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August 31, 2018

The IRS May Disregard Your LLC, But You Shouldn’t.

As you may know, an aircraft owner may use a limited liability company (“LLC”) to register and hold title to the owner’s aircraft. An LLC is formed by filing articles of organization with Secretary of State (or equivalent) in the state in which the LLC is organized. The LLC has members who hold/own membership interests in the company that are represented by the members’ capital accounts. The LLC may be managed by managers or it may be managed by the LLC member(s).

An LLC is a type of business entity that has distinct legal personality from its owner(s)/member(s) and managers. An LLC is treated as a separate “person” in the eyes of the law with an independent existence from its members. Thus, if the owner/member of an LLC dies, the entity continues to exist (although an LLC needs to specifically elect to have this continuity of existence).

However, once set up, the laws governing LLCs require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records, filing annual renewals/registrations etc.). If the LLC does not comply with those formalities, it is possible that the law will not recognize the LLC as a separate “person” and will look to the LLC’s members or managers to personally honor the LLC’s obligations. This is called “piercing the corporate veil.” Not only is this a bad situation for the LLC members, this concept is frequently confused with the Internal Revenue Service’s treatment of an LLC as a “disregarded entity.”

Although an LLC is a “legal entity”, the Internal Revenue Service (“IRS”) does not treat an LLC as a “tax entity.” Rather, the IRS “disregards” LLCs for federal tax purposes as if the entity does not exist. Most LLCs with a single member are taxed as a sole proprietorship, while a multi-member LLC is usually taxed as a partnership. In some cases, the LLC can elect to be treated as an “S” corporation if the LLC satisfies certain criteria.

As a disregarded entity, a single-member LLC does not file an income tax return or report income, loss, deduction, or credit. Instead, the LLC member incorporates these tax items into the member’s tax return. Similarly, a multi-member LLC’s members and the members of an LLC that has elected “S” corporation tax status would report on their respective tax returns.

If you are using an LLC to own an aircraft, keep in mind that the IRS’s disregard of your LLC for tax purposes does not relieve you of your responsibility to comply with the formalities required by the laws applicable to LLCs. Failure to comply with the formalities can negate the personal liability protection otherwise afforded to an LLC’s members, and can also render the aircraft’s registration invalid. So, it is important to pay attention to both the tax and the legal aspects applicable to your LLC to take advantage of the benefits of owning an aircraft with an LLC.

Posted by Greg

August 17, 2018

No, A Court Can't Force The NTSB To Explain Why It Hasn't Completed An Investigation.

In a recent case, In re Show Cause Order Dated December 15, 2017, a federal court in Maryland has quashed a state court's order requiring the NTSB to designate a person to appear on its behalf and explain why the NTSB had not yet finished an investigation into a gas explosion. Although this case doesn't involve an aircraft accident, it is both analagous and instructive with respect to the autonomy the NTSB has with respect to its investigations.

The case arose out of a gas explosion which the NTSB was investigating and during which it had taken certain physical evidence into custody for analysis in making its determination regarding the probable cause of the explosion. As you might expect, around the same time multiple lawsuits were filed alleging that the explosion was caused by the negligence of the defendants and seeking to recover damages suffered as a result of the explosion.

Although the case does not provide the full background, I suspect that at least some of the physical evidence being held by the NTSB was of interest to the parties in the litigation and they were frustrated by the length of time it was taking the NTSB to complete its investigation and release the physical evidence. Certainly not an uncommon situation and, given the NTSB's limited manpower and the broad scope of its investigatory charge, the lengthy time required to complete an investigation is, in many cases, understandable.

In any event, at some point in the underlying state court litigation the court entered an order requiring the NTSB to "designate an official to appear before the court in order to show cause as to why the agency should not be held in contempt for its failure to complete its investigation regarding the cause of the explosion and to provide dates by which the NTSB would complete its investigation and release the physical evidence in its custody."

Well, when the NTSB received the order it promptly removed the case to federal court and asked the federal court judge to quash (reject or void) the order based upon the doctrine of sovereign immunity. (Sovereign immunity precludes lawsuit against the government unless the government has consented to the type of lawsuit). The Court found that the state court order "seeks to compel the NTSB, a federal agency, to send a federal official to appear in state court for the purpose of divulging information obtained in his or her official capacity", and thus the action was barred by sovereign immunity unless the government consented. Since the NTSB did not consent, neither the state nor the federal court had jurisdiction to compel the NTSB to comply with the order.

As this case shows, motions and orders will simply incur time and expense that will not, at the end of the day, get the NTSB to move any faster than it otherwise would and, in fact, may even create delay arising from the NTSB having divert its attention from its investigation to deal with the distraction of such motions/orders. So, the moral of the story, as frustrating as it may be, is: Litigants (and others) just have to wait for the NTSB to complete an investigation and/or release physical evidence in its custody.

Posted by Greg

August 10, 2018

Understanding and Complying With Aircraft Truth in Leasing Requirements

If you lease an aircraft that is a "large civil aircraft", as defined in 14 C.F.R. § 1.1 (12,500 pounds, maximum certificated takeoff weight), you should be aware of the truth-in-leasing ("TIL")requirements of 14 C.F.R. § 91.23. Section 91.23(e) defines a lease as "any agreement by a person to furnish an aircraft to another person for compensation or hire, whether with or without flight crewmembers." Assuming your arrangement for use of the large civil aircraft falls within this definition, then you must also comply with the following TIL requirements:

The lease agreement must be in writing;
The lease must include a written TIL clause that is in bold print, at the end of the lease, and immediately preceding the space for the parties' signatures, which includes:
1. Identification of the Federal Aviation Regulations ("FAR") under which the aircraft has been maintained and inspected during the 12 months preceding the execution of the lease and certification by the parties that the aircraft is in compliance with applicable maintenance and inspection requirements for the operations contemplated by the lease (e.g. typically Part 91 since TIL requirements don't apply to Part 121 or 135 air carrier lessees);
2. The name, address and signature of the person responsible for operational control of the aircraft under the lease, and certification that each person understands that person's responsibilities for compliance with applicable FAR;
3. A statement that an explanation of factors bearing on operational control and pertinent FAR can be obtained from the responsible Flight Standards District Office ("FSDO");
A copy of the lease must be carried in the aircraft during all operations under the lease;
A copy of the lease must be sent to to the Aircraft Registration Branch, Attn: Technical Section, P.O. Box 25724, Oklahoma City, OK 73125, within 24 hours of execution; and
At least 48 hours before takeoff of the first flight under the lease the lessee must inform the responsible Flight Standards office by telephone or in-person of:
1. The location of the airport of departure;
2. The departure time; and
3. The registration number of the aircraft involved.

In the past, the regulation required that the 48-hour notification be provided to the "Flight Standards district office nearest the airport where the flight will originate." However, when the FAA recently updated Section 91.23, it replaced this language with the a less specific reference to "the responsible Flight Standards office." And, unfortunately, this change in language has now created some confusion as to which FSDO the notice must be given: the FSDO where the first flight will originate, or the FSDO responsible for the lessee's home base?

However, based upon a review of the Final Rule that made the language change, as well as AC 91-37B, Truth in Leasing, I think the notice must still be provided to the FSDO with jurisdiction over the airport from which the first flight will originate consistent with past practice. Here's why:

The Final Rule states "[t]his rule does not change any existing processes. Processes for public interaction with AIR and AFS (such as application processes, reporting processes, and oversight processes) are documented in orders, notices, advisory circulars (ACs), and policy statements. Where general references to "the FAA" are introduced in specific sections, existing advisory material for the affected section specifies the AIR and AFS offices responsible for the function identified in that Section."

And then going back to AC 91-37B, Paragraph 10 states that the 48 hour notification must be made "to the FAA", with further clarification in Paragraph 10.1 that the "notification must be made to the FSDO nearest the airport where the lease or contract flight will originate." So, I don’t think the Final Rule’s language changes past practice – which was to provide notification to the FSDO with jurisdiction over the airport where the first flight under the lease originates.

However, I do think that it would make more sense for the notification to be made to the FSDO nearest the operator’s home base (and the language in AC 91-37B "where the lease or contract flight will originate" could support this position since it could be read to require notification to either the FSDO where the lease originates (home base) or where the first flight originates). And since one of the policy factors underlying the TIL requirement is FAA oversight lessees/operators, it would certainly make sense for the notification to be provided to the FSDO with jurisdiction over the lessee/operator rather than a FSDO with no connection to the lessee/operator and within whose jurisdiction the first flight under the lease only happens to originate.

But for now, the conservative approach is to provide notice to the FSDO with jurisdiction over the airport where the first flight under the lease originates. And rather than providing the notice via telephone, the notice may also be provided via facsimile which then provides the lessee with proof of delivery of the notice in the event that a dispute ever arises as to whether the notice was given to the FAA.

Posted by Greg

August 03, 2018

Paperwork Tips For Smooth Border Crossings In General Aviation Aircraft

For those of you who have flown into or out of the U.S. in a general aviation aircraft, you know that extra thought and planning are involved in these flights. And while the process may seem daunting to the uninitiated, it really isn't if you pay attention to the necessary details. Here are a couple of the paperwork "gotchas" that can create problems for pilots if they are not considered and addressed prior to a cross border flight:

Aircraft Documents. The aircraft must have a current and valid registration certificate and an airworthiness certificate. If the registered owner of the aircraft is a corporation or a limited liability company, that entity must be an "active" entity. If it isn't, then the aircraft's registration is likely invalid. Operating an aircraft without a valid registration could subject the pilot/operator to both prosecution and civil penalties.

If the aircraft is not owned by the pilot/operator, a copy of a lease, use agreement or other documentation authorizing use of the aircraft by the pilot/operator will be required. If the aircraft was recently purchased and is being operated with a temporary registration pending receipt of the hard-card registration certificate from the FAA, the aircraft may not be operated internationally unless a Declaration of International Operations is filed with the FAA. The FAA will then fax a 30-day Temporary Certificate of Aircraft Registration or "fly wire" permitting flights outside the U.S.
Pilot/Passenger Documents. The pilot will need a valid airman certificate, a valid medical certificate, and although not required for operation in the U.S., depending upon the destination the pilot may also need a restricted radiotelephone operators permit. Also be aware that if the pilot is operating under the provisions of 14 C.F.R. Part 68 ("Basic Med"), very few other countries currently recognize Basic Med in lieu of a valid medical certificate. As a result, for most international destinations the pilot will need to hold at least a third-class medical certificate.

The pilot and each passenger must have a valid U.S. passport or other valid DHS approved travel document. And it is critical that the information on the pilot/passenger documentation matches the information provided to U.S. Customs Border Patrol ("CBP") through its eApis system. If the information does not match, entry into the U.S. could be denied or delayed, and the pilot/operator could be subject to civil penalties.

If you pay attention to the paperwork/document requirements for operating a general aviation aircraft to/from the U.S., you will avoid the turbulence and build-ups that can otherwise complicate cross border flights. For more information on cross border travel requirements, you can review the CBP website or the U.S. State Department website.

Posted by Greg

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