Legal Topics

 

–Aircraft Purchases and Sales: Aircraft buyers should not only conduct a title search and pre-purchase examination for an aircraft they are considering purchasing, but they should also consider getting an appraisal to save acquisition sales tax. (Please also see the Aircraft Liens topic.) Many states have statutes that allow sales taxing an aircraft purchase using the Aircraft Blue Book-Price Digest if the market value exceeds the actual purchase price. If you purchase an aircraft significantly below market value, the appraisal will save you from paying sales tax based on higher Blue Book values.

 

Be wary of signing letters of intent that call for the signatures of  the parties since the document can be alleged to be an enforceable contract.  Term sheets signed only by the party making the proposal are better than fully executed letters of intent.  When buying an aircraft be reluctant to make significant deposits to temporarily take the aircraft off the market since deposits are difficult to recover if the deal goes sideways. Sellers have a way of keeping deposits when buyers walk away from a deal. Small deposits you don’t mind putting at risk may be OK.

 

When selling an aircraft be certain to retain a copy (or duplicate original) of a signed bill of sale to be able to prove at what point title and possession of the aircraft passed in the event of a subsequent accident or other event. I know of one Piper Navajo owner/seller whose buyer did not record the sale and was caught using the aircraft to haul drugs from Belize. The seller’s copy of the bill of sale became very useful when the DEA came calling.

 

If you intend to have the aircraft owned by a separate legal entity rather than personally, form the entity first and have it acquire the aircraft. Don’t purchase the aircraft and then transfer the aircraft to the entity. This is better for asset protection and sales tax avoidance purposes. In Washington State, for example, transferring an aircraft you own to an entity you also own will give rise to aircraft acquisition sales tax on the transfer. Further, if you intend to lease the aircraft to avoid acquisition sales tax, be sure to have a state sales tax account established before the aircraft is purchased. Michigan, for example, will sales tax an aircraft that is leased to others if the lessor didn’t have a sales tax number prior to acquiring the aircraft. Please see the Asset Protection and the Acquisition and Sales and Use Tax topics.

 

–Aircraft Liens: Many aircraft buyers and owners learn of a lien against their aircraft only when they try to sell the aircraft, or when they try to use the aircraft for loan collateral. Most states have statutes that allow anyone who has done work on an aircraft up to 90 days after the last contact with the aircraft to file a lien for work performed on the aircraft. Because it typically takes six weeks for the FAA in Oklahoma City to process an aircraft lien, a title search will not reflect a recently-filed lien. With this being the case, a lien can easily attach to an aircraft five months after the aircraft is purchased. Aircraft buyers should review all of the aircraft maintenance records and contact anyone who worked on the aircraft within six months prior to the purchase to make certain all invoices have been paid.

 

–Aircraft Registration: Aircraft registration is not always a simple task. If the aircraft is going to be owned by a limited liability company (LLC) the FAA requires specific additional information. If the aircraft is to be owned by foreign interests, control of the aircraft must be either directly or indirectly in the hands of a US citizen. LLCs, corporations, and trusts can be used to accomplish this. If the aircraft were ever registered in a foreign country, the buyer should be certain the aircraft was de-registered in the foreign country since the FAA will not register an aircraft currently registered elsewhere.

 

There is a relatively new International Registry for aircraft and power plants that was created by the Cape Town Convention, an international treaty for registering 8-person or more aircraft or 550 SHP engines. Although registering with the registry can be expensive, if there is a likelihood an aircraft may be flown internationally, participating in the program may be worthwhile.

 

–Aircraft Ownership Corporations vs. LLCs vs. Trusts : Aircraft owners should decide what is their primary concern, e.g. asset protection, tax deductions, federal aviation regulation compliance, sales tax avoidance, etc. when selecting an aircraft owning entity. It is rare that all concerns call for the same solutions. A frequent scenario that may satisfy most goals is to have a business aircraft owned by a single member LLC that in turn is owned by an “S” corporation, and to have a separate LLC management company make the maintenance and operational decisions on behalf of the LLC that owns the aircraft. For federal tax purposes the LLC is disregarded because it is a single-member LLC, and in this scenario its activity is reported by the corporation. Asset protection is afforded the owner/shareholder through corporate and LLC legal protections as well as by the management company being responsible for most of the aviation related decisions. If there is a lease between the entities, aircraft acquisition sales/use tax may also be avoided. If the aircraft and pilot services are not provided by the same entity, Part 135 should not be implicated.

 

–Co-Ownership Agreements: When two or more individuals or entities are going to share aircraft ownership, or are going to be co-owners of an entity that owns the aircraft, an aircraft co-ownership agreement is advised. The agreement need not be formal, or even signed, if the parties fully understand what is written and believe they can abide by the agreement. The AOPA has sample agreements that can be used and/or modified. Be certain the co-owners have the potential for a good relationship by having non-competing interests, and that they understand the rules and are willing to abide by them. If the parties want to formalize the document, it can be in the form of a contract, or it can be adopted into corporate bylaws or into an LLC’s operating agreement.          

 

–Aircraft Leases: Aircraft leases are often used to avoid aircraft acquisition sales tax, but they are not always effective for that purpose, and they are not always a good idea. For federal income tax purposes, a lease sets up a presumption of passive activity, which will suspend or even preclude deducting losses from an aviation activity. Simple aircraft rental agreements like those used by an FBO (fixed base operator) may be preferred. If leases are used, they must abide by FAR 91.23, the truth-in-leasing requirement. See the Aircraft Purchases and Sales and the Aircraft Acquisition Sales and Use Tax topics.

 

–Hangar Ownership: As with aircraft, it may be provident to have the hangar owner be a protective entity, especially if the hangar will be used or visited by others. If the hangar, or the aircraft it houses, is to be used for business purposes, leasing the hangar to a business entity may generate some tax deductions, or passive income that can be sheltered by passive losses.

 

–Federal Aviation Regulations: Abiding by the FARs is not always easy, especially if an aircraft will carry passengers in addition to the aircraft owner, or if it is to be used for business purposes. Carrying persons or property for compensation requires the aircraft and crew to qualify under FAR Part 135, and if Part 135 is not implicated, the pilot may still need to have a commercial rating. The FAA’s definition of  “compensation” is not limited to monetary remuneration, and can be as insignificant as the value of a logbook entry to a time-building pilot. The FARs are not as complicated as the Internal Revenue Code, but they are similarly subject to interpretation.

 

–Post-Accident and Incident Guidance: After an aircraft accident or incident there are specific actions and reporting requirements. The airman or aircraft owner involved need to be careful to abide by all the reporting requirements without making statements and providing information that may unwittingly be inaccurate or harmful. It is imperative that the airman be truthful when making statements to government investigators since it is a felony to impede a  federal investigation of any kind.

 

The question of whether an event is an accident or an incident governs what steps need to be taken.  The NTSB and FAA do not necessarily agree upon what constitutes and accident or incident. One FAA inspector I asked many years ago how he differentiated between an accident and an incident jokingly answered “about five pages.” He was referring to the additional paperwork he had to complete for an accident versus an incident. The NTSB under Section 830.2 defines an accident to be an event where “substantial damage” occurs. It is remarkable how much damage can be sustained before substantial damage is reached. I recall an inadvertent power-on, gear-up landing in a light twin that was characterized by the FAA to be an incident.

 

–Airman Certificate Enforcement Action: FAA enforcement actions typically begin with either an FAA inspector witnessing or learning of an FAR violation. If the FAA finds basis for enforcement action, they will issue a Letter of Investigation which gives an airman an option to respond or not, within ten days. It is at this point that the airman should seek the help of an aviation attorney, if (s)he hasn’t already done so. In some instances a carefully drafted explanation with facts and argument may convince the FAA to drop the case. If the FAA continues its efforts against the airman, they will usually issue a Notice of Proposed Certificate Action (or civil penalty) if they do not consider the matter an emergency. At this point the airman has three choices: surrender his or her certificate,  ask for an informal conference probably to be conducted with an FAA attorney at an FAA regional office, or formally appeal the case before an NTSB administrative law judge. If the airman or the FAA is not content with the judges findings, the case can be appealed to the full NTSB board. Appeal thereafter may be taken to the U.S. Court of Appeals.

 

If for some reason after learning of an FAR violation the FAA believes an emergency response is required, they may issue an Emergency Revocation Order, after which the airman must surrender all certificates immediately. Failure to surrender all certificates results in a possible $1100.00 per-day penalty. An airman may appeal the emergency aspect of the order, but this must be done within two days of receipt of the order. If an airman doesn’t use the two-day appeal, an airman must surrender all certificates but then can still file an appeal as described in the paragraph above. FAA discovery of certain acts, like falsifying airman logbooks and certificate applications, certainly result in emergency revocation of all certificates, and successful appeals are extremely rare.

 

Typically non-emergency sanctions may be avoided if the airman had filed a NASA report within ten days of the event that give rise to the FAA’s action. It is probably always a good idea to file a timely NASA report when an airman believes (s)he may have violated an FAR. Having filed a report doesn’t mean it will necessarily need to be used, but if so, under most circumstances it can prevent sanctions from being brought against the airman. However, the NASA report is not exculpatory in cases of intentional FAR violations, and probably not in the case of an accident. The form is “NASA ARC Form 277, Aviation Safety Report” and can be found on the Internet under “NASA Form” or on the FAA’s web site www.faa.gov.

 

Among the greater authorities granted to the FAA is 49 U.S.C. Sec. 44709, which  FAA inspectors refer to as a “709 ride.” It is an evaluation the FAA can impose upon any airman the FAA believes my not be competent. Usually the evaluation includes a flight with an FAA inspector, but may in some instances require only a ground evaluation.

 

–Medical Certificate Application: FAA medical certificate applications need to be carefully prepared and the requested information fully disclosed. Emergency revocation of all certificates and heavy financial and criminal penalties can be imposed for falsification.

 

–Alcohol Violations: A second alcohol-related automobile moving violation will require substantial evidence of rehabilitation, after which the FAA doctors making the medical certificate reinstatement decisions can be reasonable and helpful.

 

–FAR Part 135 Charter Certificate Application: Whether and when the FAA will issue new Part 135 charter certificates depends on many circumstances that vary among the several FAA Flight Standards District Offices. A single-aircraft, single-PIC certificate at some FSDOs can be readily obtained. Multiple aircraft certificates involve a more extensive process and in some cases hiring consultants specializing in certificate procurement is advised. Purchasing an existing certificate should be done with the participation of the FSDO that will be overseeing the charter operations. Certificates of existing operators can be purchased as an alternative to applying for one.

 

–Airport Commission Regulation: Aviation businesses operating at municipal airports where there is a governing board like an airport commission need to acquaint themselves with the commission’s rules and personnel to be able to advance and defend the operator’s businesses interests. Getting on the wrong side of the commission can threaten the future of a business.

 

–Asset Protection: Asset protection begins with good insurance, and continues with operations that fall within the parameters of the insurance coverage. Additional protection arises from separating one’s potential adversaries from one’s person and from one’s personal assets. Protective entities like corporations, LLCs, trusts, etc. when properly formed and conducted will afford significant protection. If a protective entity is formed in one state, be sure it is registered in all states in which it is conducting activity, and be sure to file all annual reports with the secretaries of the pertinent states to keep the entity in good standing. Please see the Choice of Entity States topic.

 

Asset protection also involves having assets having significant equity separate from activities involving substantial risks. The risky activities should be conducted by entities having little equity. Some aircraft owners may opt to have the aircraft titled to another person or entity to limit the owner’s legal exposure, and they have only a lien on the aircraft matching the equity in the aircraft. It is worth noting here that living trusts afford no legal protection; only irrevocable trusts offer asset protection. See the Living Trusts topic.

 

–Legal Defense: The first hurdle after being sued is to be certain to respond within the time required by law. Normally an “answer” must be filed within 20 days of a defendant being served with a summons and complaint. Failing to answer a complaint, notwithstanding a very good excuse, will make the complainants assertions be deemed “admitted,” and the adversary may be able to obtain a judgment against the defendant’s assets without much due process. Getting sued is hugely stressful. If you have an attorney in whom you don’t have confidence, and whom you fear may not have your best interests in mind, you are in for a very rough ride. Attorneys are a dime a dozen so find one you like.

 

–Insurance Claims:  Pick a good insurance company so that you don’t have to twist their arm for help. Remember that part of your insurance premium pays the insurance company lawyer to find a way to not pay your claim, so don’t rely on insurance alone. Be cautious about information you report to the insurance company after an event. If the amount at issue is significant, it may justify hiring an attorney who regularly prosecutes insurance claims. If the claim alleges that you were negligent, confess your sins to your lawyer, not the insurance company.

 

–Prenuptial Agreements and Divorce: If you are getting married and are bringing an aircraft to the marriage, it may be wise to have a prenuptial agreement. A prenuptial agreement is merely a contract in the context of a marriage. If the topic of a prenuptial agreement is unpalatable, you could characterize the agreement as a contract and have it address only the aircraft. If a prenuptial agreement is not feasible or desirable, by keeping the aircraft separate from your spouse, e.g. the spouse hates flying and never boards the aircraft, it is possible the aircraft may be characterized in divorce as separate property and not subject to division.

 

An aircrew involved in an acrimonious divorce should be wary of creating an opportunity for a spouse to allege behavior that could be reported to the FAA’s Aerospace Medical Division. A police report involving domestic violence, for example, when forwarded to the FAA can be result in emergency action by the FAA.

 

–Estate Planning and Probate: Probate is not as scary or expensive as people are led to believe by persons selling living trusts. See the Living Trusts topic. Most counties have informal probate procedures that are not supervised by the courts and involve a minimum of document filing with a court administrator. If the decedent owned an aircraft, by filing the necessary papers with the county probate court administrator the estate executor will be given the power to sell or re-register the aircraft. Also, probate is like a bankruptcy in that notice of the probate is published in a newspaper few people read announcing that claims against the estate must be made within a limited time or the claims are forever extinguished. If the state in which the aircraft is based allows joint tenancy of property with right of survivorship, titling the aircraft accordingly would cause the aircraft to pass to the surviving joint owners without probate.

 

–Living Trusts: As mentioned in the Asset Protection topic, living trusts offer no legal protection. Their use is normally limited to avoiding probate, and as explained in the Estate Planning and Probate topic, probate isn’t necessarily something to avoid. Living trusts should normally be reserved for older persons and especially elders with real property in several states.  Unless all property is held in trust, probate may still be required, and lawyers will collect fees three times: forming the trust, terminating the trust, and probating the estate.