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Avoiding the Flight Department Company Trap

October 8, 2012

NBAA Flight Plan has more tips on avoiding the “flight department company trap.”

It is a trap borne out of an abundance of caution, but a trap nonetheless. NBAA Tax Committee Member Jeff Wieand has termed it the “flight department company trap,” one that can leave flight departments exposed to liability (and worse), when that was exactly what they were trying to avoid in the first place.

It is the decision by corporations to form separate companies to both hold and operate their aviation assets.

The Federal Aviation Administration (FAA) does not have a problem with a corporate entity formed solely to own or partially own an aircraft. “But if that company has no other business than owning the airplane and hires the flight crew and operates the aircraft as well, then the FAA says an air carrier certificate is required,” explained Wieand, senior vice president and general counsel at Boston JetSearch, a company that advises clients in the acquisition of business aircraft.

Often, he explained, corporate attorneys not familiar with aviation suggest creating a separate company to own and operate an aircraft as a liability shield, a means of protecting the main corporation and its assets.

But by using that separate single-purpose entity to both own and operate the aircraft, corporations run the risk of violating the prohibition under FAR Part 91 of operating for compensation or hire. The reason? Under this scenario, that new company would have just one purpose: To provide air transportation. Any capital contributions to the single-purpose entity could be viewed as payments for air transportation. That might make it much more like a Part 135 entity than a Part 91 operation, according to Wieand.

“In that case, there are many ramifications,” Wieand warned. “Your insurance may be invalid. There may be tax issues. You could violate contractual provisions such as lease covenants that say you must comply with all laws. But most significantly, there could be an accident or incident and someone could sue you, saying you’re not operating legally.”

Perhaps the solution would be to create a separate company that would own and operate the aircraft and do something else of little consequence on the side. Would that be enough to satisfy both the FAA and the IRS?

“The model of business aviation is that the aircraft is used in the service of that business. That’s where the airplane belongs. So, it isn’t sufficient just to stick some business into the (aviation) company so there’s some business there other than operating the airplane. The airplane and the primary business should be connected,” Wieand said. “Aircraft operations should be within the scope of and incidental to the company’s other business.”

Strategies for recognizing the flight department company trap, and developing aircraft ownership and operating structures that avoid the trap, are among the key issues to be covered during the NBAA Tax, Regulatory and Risk Management Conference, which will take place in Orlando, FL, Oct. 28 to 29, just ahead of NBAA2012. The Conference is eligible for CAM, CPE and CLE credit.