or a related party.

So, within the parameters of the Act, we now have clarity on when payments for aircraft management services are, and are not, subject to FET.

Posted by Greg

February 02, 2018

How Do You Respond To A Request For Reexamination?

If you are involved in an accident or incident and the FAA finds out about it, which it usually does, it is quite possible that you may receive a letter from the FAA requesting that you submit to “reexamination.” This is also commonly referred to as a “709 Ride.” If you receive a letter like this, what are your options? Fortunately, you do have options, although they are limited.

If you would like to learn more about the process and your options, please read my latest article on the subject: How To Respond To A Request For Re-Examination.

Posted by Greg

January 12, 2018

Aircraft Registration And Airman Certification Fees May Be Increasing

Today the Federal Register published the Department of Transportation's Semiannual Regulatory Agenda. Buried deep within its agenda, the DOT states that the FAA will be issuing a notice of proposed rulemaking ("NPRM") addressing fees so the agency can "recover the estimated costs of the various services and activities for which fees would be established or revised."

The proposed rulemaking will:
  • Set fees for airman certificates, medical certificates, and for providing legal opinions with respect to aircraft registration or recordation. Interestingly, the FAA does not currently charge a fee for providing this type of legal opinion.

  • Revise existing fees for aircraft registration, recording of security interests in aircraft or aircraft parts, and replacement of an airman certificate. Of note, these fees are incredibly minimal compared to similar fees one would be charged in connection with registering a car or real estate. And they haven't changed in many years. So, this proposal isn't really a surprise and, in fact, is probably overdue.

The agenda indicates that the NPRM is to be released in April, 2018. Of course, as with any NPRM, the devil will be in the details. So, we won't know the amount of the proposed new and increasing fees until the NPRM is issued. Stay tuned.

Posted by Greg

January 05, 2018

"Acceptable To" Or "Accepted By"? They Don't Mean The Same Thing To The FAA

The terms “acceptable to” and “accepted by”, although they sound similar, do not mean the same thing. Each has a very specific meaning from the FAA's perspective.

If we look to the guidance the FAA issues to its inspectors, FAA Order 8900.1, Volume 3, Chapter 1, Section 1, Safety Assurance System: General, we see that it describes general processes for “approval” or “acceptance” of certain operations, programs, documents, procedures, methods, or systems by the FAA. Unfortunately, Order 8900.1 does not address the term “acceptable to”, which is used in many sections of the regulations. And FAA inspectors have applied these terms inconsistently, which has added to the confusion.

In order to remove the confusion, the FAA recently issued a Notice to explain what each of these terms means to the FAA, and what it expects for someone to comply with each term:

"Acceptable To". An item is acceptable to the FAA, if "the FAA’s active review and acceptance prior to use is not normally required." However, even though the FAA doesn't have to accept an item prior to use, the responsible person must be able to the FAA, usually after the fact, why the item is an acceptable practice or procedure. This explanation may be as simple as showing the FAA that the practice or procedure is contained in an FAA advisory circular or other published guidance, the Original Equipment Manufacturer’s published procedures, or relevant information from an ASTM International standard.

To further explain the meaning of "acceptable to", the FAA uses the example of torquing bolts to explain that doing so by "feel" would not be a procedure acceptable to the FAA. Instead, if a maintenance provider were to follow the acceptable industry practice of using a properly calibrated torque wrench to ensure the required torque values are achieved, that would be acceptable to the FAA.

"Accepted By". In order to be accepted by the FAA, an item must be submitted to the FAA for review and acceptance prior to use. This means the item meets the FAA’s applicable criteria, the FAA has no objection to the submitted item, and the FAA has communicated that acceptance to the person submitting the item. The FAA also clarifies that "accepted by the FAA" doesn't simply mean that "the item was given to a representative of the FAA and that person received (accepted) it on behalf of the FAA)."

The FAA also notes that an operator's failure to submit an item prior to implementation, even though the operator was required to do so, "does not mean the person would be in violation of the underlying regulation requiring the item to be "acceptable.'" But it does mean the operator would likely be in violation of a regulation requiring that he or she submit the item to the FAA for acceptance.

So, the next time you run into these terms, whether in the regulations or FAA guidance, you will now know what the FAA expects for each. And if an FAA inspector tells you otherwise, you can simply refer him or her to the Notice for clarification.

Posted by Greg

December 29, 2017

The FAA's New Part 120 Voluntary Disclosure Reporting Program: Should An Employer Use It?

The FAA has released a new AC 120-117 Voluntary Disclosure Reporting Program ("VDRP") specifically for employer disclosure of 14 C.F.R. Part 120 violations. Some might say "this is a good thing." Others may say "it's about time." And still others may say the VDRP is "better than nothing." And none of these statements is entirely wrong. But we need to look at the Part 120 VDRP to understand why it may evoke these responses.

As you may know from previous articles, the FAA's Drug Abatement Division is the office within the FAA responsible for development, implementation, administration, and compliance monitoring (and enforcement) of aviation industry drug and alcohol testing programs. And it has always been very rigid and unforgiving when it comes to violations of the drug and alcohol testing regulations. Even after the FAA issued its new Compliance Philosophy, Drug Abatement didn't really change how it approached or handled these types of violations. So, when I saw the Part 120 VDRP I was initially encouraged.

The Part 120 VDRP functions much like the VDRP under AC 00-58B with similar policy considerations. The FAA believes an employer's use of the Part 120 VDRP will "encourage compliance with the regulations, foster safe operating practices, and promote the development of self-audits", which is consistent with the Compliance Philosophy's goal of returning an employer to compliance and preventing reoccurrence. In order to qualify for the VDRP, an employer must satisfy the following conditions:
  1. The employer has notified the FAA of the apparent violation immediately after detecting it and before the FAA has learned of it by other means;

  2. The apparent violation was inadvertent;

  3. The apparent violation does not indicate a lack, or reasonable question, of qualification of the employer;

  4. Immediate action, satisfactory to the FAA, was taken upon discovery to terminate the conduct that resulted in the apparent violation; and

  5. The employer has developed or is developing a comprehensive fix and schedule of implementation satisfactory to the FAA. The comprehensive fix includes a follow-up self-audit to ensure that the action taken corrects the noncompliance. This self-audit is in addition to any audits conducted by the FAA.

Once the employer completes the requirements of the Part 120 VDRP, the FAA will issue written correspondence to the employer rather than issuing a Notice of Proposed Civil Penalty (which is the FAA's standard operating procedure for Part 120 violations). However, while this initially sounds like a good thing, the Part 120 VDRP also contains some "gotchas."

First, the Part 120 VDRP states that "[o]rdinarily, the FAA does not accept a voluntary disclosure if the violation is discovered during, or in anticipation of, an FAA investigation/inspection or in association with an accident or incident." But this is typically when an employer first discovers a potential Part 120 violation. So this seems to rule out use of the Part 120 VDRP in most of the common situations faced by an employer.

Next, the FAA can refuse to accept the disclosure, or if at any time after it accepts the disclosure the FAA becomes aware that the disclosure did not meet the requirements for acceptance under the VDRP, it can withdraw its previous acceptance. If that happens, the FAA may use the evidence gathered in connection with a Part 120 VDRP disclosure to support an enforcement action (civil penalty or certificate) against the employer. So, by attempting to comply with the Part 120 VDRP an employer could very well be helping the FAA to build its case against the employer.

So, is the Part 120 VDRP a good thing? In very limited circumstances, yes, I believe it can be a good thing for an employer. However, given the FAA's past attitude and actions in response to Part 120 violations, as well as Drug Abatement's refusal to fully embrace the Compliance Philosophy, let's just say I am more than a little skeptical about how/whether the Part 120 VDRP will provide any significant relief for employers.

Employers will need to analyze their circumstances very carefully to determine whether a situation satisfies the Part 120 VDRP criteria. And employers should work with an aviation attorney to evaluate/mitigate any risk associated with a disclosure or the potential for the FAA to refuse to accept a disclosure.

For more information on the procedures for making a Part 120 VDRP disclosure, you should read AC 120-117. Also, for information regarding a general Voluntary Disclosure Reporting Program under AC 00-58B, please refer to my article: Voluntary Disclosure Reporting Program.

If you have questions about or need help with a VDRP disclosure, I would be happy to help.

Posted by Greg

December 22, 2017

LLC Statements: What You Need To Know

Have you ever tried to register an aircraft with the FAA on behalf of a limited liability company ("LLC") only to be told by the FAA that you need to submit a "statement in support of registration by a limited liability company" (an "LLC Statement")? Or have you submitted an LLC Statement only to have the FAA reject the statement for one reason or another?

If so, you are not alone. The FAA has very specific requirements for LLC Statements. Some of these requirements are mandated by regulation. Others are internal FAA requirements. In any event, complying with all of these requirements can be challenging if you don't know what is required.

Fortunately, once you know why the FAA needs the LLC Statement and what information must be included, complying with these requirements is pretty straightforward. To learn more about LLC Statements, please read my latest article on the topic: The “Ins” And “Outs” Of LLC Statements In Support Of Aircraft Registration.

Posted by Greg

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