Insurance and Legal Issues for Owners

 - March 30, 2009, 5:04 AM

In addition to the costs of acquisition, prospective buyers must consider the costs–especially insurance and taxes–they will incur once they own the aircraft. To that end, aircraft management contracts with well thought-out insurance provisions should be integral to the aircraft acquisition process, said Bill Kingsley, an account executive with the Addison, Texas-based brokerage AirSure. He discussed the pros and cons of insurance being supplied by the aircraft owner or the management company. One factor working in favor of the management company providing
the coverage is that the size of a covered fleet generally results in better coverage.

Kingsley emphasized the necessity of constructing a proper aircraft management contract to ensure that the interests of both parties are fairly represented. “This is more important than the insurance policy itself. You should have an aviation attorney go over it,” he advised.

He noted that aviation underwriters “want to see training,” initial and recurrent, from providers such as FlightSafety, SimuFlite, SimCom or the equivalent as well as evidence of a safety management system (SMS) or similar safety-oriented program in place. Kingsley expected no change in underwriting capacity over the next 12 months. Regarding the largest underwriter, AIG Aviation, he said that despite the plight of parent company AIG, the aviation division is “continuing to write business.”

Washington, D.C.-based aviation attorney Eileen Gleimer addressed what an owner/operator can do with the aircraft and how to do it legally and responsibly. She discussed various ownership and leasing options within the FARs, with a look at
whole, joint, co- and fractional ownership programs using specific flight department scenarios. She outlined the FAA’s latest view of wet and dry leases as well as operational control, and provided an overview of recent decisions regarding FARs and their effect on business aviation operations.

The seminar also instructed attendees about how to mitigate the tax implications of business aircraft operation. Ed Kammerer and Su Rosov from the Providence, R.I. law firm of Hinckley Allen & Snyder discussed how the tax code treats personal
and non-business use of aircraft. They gave particular attention to inconsistencies in
FAA and IRS treatment of non-business flight activity and changes in Standard Industry Fare Level (SIFL) imputation of travel expenses caused by the Jobs Creation Act of 2004. Kammerer described how what the IRS calls “entertainment” use of an aircraft could jeopardize a large chunk of an accelerated-depreciation tax deduction.

Nel Sanders Stubbs provided a  picture of the ever-changing landscape of state and federal taxation. The Conklin & de Decker part owner reviewed the state sales tax on both used and new aircraft, with advice on taking delivery in a state that levies no sales tax. She cautioned that for a sale in a no-sales-tax state, delivery must physically take place in that state. Some states have a fly-away exemption if the aircraft is removed from the state within a specified time. Stubbs said that
aircraft to be operated on a Part 135 certificate are exempt from sales tax but subject to certain conditions. Kammerer noted that several state legislatures are considering revoking existing aircraft tax exemptions.

Among tax changes at the federal level is the provision that an LLC operating an aircraft for a parent limited partnership is now subject to federal excise
tax for air transportation. Differing treatment of non-commercial air trans- portation between the IRS and FAA includes the IRS position that any operation that the IRS considers “carriage for compensation or hire” is potentially taxable regardless of the actual profit or lack thereof.

One tax deferral strategy, explained by Tobias Kleitman of Time Value Property Exchange, is the Like-Kind Exchange/Reverse Exchange, which Kleitman called “the equivalent of a tax-free loan from the government.” It involves an escrow-like third
party called a qualified intermediary through which an exchange of
assets takes place. Kleitman observed that the current lack of credit availability is complicating the exchange process.