Holland & Knight - Corporate Jet Practice Brochure by Holland & Knight

INTRODUCTION TO HOLLAND & KNIGHT’S CORPORATE JET PRACTICE

Business aircraft are high-value, high-visibility assets and the legal issues surrounding their acquisition, financing and operation are often complex. Holland & Knight’s aviation attorneys located in the United States and the United Kingdom have broad experience representing public companies, high-net-worth individuals, family offices, financial institutions and air taxi operators. With one of the largest aviation practices in the U.S., Holland & Knight can bring a multidisciplinary approach to address the complexities of business aircraft acquisition and operations.

Aircraft Transactions: For many owners and operators of business aircraft, buying and selling aircraft is not their primary business and they rely on our team to facilitate the deal. Our primary objective in every deal is to protect your interests. This means more than just properly planning and documenting the transaction. It also means developing creative solutions and quickly shepherding a deal to closure, particularly in the used-aircraft market, where delays can jeopardize a transaction.

Structuring Ownership and Operation: Given the costs and potential exposures involved in owning and operating business aircraft, establishing and maintaining a proper structure is critical. Our team will work with your in-house counsel and accountants to determine an optimal structure that addresses the complex regulatory and tax issues that can arise, including structuring private aircraft operations to comply with Federal Aviation Administration (FAA) regulations.

FAA ISSUES

With a client base that spans the breadth of the aviation industry, our team represents not only business aircraft owners and operators but also airlines, leasing companies, corporate jet companies, aircraft manufacturers, charter companies and other related businesses in an array of economic, legislative, safety or international aviation regulatory matters including:

advising on FAA regulations and guidance on dry-leasing arrangements, joint-ownership, time-sharing agreements and similar issues related to structuring and cost-sharing for private aircraft operations by companies and family offices

representing clients seeking air carrier or foreign air carrier authority from the U.S. Department of Transportation (DOT)

advising on foreign ownership issues related to carriers and aircraft ownership

handling DOT/FAA investigations and penalty matters

TAX ISSUES

Our aviation tax attorneys have in-depth knowledge of the unique tax issues that arise in the initial acquisition and structuring of an aircraft acquisition, and during the course of aircraft ownership, including:

federal tax planning including the use of bonus depreciation, passive loss rules, hobby loss limitations, commuting rules and federal excise tax issues

state sales and use tax planning during the acquisition and structuring phase

representing clients on state and federal tax audits related to aviation operations and assets

tax controversies involving national and local offices of the IRS, state and local tax agencies

invaluable experience gained as senior executives in the IRS Office of Chief Counsel, U.S. Attorney’s Office and U.S. Department of Justice’s (DOJ) Tax Division

DISPUTE RESOLUTION AND ACCIDENT INVESTIGATION

Holland & Knight’s aviation lawyers have in-depth experience in aviation-related dispute resolution, insurance issues and accident investigation, including advising aviation clients, including manufacturers and operators, in National Transportation Safety Board (NTSB) investigations and in defending those clients in tort actions arising out of aircraft accidents, as well as representing aviation clients on a range of commercial disputes in state and federal courts and in arbitration.

FINANCING

Holland & Knight’s aircraft finance lawyers work with prominent players in every sector of aviation finance, including most major airlines and leasing companies, major banks and private equity funds. We regularly act on novel and high-profile transactions, and have a deep familiarity with the ever-evolving structures and products that are used in the industry. We routinely represent borrowers and lessees acquiring business aircraft, and we know how to move finance deals quickly to closing.

LONDON OFFICE AND INTERNATIONAL CAPABILITY

Holland & Knight’s London office regularly handles business aviation matters worldwide. The business aviation team has vast experience handling cross-border business aircraft transactions representing owners, air carriers and financial institutions, in both commercial and business aircraft transactions including:

representing high-net-worth individuals, private and public companies in private aircraft transactions, structuring of the acquisition and ownership structure of such deals; regulatory issues affecting private aircraft, such as requirements regarding cost-sharing; negotiation of management and charter agreements; and aircraft operations, such as the optimization of liability protection.

integrating aviation regulatory advice with a broad-based understanding of business and government affairs to deliver well-rounded counsel to clients. Our team has advised on matters before the United Kingdom’s Civil Aviation Authority (CAA) and the Department for Transport (DfT).

representing clients in aviation and travel-related dispute resolution matters, often with multijurisdictional elements, in the English courts and in arbitrations.

UNIQUE ISSUES FOR BUSINESS AVIATION OPERATIONS

Whether drafting a corporate aircraft usage policy or answering one-time questions, our business lawyers can draw on the broad legal resources within our firm to address any legal concern, including matters that are unique to business aviation operations. For example, we frequently advise clients on the following issues:

Family Offices: structuring aircraft or aircraft shares ownership and operation for families, and developing bespoke structures to meet family objectives.

Fractional Programs: advising clients on fractional share acquisition as well as other alternatives to whole-aircraft ownership.

Corporate Aircraft Usage Policies: drafting corporate use policies to cover personal use, carriage of political candidates, U.S. Securities and Exchange Commission (SEC) reporting and related issues.

Political Candidates: providing advice on state and federal elections laws, aviation regulations for private operators and tax implications of flying candidates and government officials.

Customs/Export and KYC Issues: advising on export, customs and know-your-customer diligence that arise in crossborder aircraft transactions.

IRS ANNOUNCES NEW CAMPAIGN TO AUDIT PERSONAL USE OF BUSINESS JETS

Abbey Benjamin Garber, Lee S. Meyercord and Kate Minnich

The IRS announced a new campaign to audit high-net-worth taxpayers claiming business deductions for the use of private jets. Using some of the $80 million allocated for enhanced enforcement in the Inflation Reduction Act of 2022 (IRA), the IRS plans to begin “dozens of audits” to determine whether large corporations, large partnerships and high-income taxpayers are properly allocating private aircraft flights between business and personal uses.

In general, expenses related to assets used for business purposes, including private jets, may be deducted by a business. However, as private jets owned by companies and individuals are often used by partners, shareholders and executives for nonbusiness reasons, flights for personal and business uses must be properly apportioned to calculate deductions.

As this campaign takes off, large corporations and high-income individuals who own private aircraft should consider:

reviewing deductions from prior tax years to help ensure compliance with current tax law

identifying and gathering documents and information relevant to the calculation of past deductions

partnering with an aviation law counsel to create a documentation system for future tax years, as recordkeeping can be complex in this area

seeking advice and guidance from professionals with experience in aviation tax audits

The new IRS campaign comes as the Biden Administration announced plans to increase the cost of owning and operating private jets. On March 11, 2024, President Joe Biden released his 2025 federal budget proposal that included plans to alter a tax write-off for private jet purchases, as well as raise taxes on fuel used for private jets. President Biden also mentioned this initiative in his State of the Union address on March 7, 2024.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

IMPACT OF THE CORPORATE TRANSPARENCY ACT ON BUSINESS AVIATION AND FAST APPROACHING DEADLINES

By Jonathan M. Epstein, Alan Winston Granwell and Libby Bloxom

HIGHLIGHTS:

The Corporate Transparency Act (CTA) requires certain legal entities to identify their individual Beneficial Owners on a report filed electronically with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and to update their report if there are changes to information filed on an earlier report. It is not a “one and done” regime but instead requires continual monitoring and reporting of changes.

Entities formed prior to Jan. 1, 2024, have until Jan. 1, 2025, to file an initial report. There are other reporting due dates for entities formed in 2024 and 2025.

While a number of business groups and individuals have challenged the constitutionality of the CTA in court, and congressional hearings have highlighted implementation problems, including the absence of clear guidance on numerous issues, the CTA is the law of the land.

The Corporate Transparency Act (CTA), which entered into force on Jan. 1, 2024, requires certain entities, called Reporting Companies, to report information about themselves, personal identifying information (PII) about the individuals – called Beneficial Owners – who own 25 percent or more of the ownership interests in the entity or exercise substantial control over the entity, and for entities formed in 2024 and thereafter, the individuals (limited to two), who assist in the formation of the entity, called Company Applicants. The Reporting Company sends the foregoing information to the Financial Crimes Enforcement Network (FinCEN), a unit of the U.S. Department of the Treasury, which will maintain such information on a secure, nonpublic database for use by governmental authorities, certain financial institutions and financial regulators.

HOW WILL THE CTA IMPACT MY COMPANY?

The CTA will require millions of pre-2024 legal entities, as well as numerous legal entities formed in 2024 and thereafter, to file reports. Given the widespread use of special purpose limited liability companies (LLCs) and statutory trusts to hold title to aircraft and the variety of co-ownership arrangements, many aircraft owners will have Beneficial Ownership Information (BOI) filing obligations.

WHAT ARE THE DEADLINES FOR BOI FILINGS?

Domestic and foreign Reporting Companies formed prior to Jan. 1, 2024, must file their initial report by Jan. 1, 2025.

Reporting Companies formed between Jan. 1, 2024, and Dec. 31, 2024, must file their initial report within 90 days of formation of a domestic entity or registration of a foreign entity.

Reporting Companies formed on or after Jan. 1, 2025, must file within 30 days of formation of a domestic entity or registration of a foreign entity.

IS MY COMPANY REQUIRED TO REPORT?

Reporting Companies include both Domestic Reporting Companies (entities created by the filing of a document with a secretary of state or similar office under the law of a state or Indian Tribe (to include an LLC, corporation, statutory trust or similar entity) and Foreign Reporting Companies (entities formed under foreign law that register to do business in any state or Indian Tribe).

The CTA contains limited exceptions to reporting. The first covers entities outside the scope of the CTA and includes sole proprietorships, general partnerships, unincorporated associations, common law trusts and foreign entities not registered to do business in a state or Indian Tribe.

The second are exempt entities of which there are 23 types. These include:

Regulated Entities. U.S. publicly traded companies, banks, broker-dealers, regulated investment companies and investment advisors, insurance companies and certain pooled investment vehicles. These entities are exempted from reporting because the federal government obtains the information it requires through regulatory reporting requirements.

Large Operating Entities. Entities that have more than 20 full-time employees in the U.S., have physical offices; i.e., genuine operating offices (leased or owned) in the United States (not merely an agent) and have filed federal income tax returns for the prior year demonstrating more than $5 million in gross receipts from U.S. sources. This exemption is the sole exemption applicable to for-profit, non-regulated entities.

Subsidiaries of Certain Exempt Entities. Corporations, LLCs or similar entities wholly owned or controlled, directly or indirectly, by certain exempt entities also are exempt. This is an extremely important exemption as it can exempt numerous subsidiaries (see Common Questions below).

In determining whether an exemption applies, one must carefully review the detailed regulatory requirements for each exemption as FinCEN takes the view that exemptions should be narrowly construed.

WHO IS A BENEFICIAL OWNER?

As an initial matter, a Beneficial Owner only includes individuals. A Beneficial Owner is an individual who directly or indirectly owns 25 percent or more of the ownership interests in a Reporting Company or exercises substantial control over the Reporting Company, without regard to owning any ownership interests.

The 25 percent or more ownership interest test is broader than mere equity and includes five categories of ownership interests, such as capital or profits interest in a partnership or conversion rights and options. The substantial control test includes four indicia of substantial control: 1) Senior Officers (the chief executive officer (CEO), president, chief operating officer (COO), chief financial officer (CFO), general counsel (GC) or any officer without a title who exercises similar influence), 2) an individual who has authority over the appointment or removal of Senior Officers or a majority of the board of directors, 3) a substantial decision-maker over significant decisions of the company’s structure, business, or finances, such as a manager of an LLC or an individual who exercises substantial influence over decision-making of the entity, or 4) an individual who may not have “power” to direct or determine important decisions, but plays a significant rule in the decision-making process.

There are five exceptions to an individual constituting a Beneficial Owner under the CTA. These are for 1) minor children, 2) nominees, intermediaries, custodians or agents, 3) employees who are not Senior Officers, 4) an inheritor (an individual whose only interest in a Reporting Company is a future interest through a right of inheritance) and 5) a creditor.

WHAT INFORMATION DOES THE REPORTING COMPANY PROVIDE IN AN INITIAL REPORT?

The Reporting Company must report basic information about itself (e.g., name, dba, address, employer identification number, etc.), information about its Beneficial Owners’ PII, and if an entity is formed on or Jan. 1, 2024, the PII of the individuals (limited to two) who are Company Applicants (i.e., the individuals who assist in the formation of the entity).

The PII of an individual is his or her 1) full legal name, 2) date of birth, 3) residence address,1 and 4) unique ID number and issuing jurisdiction from an acceptable ID document (a nonexpired U.S. passport, state or local ID document or a driver’s license). If the individual has none of the foregoing, a nonexpired foreign passport, plus an image of the document from which the unique ID number was obtained.

Alternatively, an individual, either a Beneficial Owner or a Company Applicant, can obtain a FinCEN Identifier Number to be used in lieu of furnishing his or her PII on a report. A FinCEN Identifier is a unique numeric ID assigned by FinCEN to an individual who is submitted to a Reporting Company to be used in the report in lieu of an individual’s PII.

WHAT IS THE OBLIGATION OF A REPORTING COMPANY TO UPDATE OR CORRECT A REPORT?

A Reporting Company must within 30 days file an Updated Report when a Reporting Company’s information or a Beneficial Owner’s PII previously submitted on a Report changes.2 Note, if an individual obtains a FinCEN Identifier, the individual, rather than the Reporting Company, has the obligation to update FinCEN. A Reporting Company also must file a Corrected Report within 30 days of becoming aware or having a reason to know of inaccuracies in an earlier Report.

ARE THERE PENALTIES FOR NONCOMPLIANCE?

The CTA imposes civil and criminal penalties for willful noncompliance. These penalties may be imposed on the Reporting Company, an entity or an individual who causes a Reporting Company not to report and on Individuals who are Senior Officers of a Reporting Company at the time a Reporting Company fails to accurately and completely report or update/ correct its report.

Common Questions

WHAT SHOULD OWNERS AND THEIR ADVISORS BE DOING NOW ABOUT ENTITIES FORMED PRE-2024?

Given the Jan. 1, 2025, deadline, it is critical to start the review process now to determine if your entities are Reporting Companies and if any exemptions apply. Identifying Beneficial Owners and obtaining information for the BOI filing can take considerable time. Individuals may be concerned about disclosing personal information, and although optimally each individual easily can obtain a FINCEN Identifier Number, an individual in this regard must consider whether he or she should do so, as there currently is no way to deactivate a FinCEN Identifier to eliminate the requirement to update FinCEN for changes (although FinCEN is assessing options to remedy this issue).

HAS THE CTA BEEN FOUND UNCONSTITUTIONAL?

A federal district court in Alabama has found the CTA to be unconstitutional.3 The constitutionality of that case was argued before a Circuit Appeals Court on Sept. 26, 2024, and we await the decision.4 Whatever the outcome, the losing party may appeal the decision to the U.S. Supreme Court. In addition, there have been a number of complaints filed in federal district courts around the country challenging the constitutionality of the CTA, and some of those courts might find the CTA constitutional, thereby creating a split in Circuit Court decisions, which only would be resolvable by the Supreme Court.

It is important to understand that at this stage, compliance with CTA reporting obligations is required by all persons except those plaintiffs in the Alabama case.

DOES MY SPECIAL PURPOSE COMPANY FALL UNDER THE SUBSIDIARY EXCEPTION?

To qualify for the subsidiary exemption, a subsidiary’s ownership interests must directly or indirectly be 100 percent owned or controlled by one or more entities that are exempt other than an exempt entity that is 1) a money transmitting or money services business, 2) a pooled investment vehicle, 3) an entity assisting a tax-exempt entity or an inactive entity.

Importantly, if an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify to be exempted.5 Further, in that regard, FinCEN has not provided guidance as to the term “control,” so nuanced determinations have to be made about whether 100 percent control exists as well as with respect to ownership interests.

DOES MY AIRCRAFT TRUST NEED TO FILE?

Many aircraft operators use registration trusts to register aircraft with the Federal Aviation Administration (FAA). This structure is used for a number of reasons, including to facilitate financing and leasing, privacy and to meet the citizenship requirement of the FAA. The analysis of filing requirements for trusts is nuanced and highly fact-dependent.

For example, if the aircraft is owned by a statutory trust, which is a trust formed with a state filing, the trust itself is likely a Reporting Company. The individual(s) who indirectly own or are beneficiaries6 in the trust or are senior officers of the trustor are likely the Beneficial Owners reported in the BOI filing, unless an exemption applies.

In contrast, other registration trusts are not created by a filing with a state, and hence would generally not, themselves, be considered Reporting Companies.

It should be noted that registration trusts are almost universally grantor trusts7 in which the trustee’s duties and power are very limited. In particular, generally the trustee does not have the authority to dispose of the assets of the trust or take other significant actions except as directed by the trustor. Hence, generally, the Trustee should not be viewed as exercising exercise “substantial control.”8 Rather one would look at the Beneficial Owners of the Trustor.

IS MY AIRCRAFT MANAGEMENT COMPANY OR CHIEF PILOT A “BENEFICIAL OWNER”?

Generally, no. A management company would not be Beneficial Owner. However, if an individual within the management company exercised substantial control over the Reporting Company, that individual could be a Beneficial Owner. In practice, however, while such individuals may direct day-to-day aircraft operations as an agent for the company, they do not have authority to make substantial decisions on behalf of the company.9

Similarly, unless the chief pilot is also a senior officer of the Reporting Company, it is likely that he or she is not a Beneficial Owner because that individual would not exert substantial control over the Reporting Company, or alternatively, the individual may be an exempted from Beneficial Owner status based on the fact that the individual is employee that only derives control and economic benefit by virtue of his or her employment.10

SHOULD I BE THINKING ABOUT THESE CTA REPORTING REQUIREMENTS IN STRUCTURING OWNERSHIP AND OPERATIONS OF AIRCRAFT?

Existing considerations regarding tax planning, liability protection and FAA regulatory compliance generally outweigh the relatively modest additional requirements of BOI reporting and structuring to avoid filing may be counterproductive. For example, if an individual decided to own an aircraft in his or her own name, rather than through a special purpose entity to avoid CTA requirements, the individual’s name would appear on the FAA registry, a publicly available database, and, in addition, the individual would be exposed to unnecessary liability risks.

However, parties may decide to structure the management or ownership of the Reporting Company so as to limit the number of individuals who are in substantial control or who own 25 percent or more of the entity.

WHAT DO I DO IF BENEFICIAL OWNER IS NOT SUPPLYING INFORMATION NEEDED TO FILE?

In some cases, individuals have ignored requests to provide information, putting their trustees, company applicants, etc. in a difficult position. You should consider:

Advising the individual of their potential individual civil or criminal liability, in particular, both individuals and corporate entities can be held liable for willful violations. For example, senior officers of an entity that fail to provide information may be held liable for the willful failure to file, and a person who willfully causes a company not to file a required BOI report or to report incomplete or false information to FinCEN may be also held liable.11

FINCEN has not given clear guidance on how to file in situations where the Reporting Company cannot obtain or verify BOI. Advisers have suggested various approaches, but, in any event, the Reporting Company should contemporaneously document the steps taken to try and comply with the CTA.

WHERE CAN I GET MORE INFORMATION?

FinCEN’s BOI website (www.fincen.gov/boi) contains guidance, including a Small Entity Compliance Guide (in several languages), FAQs and “how-to” guides with respect to reporting and FinCEN Identifiers.

Holland & Knight has established a Corporate Transparency Act Team, composed of attorneys knowledgeable about the CTA in general as well of the issues arising in discrete transactional areas, such as corporate, finance, aviation and real estate, among others, to advise clients on the impact of, their exposure to, and their compliance with, the CTA (including assistance with preparation of, but not the actual filing of the report). For more information on the CTA’s specific impact on you or your organization, please contact the authors.

Please note: This alert provides a summary of the CTA based on regulations and guidance published to date for general guidance and should not be construed as legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this alert. The FinCEN regulations are complex and evolving. Impacted persons should seek legal advice regarding their obligations and responsibilities under the CTA, based on their specific facts and circumstances.

Notes:

1 A Company Applicant reports his or business address if in the business of forming companies, such as an attorney.

2 Note, Company Applicant information is not updated.

3 Nat’l Small Bus. United v. U.S. Dep’t of the Treasury, Case No. 24-10736.

4 Interestingly, in the opinion and order dated Sept. 20, 2024, denying injunctive relief in the case Firestone v Yellen, Case No. 3:24-cv-1034-SI, the federal district court judge rebuts the points made in the Alabama decision.

5 See FINCEN BOI FAQ L.6.

6 Whether a beneficiary is reportable is somewhat unclear. A beneficiary is a Beneficial Owner if he or she 1) is the sole permissible recipient of income and principal from the trust or 2) has a right to demand a distribution of, or withdraw, substantially all the assets from the trust. FinCEN also has stated that there may be other situations where individuals associated with a trust are Beneficial Owners (see below), however, it is not entirely clear when the beneficiaries of a trust with multiple beneficiaries might be reportable.

7 Note, a grantor or settlor is a Beneficial Owner if such individual has the right to revoke the trust or otherwise withdraw the assets of the trust.

8 See FINCEN BOI FAQ D.15.

9 See FINCEN BOI FAQ D.8 and FINCEN BOI Small Entity Compliance Guide § 2.4.

10 FINCEN BOI Small Business Entity Guide § 2.4 (Exemption #3).

11 See FINCEN BOI Small Entity Guide, § 1.3.

THE FAMILY OFFICE: PLANNING FOR PRIVATE AIRCRAFT ASSETS

By Jonathan Epstein and John Hoover

The past decade has seen the growth of the family office as a separate legal entity to manage the assets of families, coordinate multigenerational planning and philanthropic activities and otherwise act as stewards for family assets. Hence, it is logical that when the family members use private aircraft for business and personal travel, the family office is often involved. Aircrafts are expensive assets to acquire and operate and careful planning on ownership and operation can result in significant tax savings or deferment as well as avoid regulatory and liability pitfalls.

WHAT IS THE “OPTIMAL” STRUCTURE FOR OWNING AND OPERATING THE AIRCRAFT?

The optimal structure will differ depending on a number of factors, including expected usage, mix of business versus personal or other uses, and the structure of the family assets and income stream. In addition, the “optimal” structure must balance objectives that may conflict with one another.

Tax Planning. A large family office may have sufficient revenue and operations to support the use of a private aircraft in connection with the family office’s business. In many cases, the use of the private aircraft on family office business can be structured as a charter or lease to the family office. However, it is often difficult to justify having the family office own and operate the aircraft on all flights, including personal and other business flights. If the family office is not operated profitably, then it risks being classified as a “hobby,” resulting in adverse tax consequences.

Regulatory Compliance. If the aircraft is going to be operated as a private aircraft (and not by a FAA-certificated air taxi operator/charter manager), then there are strict limits for when a company can provide the aircraft with crew for use to another entity or person for compensation, even by the company’s owners. In practice, this means that the family office cannot typically act as a “flight department” company, or set up a separate company to own and operate an aircraft for family members. However, there are several mechanisms commonly used to allow cost-sharing among family members and entities, including: 1) dry lease arrangements and 2) timesharing agreements.

Limiting Liability. Since protecting family assets is a key charge of most family offices, structuring aircraft ownership and operation to mitigate liability is an important factor. This can be done through several means, including 1) ensuring adequate insurance coverage, 2) segregating ownership and operations of the aircraft from the main assets of the family, and 3) ensuring that corporate formalities are honored to prevent potential plaintiffs from “piercing the corporate veil.”

Functional and Sustainable Structure. While complex reimbursement structures may make sense on “paper,” simpler structures tend to work better in the long term because: 1) the administrative burden is lower and 2) they reduce the risk that over time, intracompany payments or other formalities are ignored (therefore busting the tax or regulatory object that was sought).

Usage and Succession Planning. Similar to multi-owner aircraft, given the high value and significant cost of private aircraft, careful thought should go into planning usage, as well as how and when the aircraft assets would be sold or otherwise allocated in the future.

WHAT ROLE SHOULD THE FAMILY OFFICE PLAY WITH REGARD TO PRIVATE AVIATION?

The family office plays a key role in the initial planning and ongoing accounting for the aircraft.

Planning. No one knows the family asset structures like the family office manager. A good aviation lawyer or tax advisor will want to fully understand not only the family asset structure, but which individuals and entities will use the aircraft, the percentage of personal to business use expected, how family members feel about using a charter

manager, and even the plan for disposition of the aircraft if a key individual dies or becomes incapacitated. Hence, the family office has a key role in the planning stage.

Accounting. There are a plethora of tasks that the family office is well suited to oversee.

Ownership structures are often complex, with intracompany leasing or other cost reimbursement structures that may require intercompany payments and, in some cases, the collection of state sales taxes (or, in the case of timesharing arrangements, federal excise taxes).

Setting up and monitoring the purpose of each flight and the type of traveler onboard is critical to being able to properly depreciate the aircraft and determine which costs are deductible.

Depending on how personal use is structured, there may be “imputed” income to certain individuals that would need to be reported. Ensuring that key contracts such as insurance are maintained and key vendors paid. Ensuring that funds are not commingled. For example, that where one entity is required to pay for services, such payments are made from that entity’s bank account.

CAN THE FAMILY OFFICE OWN OR OPERATE THE AIRCRAFT?

There are scenarios where the family office may be able to own and operate the aircraft directly, such as when the family office entity actually owns significant assets and has significant income. Similarly, the structure may work where the aircraft is “operated” by a charter manager or in the case of fractional shares. However, in many cases, the family office may not be the “best” entity to own the aircraft for several reasons. There are strict FAA rules about cost-reimbursement for aircraft that are privately operated. Further, from a tax perspective, the family may not have sufficient income or operations to justify the use of a private aircraft. Hence, from a tax planning perspective, it may not be in a position to benefit from depreciation of the aircraft.

SHOULD WE USE A PROFESSIONAL MANAGEMENT COMPANY?

For the family office, a good professional aircraft management company can be invaluable in hiring pilots, overseeing maintenance, and arranging hangar and insurance coverage. In addition, many managers are also FAA-certificated air taxi operators. As such, they can fly the aircraft in charter for third parties, help generate revenue to defray some of the fixed costs of owning and operating the aircraft, and be beneficial for tax planning purposes. However, there are costs associated with using a manager, and some families may not want their aircraft used by third parties.

DO WE NEED TO DEVELOP OUR OWN EXPERTISE?

While you can rely on advisors for planning, having someone within the family office who is familiar with the regulatory and tax issues particular to aviation – and who understands the rationale behind the structuring – is invaluable. For example, it is not uncommon that as time goes on, employees may seek shortcuts in what information is collected or cease making intracompany payments to simplify procedures. Having someone periodically attend business aviation conferences, as well as monitoring news and client updates put out by law firms and advisors, can also be helpful.

HOW CAN HOLLAND & KNIGHT HELP?

Holland & Knight has one of the largest aviation practices in the world, with aviation practitioners in London, New York, Miami, San Francisco, Los Angeles and Washington, D.C., and attorneys with decades of experience in business aviation transactions. In addition, our aviation practitioners and Private Wealth Services Group work with a number of Forbesranked families, individuals and private companies, with a number of our aviation and private wealth partners named as leading advisors in the Chambers High Net Worth guide. We have a multidisciplinary team that can help you address tax, transactional, regulatory and cross-border issues. For more information about developing and implementing your private aviation objectives, contact a member of Holland & Knight’s Aviation Team.

COMMUTING DISALLOWANCE IN 274( l ) DOES NOT APPLY TO PARTNERS, 2% SHAREHOLDERS IN S CORPORATIONS

By John Hoover

Beginning in 2018, Internal Revenue Code (I.R.C.) Section 274( l ) disallows deductions for the cost of flights provided to an “employee” for commuting. While this deduction disallowance may apply to employees of Subchapter C corporations, it should not apply to flights provided by partnerships to partners or to flights provided by Subchapter S corporations to 2-percent shareholders. Partners in partnerships and 2-percent shareholders in Subchapter S corporations are not “employees” subject to the commuting deduction disallowance.

For this purpose, “employee” is defined in Treasury Regulation § 1.274-14 as follows:

[E]mployee means an employee of the taxpayer as defined in [I.R.C.] section 3121(d)(1) and (2) (that is, officers of a corporate taxpayer and employees of the taxpayer under the common law rules).

Under § 3121(d)(1), “employee” does not include a partner in a partnership. Rev. Rul. 69-184, 1969-1 C.B. 256 (“Bona fide members of a partnership are not employees of the partnership ...”); Chief Coun. Adv. 2001-17-003 (April 30, 2001) (“Bona fide members of a partnership cannot be employees ...”).

The term “employee” under § 274( l )(1) also does not include 2-percent shareholders of Subchapter S corporations. Under § 1372, such shareholders are not employees for fringe benefit purposes for income tax purposes. In this regard, § 1372(a) provides:

For purposes of applying the provisions of this subtitle [Subtitle A – Income Taxes] which relate to employee fringe benefits–

(1) the S corporation shall be treated as a partnership, and

(2) any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership.

Commuting flights provided to an employee are fringe benefits. Section 274( l ), which disallows the costs of commuting flights, clearly relates to employee fringe benefits. Accordingly, under the plain language of § 1372(a), 2-percent shareholders of S corporations are treated as partners for purposes of the commuting disallowance in § 274( l ). Since partners are not employees subject to § 274( l ), 2-percent shareholders of S corporations are likewise not subject to § 274 ( l ).

The IRS has applied this analysis of § 1372 in Chief Counsel Advice 2003-44-008 (July 1, 2003). In that Chief Counsel Advice, the IRS explained that 2-percent shareholders of S corporations are not “employees” subject to the entertainment disallowance provisions in § 274(e)(2). Section 274(e)(2) applies the entertainment disallowance to entertainment provided to an “employee.” Applying § 1372(a), the IRS concluded that a 2-percent shareholder of an S corporation was not an “employee.” Therefore, the IRS concluded that the entertainment provided to the 2-percent shareholder of an S corporation was governed by § 274(e)(9), which applies to a recipient of entertainment who is “not an employee.”

In this regard, the Chief Counsel Advice explained its reasoning as follows:

Entertainment expenses that are included in an employee’s income are excepted from § 274(a) disallowance. Section 274(e)(2) excepts:

Expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of the entertainment, amusement, or recreation, as compensation to an employee on the taxpayer’s return of tax under this chapter and as wages to such employee for purposes of chapter 24 (relating to withholding of income tax at source on wages). [Emphasis added.]

Section 1372 provides that a 2% or greater S corporation shareholder is treated as a partner and the S corporation is treated as a partnership for purposes of applying the employee fringe benefit rules. Section 1.707-1(c) provides that a partner receiving compensation for services performed for the partnership is treated as a person who is not a partner. The partner must include the compensation as income under § 61(a) and the partnership may deduct the compensation under § 162(a), but the partner is not regarded as an employee of the partnership.

Costs of entertaining the shareholders of an S Corporation are similarly excepted from the disallowance by § 274(e)(9), if the S Corporation reports the value of the benefit to the shareholder on the S Corporation’s information return (and shareholder payee statement).

Congress made § 274(e)(9) permanent in the Miscellaneous Revenue Act of 1980, Pub. L. No. 96-605. Congress intended that a rule similar to § 274(e)(2) should apply to “facilities” (fringe benefits) “provided to nonemployees” so long as there was income inclusion and information reporting. H. Rep. No. 1278, 96th Cong. 2d Sess., reprinted in 1980-2 C.B. page 4709, 719.

The benefits to the shareholders in this case are governed by § 274(e)(9) rather than section 274(e)(2) which applies to employees.

Just as the IRS ruled in the Chief Counsel Advice that § 1372 requires that 2-percent shareholders in S corporations must be treated as partners and not as employees for purposes of the entertainment disallowance under § 274(e)(2) and (9), the same interpretation should apply to the term “employee” under § 274( l ) as well. Section 1372 is statutory authority, and the IRS has no basis on which to ignore it.

PHASEDOWN OF BONUS DEPRECIATION FOR AIRCRAFT BEGINS IN 2023

By John B. Hoover

Reprinted from September 27, 2022

This Holland & Knight alert explains the phasedown of bonus depreciation for aircraft beginning in 2023. Through 2022, bonus depreciation has been allowed for 100 percent of the cost of qualifying property (which generally includes new or used aircraft as long as the taxpayer did not previously own the aircraft and the qualified business use requirements under Internal Revenue Code (I.R.C.) Section 280F(b) are met). Beginning in 2023, the bonus depreciation percentage will be phasing down.

The general rule under I.R.C. § 168(k)(6) is that beginning in 2023, the applicable percentage for bonus depreciation will be phased down by 20 percent per year. Therefore, under the general rule, an aircraft placed in service in 2023 will be eligible for 80 percent bonus depreciation, in 2024 will be eligible for 60 percent bonus depreciation, and so on. I.R.C. § 168(k)(6)(A).

However, “Transportation Property” described in § 168(k)(2)(B) and “Certain Aircraft” described in § 168(k)(2)(C) will have a one-year delay in the phasedown. Thus, such property will be eligible for 100 percent bonus depreciation if placed in service in 2023, 80 percent bonus depreciation if placed in service in 2024, and so on. I.R.C. § 168(k)(6)(B).

Transportation Property includes aircraft used in the trade or business of the transportation of persons or property (e.g., charter service), while Certain Aircraft generally means aircraft that are not Transportation Property. I.R.C. § 168(k)(2)(B)(i) (IV), (B)(iii), (C)(ii). Presumably, the classification as Transportation Property or Certain Aircraft will be made based on the primary use of the aircraft. See Treas. Reg. § 1.167(a)-11(b)(4)(iii)(b); Treas. Reg. § 1.168(i)-4(d)(2).

To qualify for the one-year delay of the phasedown as Transportation Property or Certain Aircraft, the aircraft must be acquired by the taxpayer (or acquired pursuant to a written binding contract entered into) before Jan. 1, 2027. I.R.C. § 168(k)(2)(B)(i)(III), (C)(i). This requirement will ordinarily be met for aircraft acquisitions prior to 2027. The absence of a requirement to have a binding written contract prior to Dec. 31, 2022, to be eligible to use the 100 percent bonus depreciation percentage in 2023 may not have been intended by Congress. However, the statute undoubtedly controls as written, so the IRS would have no basis on which to assert that a binding written contract must be in place by Dec. 31, 2022, for a taxpayer to be eligible to use the 100 percent bonus depreciation rate in 2023.

For an aircraft that is Transportation Property to qualify for the one-year delay, the aircraft must have an estimated production period exceeding one year and a cost exceeding $1 million. I.R.C. §§ 168(k)(2)(B)(i)(VI), 263A(f)(1)(B)(iii). Since business aircraft typically do not have a production period exceeding one year, it is typically difficult for aircraft used primarily for charter service (i.e., as Transportation Property) to qualify for the one-year delay.

For an aircraft that is Certain Aircraft (i.e., not Transportation Property) to qualify for the one-year delay, the taxpayer must, at the time the contract to purchase the aircraft is entered into, make a nonrefundable deposit of at least the lesser of 10 percent of the cost of the aircraft or $100,000. I.R.C. § 168(k)(2)(C)(iii). This provision does not require that the contract for purchase be entered into at any particular time, but it does impose the deposit requirement on the date the contract to purchase the aircraft is in fact entered into.

In addition, for an aircraft that is Certain Aircraft to qualify for the one-year delay, it must have an estimated production period that exceeds four months. I.R.C. § 168(k)(2)(C)(iv)(I). Presumably, this requirement is met for most aircraft, but it is advisable to confirm it.

Finally, for an aircraft that is Certain Aircraft to qualify for the one-year delay, it must have a cost in excess of $200,000. I.R.C. § 168(k)(2)(C)(iv)(II).

If all of the above requirements for the one-year delay are met, the aircraft will qualify for the one-year delay of the placed in service date. Therefore, the bonus depreciation percentage for such qualifying Transportation Property or Certain Aircraft placed in service in 2023 is 100 percent, in 2024 is 80 percent, in 2025 is 60 percent, and in 2026 is 40 percent.

However, for such aircraft to qualify for the one-year delay of the 20 percent rate for aircraft placed in service in 2027, the acquisition rule above requires that there must be a binding written contract to acquire the aircraft in place prior to Jan. 1, 2027. If this occurs for Transportation Property, then only the basis in the aircraft accrued prior to Jan. 1, 2027, can be included in the 20 percent bonus depreciation available for such aircraft placed in service in 2027. § 168(k)(2)(B)(ii).

IRS CHIEF COUNSEL ADVICE PROVIDES GUIDANCE ON ENTERTAINMENT DISALLOWANCE FOR SOLE PROPRIETORS

By John B. Hoover

On April 2, 2021, the IRS issued Chief Counsel Advice (CCA) 2021-17-012 to explain that sole proprietor flights are generally not subject to the employer-provided aircraft rules in Internal Revenue Code § 274(e)(2), (9) and Treas. Reg. § 1.274-9, -10. (See https://nbaa.org/wp-content/uploads/flight-department-administration/tax-issues/federaltaxes/20210402-IRS-Chief-Counsel-Advice-CCA-2021-17-012.pdf) Thus, it is irrelevant whether the sole proprietor is a specified individual for purposes of these rules. Moreover, sole proprietors are generally not required to apply the occupied seat method or the flight-by-flight method under Treas. Reg. § 1.274-10(e) to allocate costs for purposes of the entertainment disallowance.

While the CCA comments on the allocation methods, NBAA proactively sought clarification on this issue in a meeting with the IRS. Following the meeting, NBAA sent a letter confirming our understanding that in view of applicable law, the CCA does not present the IRS position on the proper method to allocate costs of sole proprietor flights for purposes of the entertainment disallowance. (See https://nbaa.org/wp-content/uploads/flight-department-administration/tax-issues/ federal-taxes/20210826-NBAA-Letter-IRS-on-CCA-2021-17-012.pdf) The IRS verbally confirmed its agreement with the points in NBAA’s letter.

Existing law indicates that the primary purpose method (Primary Purpose Method) should apply to calculate the entertainment disallowance for sole proprietor flights. However, taxpayers should be aware that there is a potential risk that IRS agents will assert in tax audits that the costs of a flight must be allocated among each passenger to calculate the entertainment disallowance.

SOLE PROPRIETOR FLIGHTS

Sole proprietor flights are flights operated by an individual, where the business flights are for a business operated by the individual. These flights are in contrast to employer-provided flights, where the employer operates the aircraft and personal flights are provided as compensation to the individual. In a sole proprietor flight, the aircraft or the business could be operated by a disregarded entity owned by the individual such as a single-member limited liability company.

Another context in which sole proprietor flights may arise is when a partner in a partnership operates an aircraft on partnership business. The partner would deduct the allocable costs of the aircraft against his or her distributive share of partnership profit or loss. The partner’s costs of personal or entertainment flights would not be deductible.

The partner would typically deduct his or her partnership expenses against his or her Schedule K-1 pursuant to I.R.C. § 707. In such a case, it is important to establish that the partnership has a policy stating that it expects the partner to incur the expense although the partnership will not reimburse it. See Noyce v. Comm’r, 97 T.C. 670 (1991).

It is important to distinguish between sole proprietor flights conducted by the sole proprietorship and employer-provided flights conducted by the sole proprietorship. If a sole proprietor and his or her family members or other personal guests are on a flight, then the flight would be a sole proprietor flight and not an employer-provided flight. On the other hand, if the sole proprietor is accompanied by one or more employees of the sole proprietorship traveling on sole proprietorship business or for personal purposes on a flight provided to them as compensation, then the flight would be a mix of sole proprietor flight for the sole proprietor and employer-provided flight for the employees.

In the case of a mix of sole proprietor flight and employer-provided flight, if the sole proprietor flight is accounted for under the Primary Purpose Method, then, to provide a consistent allocation method overall, it would appear that the employer-provided flight would need to be accounted for under the “Flight-by-Flight” method rather than the “Occupied Seat Method” under Treas. Reg. § 1.274-10(e).

THE CCA CLARIFIES THAT SOLE PROPRIETOR FLIGHTS

ARE NOT GOVERNED BY THE REGULATIONS GOVERNING EMPLOYER-PROVIDED FLIGHTS

In the case of employer-provided flights, § 274(e)(2), (9) provides that the entertainment disallowance applies to the employer’s cost of entertainment flights provided as compensation to specified individuals in excess of the amount reported to them as compensation, typically at Standard Industry FareLevel (SIFL) rates. The imputed income rules, including the SIFL rates, are set forth in Treas. Reg. § 1.61-21(g).

Treas. Reg. § 1.274-10(e) provides that this disallowance applies on a passenger-by-passenger basis, under either the occupied seat method or the flight-by-flight method. These passenger-by-passenger allocation methods typically result in a greater disallowance of costs than the Primary Purpose Method, because they result in the disallowance of costs with respect to individual passengers traveling for entertainment purposes on flights conducted primarily for nonentertainment business purposes. In contrast, under the Primary Purpose Method (which is not allowed for employer-provided flights) there would be no entertainment disallowance for a flight conducted primarily for nonentertainment business purposes.

While § 274(e)(2), (9) clearly apply only to employer-provided flights, there was some concern that perhaps the regulations thereunder (Treas. Reg. § 1.274-10) somehow applied to sole proprietor flights in addition to employer-provided flights. From time to time, IRS auditors have asserted that a sole proprietor was a “specified individual” and therefore the passenger-by-passenger allocation methods apply to the sole proprietor’s flights.

Fortunately, the CCA clearly states in its “Conclusion” the IRS position that § 274(e),(9) and Treas. Reg. § 1.274-10 do not apply to sole proprietor flights. This should put an end to IRS auditors asserting that Treas. Reg. § 1.274-10(e) requires the passenger-by-passenger allocation methods for sole proprietor flights. The CCA also makes it clear that it is irrelevant whether a sole proprietor is a “specified individual.”

THE CCA DOES NOT PROVIDE GUIDANCE REGARDING THE ALLOCATION METHOD REQUIRED FOR SOLE PROPRIETOR FLIGHTS

The CCA confirms that for purposes of calculating the ordinary and necessary business expenses under I.R.C. § 162(a), the costs of sole proprietor flights should be allocated to each flight based on the primary purpose of the flight (Primary Purpose Method) as provided under Treas. Reg. § 1.162-2(b). This statement is clearly supported by the regulations and seems uncontroversial.

However, at the end of the CCA are several sentences commenting that the Primary Purpose Method is not a reasonable allocation method for sole proprietors to use for the entertainment disallowance. As confirmed by a letter from NBAA to the IRS, the IRS indicated that these comments on allocation methods for purposes of the entertainment disallowance do not purport to require any particular allocation method and do not present a specific IRS position on the allocation methods required for sole proprietors. (See https://nbaa.org/wp-content/uploads/flight-department-administration/taxissues/federal-taxes/20210826-NBAA-Letter-IRS-on-CCA-2021-17-012.pdf)

CURRENT LAW SUPPORTS THE PRIMARY PURPOSE METHOD FOR THE ENTERTAINMENT DISALLOWANCE FOR SOLE PROPRIETOR FLIGHTS

As noted above, the entertainment regulations at Treas. Reg. § 1.274-10 do not prescribe an allocation method for sole proprietor flights. While the CCA suggests (although not as the IRS position) that the Primary Purpose Method is not reasonable for sole proprietor flights, there are several reasons that the Primary Purpose Method could remain applicable for the entertainment disallowance for sole proprietors.

Before the entertainment disallowance in § 274(a) was enacted in 1962 (P.L. 87-834, § 4), the IRS made it clear that the appropriate allocation method for travel expenses was based on whether the trip was primarily personal or business. Treas. Reg. § 1.162-2(b); Rev. Rul. 56-168, 1956-1 C.B. 93. After the entertainment disallowance was enacted, the Tax Court has continued to apply the Primary Purpose Method to cars. In Pohl v. Commissioner, T.C. Memo. 1990-298, the Tax Court rejected the IRS Agent’s position that when a husband traveled for business and his wife accompanied him traveling for personal purposes, one-half of the cost of the rental car should be nondeductible.

The court held that only the marginal cost of the wife’s personal travel should be nondeductible. (See also IRS Pub. 463, at 5.) Since the Primary Purpose Method is the allocation method required for cars, it would seem difficult for the IRS to prevail in arguing that it is not a reasonable method for aircraft.

The Primary Purpose Method has been applied by the courts to allocate travel expenses for private aircraft in sole proprietorship structures. Noyce v. Comm’r, 97 T.C. 670 (1991); French v. Comm’r, T.C. Memo. 1990-314. Moreover, the court in Southerland Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 197, 198 (2000), aff’d, 255 F.3d 495 (8th Cir. 2001), acq. 2002-1 C.B. xvii, applied the Primary Purpose Method in an employer-provided aircraft structure prior to the amendment of § 274(e)(2), (9) and the issuance of Treas. Reg. § 1.274-10 which imposed the passenger-by-passenger method only on employer-provided flights. To now conclude that the Primary Purpose Method is unreasonable would mean that the IRS would be concluding that the analysis in these court cases is unreasonable. Such a conclusion would seem difficult for the IRS to maintain in view of the fact that no court has applied a passenger-by-passenger allocation method in a sole proprietor structure.

The applicability of the Primary Purpose Method to aircraft is also required under the substantiation rules for listed property (which includes aircraft). Temp. Treas. Reg. § 1.274-5T(b)(6)(i)(B) provides that taxpayers are required to account for the hours of use for cars or other means of transportation. The regulation does not further call for each use of a transportation property to be accounted for separately for each passenger. The regulation permits the Commissioner to approve an alternative method. However, the commentary on the Primary Purpose Method in the last paragraph of the CCA does not constitute the approval of an alternative method for the following reasons:

It was not intended to represent the IRS position, as confirmed by the NBAA letter.

It does not purport to affirmatively approve any particular allocation method.

It was issued in a chief counsel memorandum, which is not binding precedent as provided in § 6110(k)(3).

Section 274(m)(3) and Treas. Reg. § 1.162-2(c) impose limits on the deductibility of travel by an accompanying spouse, family, or personal guests. This statute and regulation do not prescribe required allocation methods. However, the reasons set out above support the conclusion that the Primary Purpose Method would also apply to these deduction limitations in the case of sole proprietor flights.

John Hoover is a Partner in Holland & Knight’s Tysons office and member of the Asset Finance Group. Hoover focuses his practice on federal and state tax planning, compliance, and controversy matters involving business aircraft and taxexempt organizations. He serves as chair of NBAA’s Tax Committee.

Reprinted with permission from the NBAA.

This NBAA resource is intended to provide members with an introduction to the rules that relate to the entertainment use disallowance. It is intended only to provide an illustrative introduction to the subject matter. Since the information is general in nature, it is no substitute for the advice of legal and tax advisors addressing a specific set of facts that readers may face.

COMPARING AND CONTRASTING DOMESTIC VS. CROSS-BORDER AVIATION FINANCE TRANSACTIONS

By Juan Carlos Ferrer

Though there are some similarities between financing an aircraft registered in the U.S. versus financing an aircraft registered abroad, in truth those similarities are vastly outweighed by the differences and complexities associated with a cross-border aircraft financing. The following is an overview of some important differences between domestic and cross-border aircraft finance transactions, as well as some practice pointers to assist in navigating the potential pitfalls of financing a non-U.S.-registered aircraft.

CAPE TOWN CONVENTION

Financing an aircraft registered in a country that has ratified the Cape Town Convention (CTC) can provide comfort to aircraft financiers that they will ultimately be able to timely foreclose on the aircraft should a default occur. Many countries have ratified the CTC, but a surprising number of countries have not. And even among those countries that have ratified the CTC, it is important to fully understand what elections the ratifying country has made to govern creditors’ rights in relation to aircraft. Countries that have opted for Alternative A of the CTC afford far greater protections to creditors than those that opt for Alternative B or for reliance on that country’s existing insolvency laws.

OWNER REGISTRY VS. OPERATOR REGISTRY

The U.S. Federal Aviation Administration (FAA) registry is an “owner-based” registry where the eligibility requirements for obtaining U.S. registration for an aircraft are determined based on the citizenship of the owner of the aircraft. The citizenship of the operator is irrelevant for purposes of registering an aircraft in the U.S. However, most foreign aircraft registries are “operator-based” registries that look to the citizenship of the operator – and not the owner – of an aircraft in order to determine eligibility to register an aircraft in that jurisdiction. Understanding these types of nuances and how to deal with the challenges, as well as the opportunities that they present, is key to properly structuring cross-border aircraft finance transactions.

COURT SYSTEMS AND RULE OF LAW

The well-established case law and the consistency of the U.S. court system provide comfort to financiers of U.S.-registered aircraft. However, creditors’ rights laws vary from country to country, as does the sophistication of a country’s court system. Having a good grasp of a country’s track record for how quickly and fairly a financier’s rights and remedies are adjudicated, regardless of whether or not that country has ratified the CTC, is a very important aspect of financing a nonU.S.-registered aircraft.

SOPHISTICATION OF AIRCRAFT REGISTRY

Likewise, the sophistication and efficiency of aircraft registries vary widely from country to country. Though some aircraft registries record title transfers and security interests and process deregistration requests within one to three days, other aircraft registries can take upward of 30 days to do so. Understanding, and properly planning for, these potential delays is another important aspect of financing aircraft abroad.

IMPORTANCE OF LOCAL COUNSEL

Employing knowledgeable U.S. aviation counsel to “quarterback” the cross-border aircraft financing transaction, especially one with a network of highly skilled aviation counsel in various jurisdictions, is key to any successful transaction. Identifying and engaging the “go-to” aviation counsel in a particular country will greatly facilitate a smooth closing, both in terms of ensuring that the financing documents comport with local law requirements and in facilitating the closing process with local authorities.

Given these and other issues, financing an aircraft abroad can seem like a daunting task. But with proper guidance and planning, aircraft financiers can be confident that their interests will be protected notwithstanding that the aircraft is registered outside of the U.S.

For more information or questions, please contact the author.

CLOSING THE DEAL: GETTING CROSS-BORDER BUSINESS AVIATION TRANSACTIONS DONE RIGHT

By Jonathan M. Epstein and Libby Bloxom

HIGHLIGHTS:

With a limited inventory of quality used business aircraft available in the United States, buyers are looking to acquire business aircraft from non-U.S. sellers.

Such international aircraft transactions create real opportunities but can be more challenging to get across the finish line for a number of reasons.

In addition, the influx of Russian-owned business aircraft on the market highlight the need for enhanced due diligence and regulatory compliance.

Differences in law as well as cultural differences can prolong international aircraft transactions. Assembling a good team of legal and technical professionals, as well as an aircraft broker familiar with international transactions, is essential for a successful transaction. Such a team can help potential buyers navigate the following key issues.

TECHNICAL ISSUES CAN CREATE MAJOR COSTS/HEADACHES

It is critical to have knowledgeable technical experts experienced in international transactions to advise on a range of technical issues, such as:

• The aircraft may need an Export Certificate of Airworthiness and will need to be inspected by a Federal Aviation Administration (FAA)-Designated Airworthiness Representative (DAR). DARs can differ in expertise and opinion, so it is important that the same DAR who does the inspection also is available to issue the Certificate of Airworthiness upon registration of the aircraft with the FAA.

• There may be differences in equipment required between the FAA and European Union Aviation Safety Agency (EASA)-certificated aircraft.

• Changes to aircraft configuration approved by one authority may or may not need revalidation.

BE AWARE OF LEGAL DIFFERENCES

Understanding and being flexible, where possible, on key legal issues can often resolve legal impasses. For example:

• While used aircraft transactions in the United States are typically “as-is, where-is” with broad disclaimers regarding the condition of the aircraft, that is not the norm in some jurisdictions, where there is an expectation that the seller will warranty the condition of the aircraft.

• In Europe and the United Kingdom, it is common for sellers to ask for “tail coverage” insurance covering the seller for some period following the sale. Although rare in U.S. transactions, this coverage is available in the United States.

• Some jurisdictions require original signature pages, notarized or apostilled documentation. This can delay a closing if such requirements are not identified early in the transaction.

TIMING AND LOCATION OF CLOSING AND DEREGISTRATION/REGISTRATION

One common area of dispute is when and where title will pass. This is complicated for a number of reasons:

• Non-U.S. sellers may be uncomfortable closing in the United States because of a lack of familiarity with U.S. tax laws. Similarly, U.S. sellers will have concerns about value-added tax (VAT) and other potential taxes when closing abroad. When closing in foreign jurisdictions, we often recommend engaging local aviation counsel/tax experts to advise our U.S. clients.

• A seller typically wants payment when it files to deregister the aircraft from its jurisdiction, whereas the buyer will not want to release funds until the aircraft is registered in its country. Given that the deregistration of title process can take several days in some cases, this can create an impasse. Careful drafting of the “closing room” clause can often satisfy both parties’ concerns.

HAMMER OUT COMMERCIAL TERMS IN THE OFFER/LETTER OF INTENT (LOI)

While the LOI in a domestic transaction is often very short, the number and types of issues that may be potentially contentious in a cross-border deal are significant and should ideally be ironed out at the LOI stage. Such issues include the closing location, choice of law, which party pays for ferry flights and export certificates of airworthiness, and the scope of the prepurchase inspection.

BE COGNIZANT OF CULTURAL DIFFERENCES

Cultural differences also can delay a closing. Such differences can impact negotiations of the purchase agreement. For instance, although U.S. practice is to follow the terms of a nonbinding LOI, in some cultures, aggressive bargaining may continue on material terms – even during the delivery phase.

Being flexible and compromising on certain terms, without losing the overall value of the transaction, is important in order to not delay closing. In addition, prior to engaging in negotiations, it may be prudent to inform the U.S. party that such aggressive negotiations may occur.

COMPLYING WITH IMPORT/EXPORT REQUIREMENTS

Separate from the aviation regulatory requirements associated with international transactions (e.g., registration, deregistration, export certificates of airworthiness, etc.), aircraft being sold cross-border are treated as “merchandise” and subject to different export, import and tax considerations than when carrying passengers in the normal course of business.

• Aircraft entering the United States for the purpose of sale must generally be “permanently imported” for customs purposes at the time of entry, even if they are coming into the United States for a prepurchase inspection where the purchaser can and may reject the aircraft. This should be clearly documented in the purchase agreement and discussed with the broker/seller to ensure that the import process is followed.

• When exporting from the United States, all parties need to ensure that the export is in compliance with U.S. export control and export clearance laws, including making an Electronic Export Information (EEI) filing when required in connection with the export of aircraft. (See Holland & Knight’s previous client alert, “Avoiding Pitfalls When Exporting Aircraft from the United States,” for helpful tips and guidance; https://www.hklaw.com/en/insights/ publications/2021/02/avoiding-pitfalls-when-exporting-aircraft-from-the-united-states.)

• When purchasing an aircraft from a foreign seller and the aircraft was originally exported from the United States, it is important to make sure that the aircraft was exported properly. In some circumstances, when the aircraft was not properly exported, a corrective EEI filing may have to be made prior to importing the aircraft.

CONDUCT ENHANCED KNOW YOUR CUSTOMER (KYC) DUE DILIGENCE

With international aircraft transactions, increased compliance risks warrant enhanced due diligence:

• A number of business aircraft owned or formerly owned by Russian nationals are on the market. While it is possible to do such deals, where the Russian national is not sanctioned, these deals are complex and require substantial diligence, and in some cases authorization from the U.S. government may be required. (See Holland & Knight’s previous alert, “Navigating Russian Sanctions in Corporate Jet Transactions”; https://www.hklaw.com/en/insights/ publications/2022/05/navigating-russian-sanctions-in-corporate-jet-transactions )

• The U.S. government believes that drug cartels are routinely buying older business aircraft to use for drug smuggling or other criminal activity. Hence, when selling older aircraft to South American and Central American buyers, additional diligence is required.

THE HOLLAND & KNIGHT DIFFERENCE

Holland & Knight has the depth and experience to handle cross-border transactions in many jurisdictions, with aviation attorneys in the United States, U.K. and Mexico who are supported by experienced aviation finance and international tax practitioners. Our attorneys have successfully navigated complex commercial and business aircraft cross-border deals around the world.

For more information or questions about a specific situation involving your organization, please contact the authors or another member of Holland & Knight’s Business Aviation Team.

PLACING YOUR AIRCRAFT WITH AN AIRCRAFT

CHARTER-MANAGEMENT COMPANY

By Jonathan Epstein

The management, operation and maintenance of a business aircraft is a complex and expensive undertaking. Although some aircraft owners may be able to hire experienced pilots and mechanics, a good charter-manager brings additional resources in connection with maintenance oversight, logistics and flight planning. As a charter-manager customer, an owner often may take advantage of the charter-manager’s buying power associated with costs for overhead such as fuel and insurance. FAA-certified charter-managers may generate additional income for the owner by chartering the aircraft to third parties, and often will allow an owner to charter other fleet aircraft at a discount.

THE CHARTER-MANAGEMENT ARRANGEMENT

Charter-management agreements range from “turn-key” management of an owner’s entire aircraft operation, including providing pilots, hangarage and insurance, to more limited arrangements. In a typical arrangement, the owner pays all the costs of owning and operating the aircraft, including the pilots’ salaries and benefits (even if employed by the manager). If the manager is certificated as an air-taxi operator under FARs Part 135, then in addition to managing the aircraft, the manager may lease the aircraft and use it to generate revenue from third parties. A common arrangement is for the charter-manager to pay/credit 85 percent of the revenue generated from third-party charters to the owner as lease payments.

CHOOSING A CHARTER-MANAGEMENT COMPANY

Charter-managers range from single aircraft operations to large international companies operating hundreds of aircraft. It is advisable to meet with and obtain quotes from more than one charter-manager before making any commitments. Among the recommended issues of inquiry are the following:

Is the charter-manager certified under FAR 135?

Is the charter-manager rated by any third-party services, such as WYVERN or ARGUS?

Has the charter-manager gone through the voluntary process to obtain International Standard for Business Aircraft Operations (IS-BAO) certification?

Does the charter-manager have experience in the relevant category of aircraft?

Does the charter-manager have facilities near where the aircraft is based?

What is the charter-manager’s safety record?

SPECIFIC FAA REGULATORY ISSUES PLAY A ROLE IN STRUCTURING THE CHARTERMANAGEMENT ARRANGEMENT

Regulatory concepts are important when structuring aircraft ownership, including who will be in “operational control” of the aircraft for particular flights. In a pure management arrangement, the owner may hire the manager to provide pilots but the owner remains in operational control of the aircraft for the private flights of the owner (to be operated under FAR 91). In a pure charter-management arrangement, the charter-manager (which must be a certificated air-taxi operator) will lease or otherwise have contractual possession and operational control of the aircraft for all flights (operated as commercial flights under FAR 135). Most common is a combined arrangement where flights for the owner are conducted under the “operational control” of the owner under FAR Part 91, and flights for third parties are conducted by the chartermanager as commercial flights under FAR Part 135. There are tax, operational restrictions and other factors that go into determining the best structure, which include the following:

The “Flight Department Company Trap” – An owner may operate an aircraft under FAR Part 91 for its own business purposes (e.g., incidental to the main business of the company). However, if the company’s primary purpose is to provide air transportation for compensation (even if the compensation comes from a member or parent company), then that entity is required to obtain an air-taxi certificate. Hence, while a special purpose entity may own the aircraft, that entity will generally have to lease the aircraft to the parent or true operating subsidiary if it wants to fly the aircraft under FAR Part 91.

The “134½ Operator” – If the manager does not hold a FAR Part 135 certificate, be wary of scenarios that involve 1) the owner leasing the aircraft to a number of entities with the manager providing pilots; 2) the manager making use of another operator’s FAR Part 135 certificate; or 3) “franchising” type arrangements where the owner is independently marketing the aircraft for charter. While there are scenarios for joint ownership and leasing that are legitimate, the FAA has punished operators that are viewed as trying to skirt the air-taxi certification process.

STATE AND FEDERAL TAX CONSIDERATIONS

Depending on the specifics of the arrangement, a charter-management arrangement may have tax implications and your accountant or tax advisor needs to be part of the planning. For example, in some states predominant use in charter may qualify the aircraft for an exemption from state sales and use tax. However, the federal income tax issues associated with charter-management arrangements are complex and uncertain. For example, in the case of a charter flight provided to anyone other than the owner or a lessee, the IRS may take the position that a charter-management arrangement should be characterized as a rental of the aircraft to the manager, rather than services provided by the manager to the owner. Therefore if employees of the owner or its related entities charter the aircraft, this may trigger a 7.5 percent federal excise tax (FET) on air transportation on the charter payments that is not generally applicable to most FAR Part 91 flights. Charter use may also affect the applicable depreciation method or passive activity treatment of the aircraft, but third-party charter may be useful if there is considerable personal use of aircraft.

UNDERSTANDING THE COST STRUCTURE OF THE AGREEMENT AND AVOIDING CONFLICTS OF INTEREST

Many disputes between owners and charter-managers arise from misunderstandings about costs/markups that were either not disclosed or not understood by the owners, particularly where they create a potential conflict of interest. For example, charter-managers typically charge a handling fee/surcharge on parts and material that is often a percentage of the cost of the parts/material. This surcharge creates a disincentive to find the lowest price solution for repairs/repair parts. Charter-managers may charge labor rates for maintenance oversight in addition to actual time spent conducting maintenance and repair. In addition, charter-managers often keep their management fees low but make a profit on fuel, hangar rental and other ancillary services. None of these fees are necessarily “red flags,” but they should be discussed upfront and addressed in the management agreement so there is no misunderstanding.

LIABILITY AND THE CHARTER-MANAGER’S INSURANCE POLICY

An owner often benefits from placing its aircraft on a charter-manager’s fleet insurance policy. The manager may have higher liability limits and lower premiums than the owner could obtain on its own. However, it is critical that the management agreement and the actual insurance endorsements adding the owner to the policy fully cover the owner and any affiliates that will operate the aircraft, and meet the requirements of any financer holding a security interest in the aircraft. As discussed above, often the owner or an affiliated company under a lease will be in “operational control” of private flights for the company operated under FAR Part 91. However, it is not uncommon to see the owner and/or affiliated company listed as an “additional insured,” and covered for liability solely for the operation of the aircraft by the “named insured” (i.e., the charter-manager). Hence, the owner may not be covered for its own operation of the aircraft. There are other protections that an insurance broker may add — at no cost — to the policy endorsement and certificate to ensure that the company is fully covered by this policy.

CONDUCT A

THOROUGH ANALYSIS PRIOR TO ANY CHARTER-MANAGEMENT ARRANGEMENT

When considering a charter-management arrangement, aircraft owners must carefully analyze both the nature of the charter-management arrangement and the specific charter-manager who will operate the aircraft. FAA regulatory compliance, income generation, tax implications and insurance coverage are some of the very important components of the analysis. Particularly important is identifying surcharges or markups to be imposed by the charter-manager that may not be readily apparent. The aircraft owner should educate itself as to these issues with appropriate legal and accounting advice in order to have productive discussions and negotiations with charter-manager candidates.

PRIVATE AND BUSINESS AIRCRAFT PRIVATE AND

AIRCRAFT

Holland & Knight has an established group of attorneys with extensive experience handling private aircraft transactions for high-net-worth individuals, financiers, and private and public companies. Our team is well versed in the full range of legal and commercial aspects of aviation law, from purchases and sales to regulatory matters and more.

Handling All Types of Private Aircraft Transactions

Purchase, sale, ﬁnance and lease ﬁnance of private aircraft, including the structuring of the acquisition and ownership structure

Corporate and ﬁnancing transactions

Disposition of special assets, including numerous types of aircraft

Aircraft operations, including the optimization of liability protection

Leading Lawyers With A Track Record You Can Depend On

Rely on Holland & Knight’s experienced attorneys to guide you through the myriad legal challenges that arise in the private aircraft industry.

Highly qualified and extremely responsive to change, our team and its members have a long history of being recognized as leaders in aviation law.

Aviation insurance coverage matters

Regulatory issues affecting private aircraft, including regulatory requirements regarding cost-sharing

Fractional share transactions

Negotiation of management, charter and maintenance agreements

Tax controversies involving national and local ofﬁces of the IRS, state and local tax agencies

In the 2024 Chambers High Net Worth guide, Holland & Knight was recognized in Band 1 of the Global-wide Private Aircraft category.

Clients commend the firm for being “well respected in this area” and for being “plugged into the aircraft needs from a legal and tax perspective.”

– 2024 Chambers High Net Worth guide

PRIMARY CONTACTS

Jonathan M. Epstein

Partner | Washington, D.C.

+1.202.828.1870

jonathan.epstein@hklaw.com

Juan Carlos Ferrer

Partner | Miami

+1.305.789.7748

jc.ferrer@hklaw.com

Logan Evan Gans

Partner | Miami

+1.305.789.7491

logan.gans@hklaw.com

Abbey Benjamin Garber

Partner | Dallas

+1.214.969.1540

abbey.garber@hklaw.com

John B. Hoover

Partner | Tysons

+1.703.720.8606

john.hoover@hklaw.com

Jonathan M. Epstein has more than 20 years of experience assisting high-net-worth individuals and companies in private aircraft transactions. He helps clients in the acquisition of aircraft and in structuring aircraft operations. He has particular experience in international transactions, and he regularly advises charter operators, airlines and aircraft leasing companies on export-import and other compliance matters. He is active in the private aviation industry and is the immediate past chair of the National Business Aviation Association (NBAA), Regulatory Issues Advisory Group.

J.C. Ferrer focuses his practice on commercial and private aviation matters, banking and finance, secured transactions, cross-border leasing and financing, general corporate matters, and sales and acquisitions of capital equipment. He actively represents financial institutions, funds and highnet-worth individuals in connection with the purchase, sale and finance (including lease finance) of private and commercial aircraft, as well as in corporate and financing transactions. Such clients often rely on Mr. Ferrer to help acquire, finance and dispose of special assets.

Logan Gans is a private wealth and tax attorney in Holland & Knight’s Miami office. He represents clients on U.S. federal tax, international tax, and state and local tax matters, including business aviation transactions and tax controversies. Prior to joining Holland & Knight, he was a partner at an Am Law 200 law firm and an international tax senior certified public accountant with a large multinational accounting firm. Recently, he was honored by the Daily Business Review as one of the most promising South Florida lawyers under the age of 40.

Abbey Garber has experience in all aspects of IRS practice, including audit, appeals, collection and litigation. He is representing several owners of private aircraft in IRS audits and appeals and has negotiated with the IRS on behalf of foreign air carriers as well. Prior to joining Holland & Knight, Mr. Garber served as an attorney, manager and executive for more than 30 years in the Office of Chief Counsel at the Internal Revenue Service. Mr. Garber has been recognized for his work by many top legal publications and organizations. He was named the 2024 Outstanding Texas Tax Lawyer by the State Bar of Texas.

John B. Hoover focuses his practice on federal and state tax planning, compliance, and controversy matters involving business aircraft and taxexempt organizations. His business aviation tax work includes structuring business aircraft arrangements, federal and state tax controversy work, aircraft transactions and assisting the National Business Aviation Association (NBAA) on tax regulatory initiatives.

Lee S. Myercord

Partner | Dallas

+1.214.969.1315

lee.myercord@hklaw.com

Barton W. Morrison

Partner | Orlando

+1.407.244.1131

barton.morrison@hklaw.com

John F. Pritchard

Partner | New York

+1.212.513.3233

john.pritchard@hklaw.com

Robert A. Ricketts

Partner | London

+44.20.7071.9910 robert.ricketts@hklaw.com

Audrey L. Sung

Partner | San Francisco

+1.415.743.6940 audrey.sung@hklaw.com

Lee Meyercord is a tax partner with Holland & Knight who represents taxpayers in all stages of a federal tax dispute, including audits, administrative appeals and federal income tax litigation. She has represented a broad range of clients, including Fortune 100 companies, large partnerships, closely held businesses, exempt organizations and high-net-worth individuals. She has experience representing airlines and owners of private aircraft in tax disputes and is well-versed in the complex centralized partnership audit rules. Ms. Meyercord is Board Certified in Tax Law by the Texas Board of Legal Specialization.

Barton Morrison’s aviation practice focuses on the purchasing, selling and financing of private, business and training aircraft. Further, he advises on the documenting, closing and financing of aircraft, including the coordination of aircraft deliveries with the FAA, foreign Civil Aviation Authorities (CAAs) and the International Registry. Mr. Morrison also represents some of the world’s largest aircraft leasing companies, national and international banks, airlines and aircraft owners and lessees in the purchase, sale, lease, financing and securitization of commercial aircraft.

John F. Pritchard has more than 25 years of experience in aircraft, equipment and facility finance. He is knowledgeable in all areas of assetbased financing and concentrates on the representation of lessees, lessors, lenders, borrowers and government guarantors in domestic and cross-border financings, securitizations, workouts and foreclosures. Mr. Pritchard has given many speeches on aircraft and equipment financing at various conferences.

Robert A. Ricketts is an English aircraft finance solicitor who focuses his practice on aviation law, covering a wide range of legal and commercial aspects. He advises banks, leasing companies and airlines on various issues arising from the sale, purchase, leasing, financing, maintenance and mortgaging of aircraft, including relevant registration procedures. Mr. Ricketts counsels a number of high-net-worth individuals as well as public and private companies on their aircraft acquisitions and aircraft operation.

Audrey L. Sung’s practice places an emphasis on asset-based financing for assets ranging from commercial jet aircraft to turboprop aircraft and from oil drilling rigs to private yachts. She represents financial institutions as well as borrowers and operators in a variety of financing structures. She also has extensive experience representing financial institutions and operating lessors in a wide range of domestic and cross-border leasing transactions (including sale-leasebacks), in asset acquisitions and dispositions in the secondary market, and in negotiations with manufacturers and vendors of new equipment.

Chris Wilson

Partner | Nashville +1.615.850.6125 chris.wilson@hklaw.com

Chris Wilson focuses his practice on state and local tax planning, compliance and controversy matters involving all areas of business, including aviation. His aviation-related experience includes assisting in structuring aircraft acquisitions as well as assisting clients with aviationrelated state tax controversies.

Giles Cornwall

Consultant | London

+44.20.7071.9917

giles.cornwall@hklaw.com

Libby Bloxom

Associate | Dallas

+1.214.964.9455

libby.bloxom@hklaw.com

Mary Gong

Associate | London

+44.20.7071.9947

mary.gong@hklaw.com

Marina Veljanovska

O’Brien

Associate | Washington, D.C.

+1.202.469.5493

marina.obrien@hklaw.com

Giles Cornwall is an English aircraft finance consultant to Holland & Knight’s London office. His practice is focused on the sale and purchase, financing and leasing of aircraft and includes the negotiation of sale and purchase agreements, financing, security and lease documentation on behalf of lenders, aircraft owners, operators and high-net-worth individuals, as well as on issues relating to the sale, purchase, leasing, financing, maintenance, registration and operation of corporate fixed-wing and rotary aircraft.

Libby Bloxom’s practice involves assisting clients in corporate jet transactions and structuring of corporate aircraft operations to comply with FAA regulations, as well as a broad range of international trade regulatory and transactional matters. She assists clients with aircraft export clearance and customs issues, and helped draft guidance for the NBAA on these issues.

Mary Gong is an asset finance attorney who focuses her practice mainly on a variety of aircraft financing and leasing transactions involving a number of jurisdictions. She provides counsel for a number of high-net-worth individuals as well as multinational corporates on a range of transactions, including aircraft sales and acquisitions, aircraft deliveries and airline restructurings.

Marina Veljanovska O’Brien advises airlines, airports, aviation service providers, aircraft leasing companies, corporate flight departments, pilots and U.S. operators on compliance with applicable air transportation and safety-related laws and regulations. These include economic licensing, airport sponsors’ obligations, transportation safety standards (including hazmat), pilots’ rights and obligations, as well as risk assessment in the context of mergers and acquisitions. Ms. O’Brien is active in the NBAA’s Regulatory Issue Advisory Group and recently co-authored the NBAA’s Guide on the FAA Pilots Records Database Rule.