The development and implementation of an optimal corporate aircraft ownership and operating platform call for a comprehensive and integrated analysis of several highly-nuanced subjects. Income, excise, sales, use and property taxes are ever-present concerns in structuring the platform. Protecting one’s assets from aviation liabilities obviously is of great importance. The Federal Aviation Regulations – primarily Parts 91 and 135 – must be adhered to, sometimes to the detriment of tax planning and liability limitation strategies.
Based on the experience gleaned from handling over 1,000 transactions, the one question that our clients always ask is whether a Limited Liability Company ("LLC") should be organized to own and operate the aircraft. And the answer that is almost always given is, "it depends."
The LLC is as effective a liability limitation tool as a corporation or a trust. Successful plaintiffs generally are limited to collecting damages from the offending LLC’s assets, leaving the other assets of the LLC’s owners unexposed. This assumes that the LLC remains in good standing, maintains corporate and financial records and otherwise observes the proprieties of operating as an independent entity, lest plaintiff’s lawyers attempt to "pierce the corporate veil" by asserting that the LLC is an alter-ego of its owner and should be disregarded as a separate entity. Avoiding illegal activities is also relevant in avoiding the pierced veil. Liabilities associated with aircraft operations and aircraft ownership, respectively, can be exorbitant. If liabilities exceed carried insurance, the LLC’s liability limitation feature can be an estate saver.
As an income tax planning tool, the LLC offers many helpful options. At the taxpayer’s election, the LLC may be taxed as a corporation, a partnership or, if it has a single owner, a disregarded entity. As a disregarded entity, the LLC may have its own EIN or it may use the EIN of its owner. One advantage of the LLC as a disregarded entity is that payments between the LLC and its owner, such as for lease rents or for flight services, are not subject to income tax. As a partnership, there is no entity level income tax. If not outweighed by the burden of double taxation, there are several potential advantages to being taxed as a corporation.Sales and Use Tax
Many states have a 'resale' exemption to its sales and use tax. Under the typical exemption, the buyer, who otherwise would be subject to the sales or use tax, organizes an LLC to take title to the aircraft and lease it to the LLC’s owner. As the lease is deemed to be a resale, the aircraft is not subject to a large, lump sum sales or use tax upon the purchase price. Rather, the tax is assessed upon the amount of the lease rents and generally taxed when received. Without triggering income tax, the disregarded LLC can provide an effective tool to reduce (i.e., defer) sales and use tax. Not all states have a resale exemption and the terms and conditions of the exemption vary from state to state.Excise Tax
Amounts received for commercial air transportation services are subject to a 7.5% Federal excise tax ("FET"). Taxable commercial air transportation occurs when a party receives compensation for the provision of an aircraft and pilot services. Providing an aircraft under a dry lease (i.e., the provision of an aircraft without pilots) does not constitute commercial air transportation services.
As discussed below, Part 91 allows an entity to receive compensation for the provision of flight services (i.e., aircraft and pilots) to certain affiliated entities. Normally, the receipt of such compensation would be impermissible for a party lacking an air carrier certificate. Until 2008, payments for flight services between a taxpayer and its disregarded LLC were not subject to the FET. Now, even though the payments would not be subject to income tax, they could be subject to the FET. If the LLC is taxed as a corporation and is owned by a corporation, the FET could be avoided.
As noted above, Part 91 allows reimbursement for flight services between certain affiliated entities. However, the entity operating the flights must also carry on flights in connection with its own business, which may not be an aviation business. That is, although tempting as a liability limitation and income tax reduction tool, it is impermissible to organize an LLC (or any other entity) to act as the "flight department" for affiliated entities or for individuals.
Violation of the so-called "flight department company" rule could constitute an illegal activity, which could result in the invalidation of insurance, piercing the corporate veil, and the imposition of monetary and other sanctions upon the pilots, the company and potentially other individuals.
The LLC has many attractive features for utilization in the development and implementation of an optimal aircraft ownership and operating platform. All factors must be considered before hanging one’s hat on the LLC as the simple, sure solution. Given the high stakes, prudent business aircraft buyers and owners should obtain seasoned, specialized counsel on all relevant legal matters.
Rex E. Reese, Esquire, is a private attorney specializing in business aviation matters. Mr. Reese has handled over 1,000 business aircraft acquisition, sale and financing transactions and is regarded as one of Washington's best tax attorneys. He may be contacted at 703.842.8000, email@example.com, www.jetviser.com.