The Pleasures, Perils and Persnickety Rules for Owning Your Own Airplane or Participating In a Time-Sharing Arrangement
October 1, 2004
Family business-owned aircraft fall under strict FAA rules.
You’ve arrived. Your business is doing well, and it’s time to make things a
little easier on yourself. One of the real pleasures of being really successful
is having your own airplane. If you’re going to be a road warrior, you may as
well do it in style. For the executive, there are no lines at the check-in
counter or the security check-point. No taking off your shoes, your jacket, your
belt or your jewelry before you get on board. And you can go where you want when
you want, maximizing your personal productivity and minimizing the exhaustion of
commercial travel. From the company’s viewpoint, executives can use transit time
for business meetings, and there is greater security in parts of the world where
kidnapping and physical safety can be real concerns. And it’s a great start to
the family vacation.
But owning an airplane is a serious commitment, both monetarily and as an
operational matter. The Federal Aviation Administration (FAA) is charged with
overseeing flight safety and it has done so by issuing multiple and confusing
regulations governing the use and operation of all U.S.-registered aircraft and
non-U.S.-registered aircraft to the extent they fly in U.S. airspace. Failing to
abide by FAA regulations can result in serious monetary fines for the airplane
operator and disciplinary action for pilots.
Let’s take as an example a relatively small, but quite successful, family
business. There is a parent company, owned by a family trust, and several
subsidiaries owned entirely by the parent. In addition, there are other
companies owned by family members who are also beneficiaries of the trust. And,
of course, there are the family members themselves. The parent company buys an
airplane so its executives, who are family members, don’t spend a lot of time in
airports, connecting to the small cities where the subsidiaries’ assets are
located. Also, the family members are concerned about their security and that of
their children.
The idea is that the parent company will direct the aircraft’s use and, when
flights are made on behalf of one of the subsidiaries, the parent will charge
the subsidiary for the cost of the transportation. The family members have other
business interests that are not part of the parent-subsidiary structure, and
those businesses also would benefit from using the airplane from time to time.
Naturally, the parent would expect the non-subsidiary companies to pay for their
use of the plane. When the plane isn’t being used for business, it will be
available for family members for personal travel. The parent company does not
want to have liability in the event of an accident with the new airplane –
everyone’s nightmare. So it sets up another subsidiary to own the airplane and
hire the pilots. The plan seemingly makes a lot of sense.
Unfortunately, FAA regulations make the parent’s intentions illegal, unless
the subsidiary that owns and operates the airplane becomes a commercial operator
under the FAA’s rules. The important question for the FAA is “who is operating
the aircraft?” Under the FAA’s regulations, the person in operational control of
the aircraft is responsible for complying with the regulations and ensuring
safety of flight. Note that the aircraft owner may be different from the
aircraft operator. The FAA only regulates the operator.
Definitions
“Commercial operations” means the transportation of persons or
property in common carriage for compensation or hire.
“Common carriage” means holding out to the general public the sale of
transportation.
“General aviation” means the private carriage of persons or property.
“Private carriage” means carriage of persons or property restricted to
a limited circle of persons.
The Goals
Most companies want to fly under the general aviation rules. General aviation
rules are quite flexible, as they were originally designed with the private
pilot in mind. Designation as a commercial operator makes operating the aircraft
much more expensive and limits some of the operating flexibility available under
the general aviation rules. Also, different and more expensive insurance is
required for commercial operations.
At the same time, the company wants to get the best possible return on its
investment.
The Issues and Some Solutions
The first problem with the parent company’s intentions is that it has
isolated the airplane and pilots into a separate subsidiary that has no other
business than that of operating the airplane. That limits potential liability,
but the FAA considers this structure to be a “flight department subsidiary.” If
the flight department receives money from the parent or other familial
companies, it is accepting “compensation” for the flights, even though the
compensation is in the form of a book entry and the entity is ignored for tax
purposes. That means that the flight department must operate under the
restrictions of commercial operator rules.
To operate under general aviation rules, the company operating the airplane
must have legitimate business interests other than operating the airplane. The
parent may place ownership of the aircraft into a subsidiary corporation to
partially shield itself from liability, but the operating company must have a
purpose other than providing air transportation. A holding company is one
possible option. Another option is to form a “services” company that includes
all transportation services, human resources, legal and accounting for the
entire group. Once the aircraft operator has legitimate business operations
other than air transportation, it may lend the aircraft and pilots to its parent
or subsidiary corporations, or to other subsidiaries of the parent, and charge
the company the fully allocated cost of owning and operating the airplane for
those flights, provided that the use is related to the business of the parent or
the subsidiary. No charge may be made for guests traveling on the company plane
or to executives of the company not traveling on business.
If the unrelated businesses of family members wish to use the airplane, they
must first have in place a “time share agreement” with the operating company.
The agreement must be filed with the FAA before the first flight, the local FAA
office must be notified and a copy of the agreement must be kept on board the
airplane during the time-share flights. Under a time share agreement, the
operating company may charge only certain costs for the particular flight. These
costs are enumerated in the FAA’s regulations and include the costs of fuel, oil
and other products used for the particular flight, certain crew and catering
costs, airport tie-downs, weather planning costs and other specific items. The
operating company may not charge a flat, hourly rate for the use of the airplane
and crew.
Alternatively, the company owning the aircraft could lease the aircraft to
the unrelated company and that company could hire independent pilots to fly on
its behalf. The airplane and the pilots may not be hired from the same company.
Under this option, the company owning the aircraft can charge whatever it wants
to lease the aircraft to the hiring company, the hiring company finds its own
pilots, and the hiring company becomes the aircraft operator for purposes of
complying with FAA regulations and safety of flight.
When family members use the airplane for their personal travel, the operating
company may not accept compensation for the cost of the flight. Instead, the
value of personal travel becomes income to the family member, which should be
reported on an IRS Form 1099, at a rate established by the Department of
Transportation known as the Standard Industry Fare Level (SIFL). The SIFL rate
is quite advantageous vis-à-vis the cost of comparable air
transportation.
A Word About Time Shares
Time sharing is a thriving business for aircraft manufacturers. Basically,
the manufacturer sells its airplanes to a subsidiary, which resells the
airplanes in 1/16th shares to the general public. Each share entitles
the owner to a specific number of hours of aircraft use, usually 50. The
manufacturer’s subsidiary has a fleet of shared aircraft, and agrees to schedule
transportation for the time-share owner on demand, with certain limitations. The
time- share company provides professional pilots, maintenance, scheduling
services, insurance and other operational assistance. All the owner does is tell
the time-share company when and where he wants to go. The owner almost never
flies in his own airplane, but flies in one of a fleet of airplanes.
The share owner remains in operational control of the airplane when he is
using it, and so has the responsibility of complying with FAA regulations.
Additionally, time shares are valid for a particular period of time, usually
five years, after which the owner’s right expires.
Conclusion
The decision to buy an airplane is a serious one and should not be undertaken
lightly. It is very important to understand and comply with the rules of the
road. The FAA interprets its regulations narrowly, and persons who own and
operate an airplane need to consult with experts to get the best and most
flexible usage possible given their particular circumstances.
For more information, e-mail Louise Cobbs at
louise.cobbs@hklaw.com or call toll
free, 1-888-688-8500.