Business Aviation Law Blog

The economic case for fractional aircraft use

Harry Ekblom — Wed, 15 Jul 2009 21:21:33 -0500

A recent post makes the economic case for fractional aircraft use.

Barron's article justifying ownership & use of business aircraft

Harry Ekblom — Mon, 20 Apr 2009 10:46:36 -0500

See a recent article in Barron's (April 18, 2009) "In Defense of Your Own Plane" for some reasons why owners of business aircraft may want to reconsider putting their aircraft up for sale.

Florida Weighs Tax Break for Aircraft

Harry Ekblom — Wed, 15 Apr 2009 18:16:18 -0500

See the article dated April 15, 2009 in the online edition of The Wall Street Street Journal. The article references an article in the St. Petersberg Times reporting on a proposal moving through the Florida legislature that would cap aircraft sales and use taxes at $25,000. Incidentally, the Florida Senate Bill Analysis and Financial Impact Statement for this proposal (CS/SB 2376) provides a useful summary of Florida sales and use taxes relating to aircraft.

Amendment to NY Sales & Use Tax Law Affecting the "Commercial Aircraft" Exemption

Harry Ekblom — Tue, 14 Apr 2009 13:52:51 -0500

Given their straitened finances, many States are taking a hard look at measures to raise additional tax revenue. Business aircraft operations are likely to receive more than their fair share of attention from state legislators and administrators. Among the most recent of these initiatives to come to light are two measures from New York that tighten existing sales and use tax exemptions affecting aircraft purchased or based in that State.

One of these measures limits the scope of the “commercial aircraft” exemption (N.Y. Tax Law §1101(b)(17)) from New York’s sales and use tax. Under §1101(b)(17), an aircraft needs only to be used primarily (i.e., more than 50%) to transport persons or property for hire in order to qualify for the exemption. A little counter-intuitively, the availability of the commercial aircraft exemption is not conditioned on the operation of an aircraft under FAR Part 135 or 121 (that is, air charter or airline operations). Because of this, this exemption was especially useful to those business aircraft operators that used their aircraft primarily for their own use and for the use of their affiliates, but not primarily for third party charter – a pretty typical fact pattern for larger businesses with aircraft operations.

New York Assembly Bill 157-B amends the commercial aircraft exemption to provide that an aircraft used primarily to transport a purchaser’s personnel or those of an affiliated entity does not qualify for the exemption. The amendment adds the following language to §1101(b)(17):

Transporting persons for hire does not include transporting agents, employees, officers, members, partners, managers or directors of affiliated persons. Persons are affiliated persons with respect to each other where one of the persons has an ownership interest of more than five percent, whether direct or indirect, in the other, or where an ownership interest of more than five percent, whether direct or indirect, is held in each of the persons by another person or by a group of other persons that are affiliated persons with respect to each other.

The amendment appears to be directed at those larger business aircraft operators that use their aircraft primarily for their own use and for the use of their affiliates. This amendment is likely to discourage operators from basing their aircraft in New York. On a positive note, it should help to relieve congestion at Westchester County Airport. The amendment will be effective June 1, 2009.

Massachusetts Jet Card Startup

Harry Ekblom — Sun, 15 Mar 2009 11:30:11 -0500

See the February 20, 2009 edition of Boston Business Journal for an article on jet card company based in Quincy, Massachusetts. For some perspective on jet cards, see Mike Riegel’s website entry on jet cards.

Extension of 50% Depreciation Allowance for Business Aircraft

Harry Ekblom — Thu, 19 Feb 2009 20:27:29 -0500

On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009. Of particular interest to the aviation community is the Act's one-year extension of the 50% bonus depreciation allowance. To qualify, aircraft must be placed in service by December 31, 2009 (rather than December 31, 2008, as was previously the case). For "certain aircraft" (that is aircraft with a cost exceeding $200,000 and an estimated production period exceeding four months), aircraft must be placed in service by December 31, 2010 (rather than December 31, 2009).

Sales of Aircraft Fractional Interests - The Meaning of "Fair Market Value"

Harry Ekblom — Thu, 19 Feb 2009 16:48:13 -0500

As noted in a prior entry, in the larger programs, the program manager will have committed itself to repurchase each fractional owner's interest. Typically, the purchase price is based on the "fair market value" of the aircraft, multiplied by the owner's percentage interest. The program documents will usually provide that if the parties can't agree on the fair market value, that value will be determined through some type of an appraisal process.

Shortly after you exercise your repurchase or "put" right, the program manager will quote you a value. Resist the urge to throw up you hands. Insist that the program manager show you the data it is relying on, and explain its methodology. You should consider bouncing the program manager's quote off a consultant (e.g., Fractional Advisor or Aviation Management Systems). You should absolutely do so if the program manager's explanation seems unintelligible and/or unreasonable -- a classic indicator of a well below fair market quote. Once you have the program manager's quote in hand, your options are to accept that quote, or go though the appraisal process. A consultant should be able to give you a sense of whether the program manager's quote is an unreasonably low "low ball" number. If it is, consider going the appraisal route.

Sales of Aircraft Fractional Interests - Sales to Third Parties

Harry Ekblom — Thu, 19 Feb 2009 16:40:47 -0500

• Fractional ownership disposition options – sale to a third party. “Plan B” for fractional owners looking to dispose of their interests is to sell to a third party purchaser with the consent of the program operator. If you have time remaining under your fractional program management agreement and you have underflown your interest, this option bears looking into. In all fractional programs, the maximum number of hours that an owner is permitted to use program aircraft during a contract year varies with the size of the owner’s interest – e.g., 50 hours for a 1/16th interest, 100 hours for a 1/8th interest and so on. Most programs permit unused hours from any contract year to be carried forward to succeeding contract years. If you are three years into your contract and have built up a substantial number of unused hours, keep in mind that those unused hours may be of value to a prospective purchaser. The point here is that if you put your interest back to the program operator you will not be compensated for these unused hours, whereas if you sell your interest to a third party, you might be. Everything comes at a cost, however. Here, it is the loss of certainty in the timing of the sale. You will need to engage a broker and it might take some time for the broker to locate an interested purchaser.

Sales of Aircraft Fractional Interests - "Put" to Fractional Operator

Harry Ekblom — Thu, 19 Feb 2009 16:15:21 -0500

More thoughts on dispositions of fractional aircraft interests:

• Fractional ownership disposition options – repurchase by program operator. Broadly speaking, fractional interest owners in the larger programs (NetJets, Flexjet, for instance), may dispose of their interests in two ways. Either you exercise your “put” back to the program operator, or you sell your interest to a third party with the consent of the program operator. In the larger programs, the program operator will have committed itself to repurchase your interest at its fair market value, net of a stipulated remarketing commission. In most of these larger programs you can be reasonably sure that you will be able to dispose of your aircraft within “x” days (assuming you can agree with the program operator on what “fair market value” really is). Don’t take that timing certainty for granted, particularly in a market that is trending down. A later post will address problems associated with determining “fair market value.”

Sales of Aircraft Fractional Interest - Tax Recapture

Harry Ekblom — Fri, 13 Feb 2009 11:22:39 -0500

Given the economic climate, some business aircraft owners are thinking of disposing of their aircraft. A sign of the times, unfortunately. This post is first in a series that flags some issues that tend to pop up in the context of aircraft dispositions. The first few posts will focus on dispositions of interests in aircraft under fractional ownership programs.

• Budget for recapture of tax depreciation. Most owners are well aware of the tax benefits associated with the use of aircraft in their businesses - particularly the allowances for bonus depreciation and accelerated depreciation. Given that business aircraft operated under Part 91-K may qualify as 5-year MACRS property, some owners may have a zero basis. If you have a low tax basis you should keep in mind that the sale of your interest may trigger the recapture of the depreciation allowance, and that this will be treated as ordinary income – not capital gain – for federal income tax purposes. If you have purchased (or expect to purchase) another aircraft or interest you may be able to avoid recapture through the use of a like-kind exchange – but if you are simply looking to put your days of aircraft ownership in your rear view mirror, a like-kind exchange is not the answer.