AIN’s 2024 Corporate Aviation Leadership Summit (CALS) West brought together business aviation thought leaders to examine and discuss some of our industry’s pressing issues. The session’s topics included the legal aspects of business aviation, generational differences, employee retention, maintenance, training, hiring/DEI, compensation, and sustainability.
Nearly 120,000 students are enrolled in U.S. law schools. Odds are that many of them will deal with some aspect of business aviation.
The CALS West attendees identified five critical areas where business aircraft operators need to understand the legalities of typical operations, including taxes for Part 135 charter, aircraft management companies, business and personal use, pilot freelancing, and aircraft lawyers and brokers.
Because the relationships between airplanes and the law are highly technical, this was a roundtable with attendees asking questions and the moderator, Nathan Pietila, providing answers.
The Less Taxing Aspect of Charter Operations
Q: Does operating our aircraft through a Part 135 management company really save on taxes?
Pietila: The standard 7.5 percent federal excise tax does not apply to flights a management company performs for the aircraft’s owner, regardless of whether the flight is operated under Part 91 or 135.
However, because the FAA requires the Part 135 operator to have legal possession of the aircraft during these flights, it can be argued that since the charter manager “owns” the aircraft, the actual owner may not qualify for that exemption.
Q: What are Part 380 public charters?
Pietila: Part 380 permits Part 135 providers to operate scheduled flights and sell individual seats on aircraft with fewer than 30 seats. This allows some smaller jet aircraft to operate without the need for the intensive rules in Part 121 and without the need to obtain DOT economic authority for per-seat common carriage.
Recently, a well-known regional airline announced its intent to start Part 135 operations under Part 380, using Bombardier CRJ 200s outfitted with fewer seats to service smaller airports on thinly traveled routes. The FAA has yet to approve the request.
When Is Your Crew Not Your Crew?
Q: Our aircraft are managed by a Part 135 company, and our local FSDO interpreted the regulations as saying we must use Part 135-qualified pilots on all owner flights. Is that correct?
Pietila: If the aircraft is at any time piloted for an owner flight under Part 91 by crewmembers who are not qualified for Part 135 operations for the certificate holder, the aircraft must undergo a conformity check before it can be used again for Part 135 operations.
This puts the management company in a difficult position because for the aircraft’s owner to have appropriate operational control of the aircraft for Part 91 operations, the owner must have an unrestricted choice of crewmembers.
If the owner is prevented from selecting its own crewmembers and must use a management company crew, the management company runs the risk of exercising too much operational control over a Part 91 flight. Quite the Catch-22!
It’s Not Business, It’s Personal
Q: Does it make sense for the company to own an aircraft for business use and for the owners of the company to operate a separate aircraft for personal use?
Pietila: Where a single family or single taxpayer controls the company, separate aircraft probably don’t make sense from an income-tax perspective.
Q: How does the IRS know whether the aircraft is being used for business or personal reasons?
Pietila: The IRS requires the purpose of every passenger on every flight to be tracked and documented to determine whether business, personal, or personal entertainment use is happening.
Also, for public companies, the SEC requires personal use by executives to be disclosed. Collecting information is a continuing headache for flight departments, so adequate support from the company’s tax and accounting departments is essential.
Additionally, some states have exemptions from sales and use taxes for aircraft that are operated in common carriage, so this may be a viable strategy to reduce or eliminate sales and use tax on an aircraft, provided that the aircraft is also chartered out to unrelated parties. The owner actually pays a fair market value charter rate. However, every state is different, so ask your tax advisor.
Moonlighting Pilots Beware
Q: Can my employer forbid me from moonlighting for non-competitive operators?
Pietila: This may not be tenable in the current tight market for pilots. Check with the employment council in your state to see whether your employer can forbid you from moonlighting as a crewmember while you are on vacation.
Q: What is the potential liability to his regular employer if an accident occurs while a pilot is moonlighting?
Pietila: It’s hard to see how an employer can be held liable for something an employee does “off the clock.” But that doesn’t mean the employer won’t get hauled into court on some kind of negligence theory, and getting the case dismissed will probably cost time and money.
Q: If you are going to moonlight, what is the best course of action to avoid liability issues?
Pietila: Have the pilot named as an additional insured on the other aircraft’s policy. The primary employer’s liability in the event of an accident is most likely derivative from the pilot’s own negligence. The pilot can still be sued, but he or his estate probably has little resources to satisfy a judgment.
Do You Get What You Pay For?
Q: Are aircraft brokers and aviation attorneys worth it?
Pietila: A reputable broker understands the current pricing environment and should be able to help you find an aircraft that meets your mission requirements and avoid aircraft that are not ideal in terms of past or prospective maintenance.
Attorneys work hand in hand with brokers to ensure the business points are captured in the language (so you get what you paid for) and that possible unforeseen contingencies are planned for. Attorneys also assist with income and sales-tax planning and FAA regulatory compliance with the ownership and operating structure.
Brokers and attorneys also understand what’s possible to obtain in the deal process––so you aren’t chasing after deal points that aren’t economically possible or legal terms that don’t make a practical difference or are never seen in the aviation context. Make sure you assemble a good team for any aircraft transaction—aircraft brokers and aviation attorneys are definitely worth their fees!