Amanda Applegate

Are you eligible to own an aircraft registered in the United States? The United States Code (or “U.S.C.”) enacted by the U.S. Congress establishes the ownership requirements for civil aircraft registered in the United States. A U.S. registered aircraft can be owned by (i) a person or entity who meets the definition of “Citizen of the United States” as set forth in 49 U.S.C. 40102(a)(15), or (ii) a person who is a resident alien, or (iii) a non-citizen United States corporation.

The most common ownership situation involves a person or entity that meets the definition of “Citizen of the United States” in 49 U.S.C. 40102(a)(15). Section 40102(a)(15) provides a definition for individuals, partnerships and corporations/associations (which also applies to limited liability companies). However, instead of owning an aircraft individually and subjecting oneself to the potential liability of such ownership, most buyers elect to put the aircraft into a business entity.

Many of my clients don’t think about the citizenship requirements for owning an aircraft because they are United States citizens and they assume that any partnership, corporation or limited liability company (“LLC”) formed in the United States will qualify. However, each type of entity has a specific test to see if it meets the statutory definition, and many entities that one would assume qualify to own an aircraft registered in the United States, in fact, do not.

Partnerships that own aircraft are rare because the citizenship test requires “a partnership each of whose partners is an individual who is a citizen of the United States.” The partnership must be comprised of individual United States citizens and if any of the partners are not individuals (i.e., a corporation or another partnership), the partnership fails the citizenship test. Since partnerships, especially limited partnerships, often have at least one corporate partner, they often fail the citizenship test. It is important to note that in the case of a limited partnership, the general partner and the limited partners must all be individuals.

Another perplexing ownership situation arises when the potential ownership entity is a multi-layered LLC. When an LLC owns an aircraft, an additional document called the statement in support of registration (“SSR”) must be filed with the FAA registry. The SSR is a statement that confirms that the citizenship test for an LLC has been satisfied. In addition to filing the SSR for the entity which will own the aircraft, an SSR must also be filed for every LLC within the ownership structure. This means that if the owning LLC is managed by an LLC or has any LLCs which are members, each LLC in the chain of ownership of the owning LLC, must file an SSR. Each layer of the LLC must meet the three-pronged citizenship test described below for the owning entity to be able to own an aircraft registered in the United States. An additional concern is that because each LLC within the owning entity as well as the owning entity must file an SSR, there is a significant loss of anonymity. Each layer of the structure is disclosed, and the information is available to the public.

Both corporations and LLCs face a three pronged citizenship test under Section 40102(a)(15). First, the corporation or LLC must be incorporated or formed and existing under laws of the United States or any state, the District of Columbia or a territory or possession of the United States. Second, all of the following management tests must be satisfied: (i) the president must be a United States citizen, (ii) at least two-thirds of the managing officers/managers must be United States citizens, and (iii) at least two-thirds of the directors must be United States citizens. Finally, at least 75 percent of the voting interests (corporate shares or LLC membership interests) must be owned or controlled by citizens of the United States, and the entity must be under the actual control of United States citizens.

Another way to own an aircraft registered in the U.S. is as a resident alien. The resident alien applicant must check the appropriate box on the FAA aircraft registration application and provide the FAA with his/her alien registration number. It is important to note that while a resident alien may own an aircraft individually, the resident alien does not satisfy any of the management or control requirements for a corporation/LLC or partnership. For example, if the sole member of the LLC is a resident alien, the LLC does not satisfy the citizenship test.

There are two main exceptions to the citizenship requirements. First, the regulations allow for the ownership an aircraft registered in the U.S. by a noncitizen U.S. corporation under 49 U.S.C. 44102(a)(1)(C). An aircraft can be registered by a corporation that does not qualify as a U.S. citizen if it is incorporated in one of the United States and the aircraft is based and primarily used in the U.S. This is commonly referred to as “based and primarily used registration.” The non-citizen United States corporation applicant must check the appropriate box on the FAA aircraft registration application and list an address where records are available for inspection.

Second, if a prospective aircraft owner cannot satisfy the citizenship requirements, the most common way to register an aircraft in the United States is through the user of an owner trust. Owner trusts serve two main purposes: (i) allowing a person or entity that does not meet the U.S. citizenship requirements to own a U.S.-registered aircraft and (ii) preserving confidentiality. Several well-known and often-used websites allow the public to track the movements of most general aviation aircraft on an Instrument Flight Rules (“IFR”) flight plan. Since Federal Aviation Administration (“FAA”) aircraft registration information is a matter of public record, it’s relatively easy to find out who owns any given aircraft, and then monitor their travels. This information can be used by the media or business competitors to the disadvantage of the aircraft owner.

Owners concerned about confidentiality can protect their anonymity by registering the aircraft with an owner trust. Under an owner trustee ownership structure, the trustee takes title to the aircraft and gives the beneficiary or “trustor” the right to operate it. Some aircraft owners create the trust agreement with an existing entity. However, if the trustor can be traced back to the underlying owner of the aircraft, the goal of confidentiality has not been achieved. If anonymity of the ownership is the objective, then the trust should be independent of any entity that can be linked back to the underlying owner. David Wall of TVPX Aircraft Solutions, Inc. states, “Over the past several years we have seen an increasing number of clients choosing a trust structure to help provide an additional layer of confidentiality, especially in the finance and technology sectors.”

Regardless of whether the owner trust is being used to resolve citizenship issues or to protect confidentiality, the structure of the trust is the same. When the aircraft is placed in trust, legal title to the aircraft is registered in the name of the owner trustee as the owner of the aircraft while the trustor retains a beneficial interest in the aircraft. Title 14, Section 47.7 of the Code of Federal Regulations (“CFR”) codifies the requirements for aircraft registration in the name of owner trustees.

In 2013, the FAA issued a Notice of Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations Involving Non-U.S. Citizen Trustors and Beneficiaries (“Clarification”) 78 Fed. Reg. 36412 (June 18, 2013). Under the Clarification, the FAA requires that all operating agreements that transfer possession and use of an aircraft held in trust from the owner trustee to the trustor be submitted to the FAA in conjunction with all other instruments submitted for registration purposes pursuant to 14 C.F.R. § 47.7(c)(2)(i).

It is important to note that selecting the entity to use for aircraft registration cannot be done in isolation. The ownership entity must not only meet the registration requirements, but it also must make sense from a tax planning perspective and be in regulatory compliance. If a sole purpose entity is formed to own an aircraft, additional planning must take place because, while a sole purpose entity can own an aircraft, it cannot operate an aircraft under Federal Aviation Regulations (“FAR”) Part 91. In order to operate under FAR Part 91, the primary business purpose of the company must be something other than owning an aircraft. Again, with ownership structure and operating planning, solutions are available. But remember that complying with U.S. citizenship requirements for owning an aircraft is only the beginning of formulating a plan which must also consider tax planning and operational compliance.

Aircraft ownership structure planning should be done well in advance of the scheduled closing date. Discovering immediately prior to closing that the purchasing entity cannot legally own an aircraft registered in the United States causes unnecessary stress and can delay the closing.

 

Every year as the summer draws to an end I do my best to prepare for the crush of 4th quarter closings. I expect 2024 to be a particularly interesting 4th quarter. First, in a presidential election year, transaction volume slows immediately prior to the election due to the uncertainty of the outcome. However, historical data shows that the transactions are only delayed, and the actual volume is not impacted over the course of the 4th quarter. Another interesting issue is that a larger number of older aircraft are continuing to fly while a larger number of newer aircraft are also being added to the private aircraft fleet. The increase in the number of units available for buying and selling will also increase the total number of units that are transacted. Additionally, as certain popular models continue to age, more systems, components and equipment on those aircraft are becoming obsolete. As a result, having a fully operational aircraft ready for sale is increasingly difficult and time consuming, especially as we continue to have supply chain issues with aircraft parts. Finally, finding available inspection slots is always difficult in 4th quarter. It may be more difficult than expected this year due to a compression of transactions after the presidential election and also due to the fact that some inspection facilities are limiting or eliminating pre-purchase inspection slots for older aircraft.

As we prepare for the remaining sales which will take place in 2024, certain items in the sales process can be completed in advance, resulting in a less condensed and more seamless sale. Some of these items should be done annually, regardless of if the aircraft is going to be sold, and are not a waste of money even if the aircraft is not sold.

1. Loose equipment and spare parts can be a part of the aircraft sale, sold separately, or retained. Since the Seller can decide what is being sold with the aircraft, a loose equipment list can be created in advance of the sale and anything that is not included can be priced and listed for sale separately or retained for future use.

2. When listing an aircraft for sale, an aircraft specification will need to be developed for advertising. Creating the aircraft specification and the photos of the aircraft can be done in advance of when the aircraft is listed for sale. Later, if it is decided that the aircraft will not be sold, most of these items can be reused whenever the sale happens.

3. The flight department or management company can review and organize the aircraft records to confirm they are complete and continuous.

4. A title search can be performed by an aircraft escrow agent. Upon receipt of the title search, the Seller can address any title issues in advance and thus avoid any closing delays.

5. If the aircraft has a registration number on it that the Seller would like to keep, a request to change the tail number can be filed before the aircraft is listed for sale. Depending on how long it takes to sell the aircraft, it is possible that the FAA will issue the 8050-64 prior to the sale, which would allow for a change in tail number prior to closing. Changing the tail number before the sale will allow the Seller to retain control over the preferred registration number and have the tail number available sooner for future use.

6. The Seller can schedule a pre-purchase inspection for the aircraft and oversee the inspection, then sell the aircraft with the inspection already completed. This allows the Seller to control the timing and the scope of the inspection. However, it does mean the Seller pays for the inspection instead of the purchaser. Though this may be a reasonable trade off to maintain control of the process.

7. Building the sales team in advance is also very helpful. The Seller can interview and decide who will broker the aircraft, oversee the inspection and handle the legal work for the transaction. When it is time to list and sell the aircraft, the team will already be in place and ready to move immediately.

On May 15, 2024, the FAA Reauthorization Act of 2024 was passed by Congress and has now been sent to the President for signature. The bill allocates funds in the amount of $105 billion and covers a period of 5 years. The bill itself is over 1,000 pages long but an important read because it will likely impact every American who travels by air. It reauthorizes the FAA, funding, and commercial federal excise tax but also includes work force development programs, fee free family seating, required refunds from airlines to passengers for cancelations and significant delays. It is arguably one of the most comprehensive bills to be passed by Congress in recent years. It is worth exploring everything that the bill contains, but if you don’t want to read all of the 1,000 pages, there are some great summaries available.

If I had to pick the provision I am most excited about, it would be a directive to solve the privacy issues we currently have in private aviation. I believe it is dangerous for people on private aircraft to be publicly tracked and am thankful that we did not wait for a devasting event to occur before action was taken.

Sec. 803. Aircraft Privacy requires the FAA to establish a process where a private aircraft owner or operator may request withholding the registration number and other similar identifiable data or information from the public for noncommercial flights, including preventing the display of certain information on the FAA registry website. In addition, the FAA is required to establish a program for aircraft owners and operators to apply for a new ICAO aircraft identification code. We can only hope that the process is developed in a way without any security gaps.

Below are additional provisions that I am excited about:

Sec. 804. Accountability for Aircraft Registration Numbers requires the FAA to review the process for reserving aircraft registration numbers to ensure equal opportunity for members of the public to obtain specific aircraft registration numbers. Unfortunately, over the years some companies have turned this into a for-profit business and with any luck this will help correct the problem.

Sec. 817. Eliminate Aircraft Registration Backlog requires the FAA to take such actions as may be necessary to reduce and maintain the aircraft registration and recordation backlog at the Civil Aviation Registry so that, on average, applications are processed no later than 10 business days after receipt. I am hopeful that this somehow not only include aircraft registration applications, but also the registration number change requests, which currently take a significant amount of time to process.

Sec. 101. Airport Improvement Program (AIP)/GA Airport Funding authorizes $4 billion a year for the FAA’s airport projects program. This number represents an increase from the current $3.35 billion annual spending level.

Sec. 750. Government Accountability Office (GAO) Study on FBO Fee Transparency directs a GAO study on the efforts of FBOs to meet their commitments to improve the online transparency of prices and fees for all aircraft and enhancing the customer experience for general and business aviation users. While this provision does not go as far as some hoped it would, at least it will start a review that could lead to corrective actions.

Sec. 831. GAO must initiate a review of charitable flights, including a review of all applicable laws, regulations, policies, legal opinions, and guidance pertaining to charitable flights and the operations of such flights including a review of the regulation that prohibits reimbursement for fuel costs for private pilots.

This reauthorization bill is a long time coming and while I am sure each of us would change a few things in the bill, it is amazing to have the reauthorization in place for the next five years. I look forward to the changes that will come from this bill and what will be accomplished in so many important areas.

As an aircraft owner, there may be opportunities to lease your aircraft on an exclusive basis. This can happen with a Part 135 charter company or to an individual or company who needs temporary access to an aircraft, usually because their aircraft is down for extended maintenance, or they are waiting for their own aircraft delivery from a manufacturer. When evaluating the possibility of entering into an exclusive aircraft lease, there are important factors that must be considered and addressed in the perspective lease.

Lessee Without a doubt, the most important aspect for an owner who is entering into an exclusive lease is the identity of the lessee. Extensive due diligence should be performed on the lessee to make sure they have the financial stability to make the payments under the lease and that they have the right aviation team to manage, operate and maintain the aircraft to the in-depth requirements of the aircraft owner.

Territory Since the aircraft is a movable good, it is important to understand which areas of the world where the lessee will be operating the aircraft. Is the area of use going to be restricted to the continental United States or is the lessee going to have the ability to use the aircraft outside of the United States? A larger geographic area of use has greater risk to the aircraft owner, since it may be difficult to locate and/or repossess an aircraft in the event of a default under the lease.

Insurance Prior to entering into an exclusive lease agreement, the agreement should be sent to the insurance provider to make sure they will provide the required coverage, including listing the lessee as an additional insured. The insurance broker may have valuable input regarding the insurance provisions in the lease and therefore a draft of the lease should be provided to the insurance broker early in the negotiations.

Delivery Conditions and Return Conditions Prior to the start of the lease, it is important to determine the condition of the aircraft so there is a benchmark to reference when the aircraft is returned. The Aircraft should be returned in the same condition it was received, but if there is no baseline condition established, the return conditions may be more difficult. A complete list of the return conditions should be included in the lease, along with the details of how and when the lease return inspection will be performed. The lease should include specific details as to (i) who will do the inspection, (ii) who will pay to move the aircraft to the inspection facility, (iii) who will pay for the cost of the inspection and (iv) who will pay to correct any inspection discrepancies. It is also important to stipulate if the inspection will take place during the last month of the lease or after the lease termination.

Duration The duration of the lease will determine how important other aspects of the lease are, including the return conditions. The shorter the lease, the less risk to the owner of the aircraft.

Tax Considerations Consultation with an aviation tax expert prior to entering into the exclusive lease is a must. Income will be generated by the lease of the aircraft and an understanding of how that income will impact the tax planning done for the aircraft when it was acquired is important. The lease should also identify the party responsible for any taxes that may be payable on the lease payments.

Recordation The lease of the aircraft can be recorded with the FAA registry and with the international registry (if the aircraft is of a certain size). A determination as to whether the lease should be recorded will be necessary and often depends on the duration of the lease, the relationship of the parties, and where the aircraft will be operated.

Use Presumably the owner of the aircraft is entering into the lease of the aircraft to generate revenue. The parties will need to determine if the lessee will pay a monthly lease rate, regardless of the number of hours flown, or an hourly lease rate. If a monthly lease rate is selected, the parties will also have to determine if there is a maximum number of flight hours that can occur under the lease before a higher lease rate applies. If the lease rate is hourly, will there be a minimum amount due to the owner during the term of the lease? Also, it is important to determine if there will be any other use restrictions, such as a minimum hour to cycle ratio to prevent additional wear and tear on the aircraft, no smoking on the aircraft, and/or hangarage guidelines away from the home base. In addition, if the owner of the aircraft financed the purchase of the aircraft prior to entering into the lease, the lender may require the owner to obtain the consent of the lender to the lease arrangement.

Cost Allocation The parties will also have to determine who is responsible for costs and the lease should make it clear how and when such payments are made. Property tax, use tax, landing fees, fuel, maintenance, insurance, annual subscriptions, and monthly maintenance program costs are just a few of the costs that need to be allocated between the parties. The lessee must provide its own crew and pay for the crew, however, the cost allocation for some other items may be negotiable.

Inspection and Audit Rights The owner of the aircraft needs to have the right to audit and inspect the aircraft to make sure the aircraft is being maintained in an acceptable manner. This should not just be a provision in the lease, but an item that the owner of the aircraft actually exercises. How often and the scope of the inspection and audit will depend on two main factors: duration of the lease and the relationship between the parties. Another tool that the owner of the aircraft can use is to require the lessee to provide read-only access to the maintenance records. The pedigree of the aircraft can be dramatically impacted if the aircraft is not maintained, or the records are not accurate. As a part of the audit process, the aircraft owner should periodically have a title search run at the FAA to ensure that no unpermitted liens are placed against the aircraft during the lease.

While allowing an aircraft to be used on an exclusive basis by another party can generate revenue for the aircraft owner, there are risks that should be considered before relinquishing control of the aircraft. A thorough and thoughtful exclusive lease agreement should address all relevant factors to protect the aircraft owner and the aircraft.

Over the past 12 months I have had a significant increase in calls with jet card holders, membership program participants and fractional owners who have received the upsetting news that their paid and contracted private aviation provider is unable to provide services. Recently we have seen Jet It, AeroVanti, and Set Jet cease operations along with George Jet pausing operations. Moreover, I am aware of additional aviation service providers who have not officially ceased operations but are currently not fulfilling their contractual requirements and are not providing any private aviation services.

Not only do the card holders, members and fractional owners suffer service disruptions and financial losses when these programs fail, but the private aviation industry suffers reputational damage. Support service companies such as fuel providers, maintenance repair centers and catering companies are often left unpaid by the failed programs. I have also seen cases where the charter operators who provide supplemental support for the failed programs are left unpaid.

Unfortunately, it can be very difficult to determine the financial wherewithal of a private company that is not subject to public disclosure requirements. As a result, some professionals in the industry have started to request additional financial information, even from privately held companies, prior to entering into an agreement with the aviation service provider. Until there is more financial transparency, there are still a few things that can be done to protect against loss:

1. Prepayment If prepayment for future flights is part of the provider’s business model, is the provider willing to segregate the prepayment amount into a separate account in the name of the customer?
2. Aircraft Are the aircraft in the program owned by the company, leased, or chartered on demand? If owned, title searches can be done at a cost of a little over $100, so you can see if any support service providers have filed liens for lack of payment. If aircraft are leased, will the service provider issue letters from the aircraft owners affirming that lease payments are being made in a timely manner.   If the program uses on demand charter, can the service provider supply a list of who their main charter suppliers are and a recent letter indicating that the charter operator is paid on time for the services it provides.
3. Restrictions Is the program set up to guarantee performance everyday of the year? If so, is that business model sustainable based on the number of customers and size of the guaranteed service area? Said another way, is the program providing guaranteed access to aircraft all over the country on a fleet too small to support such a venture?
4. Variable Costs Is the program set up so that variable costs such as fuel and insurance are passed onto the customer or is the program set up to be all inclusive, regardless of variable costs? If the program is all-inclusive, is that sustainable?
5. Leadership and Longevity Who are the leaders of the company? What is their understanding of private aviation and what is their reputation in the industry? How long has the company been in business? How long has the current leadership been in place? Is the company profitable?
6. Service Contracts For the aircraft being operated by the service provider, are there maintenance programs on the engines, APU, airframe etc. and if so, can the program provider furnish a letter that such programs are current and in good standing?
7. Financial Backing Who is providing financial support to the company and will that provider give a letter confirming any recently published financial support announcements? We have seen instances where providers have claimed to have lined up additional financing only to then learn the financing was never approved and distributed.  Another question to ask is, if the provider owns all of the aircraft and new aircraft are on order, where is the capital coming from to make the payments necessary for the new aircraft orders?
8. Lawsuits Is there any history of or pending litigation between the provider and the provider’s customers or suppliers? If so, those lawsuits may provide valuable information in selecting a provider and the court filings are public information. Will the provider represent that there is no pending litigation with customers or suppliers?
9. Product Selection Does the aircraft type offered make sense? Is the aircraft type selected built to fly the number of hours that the program provider plans to use them for? How often will the aircraft selected have to be down for major inspections and how often do those major inspections occur. Have the operating costs been properly calculated based on the planned utilization of the aircraft? Is there enough infrastructure available for the maintenance that will be needed on the aircraft?
10. Margin Does the offer seem too good to be true? Is it hard to understand how the service provider will make any money? Is the offer significantly lower than any other provider? All of these are red flags that should not be ignored.

Before sending a significant amount of money to any service provider, I recommend considering the ten items above. If you can’t get comfortable with these ten items, then perhaps a different program should be considered. If you do not have time to investigate the offer, then call a consultant or an aviation attorney and have them do the investigation for you. Recently, a client called me on a collections case for a charter broker who had not paid the charter operator. As soon as the client said the name, I knew we were in trouble. I think we will see more programs fail in 2024. Business models that were created at a peak of an aviation business cycle (such as during Covid), often do not have enough margin built into them to survive when we are not at a peak. With a bit of diligence on the part of consumers, failing companies (or those likely to fail) can be avoided.

 

When I began my career in the aviation industry 25 years ago, the “life cycle” of private aviation consumers was straightforward and predictable. They sampled private aircraft travel by chartering, moved into fractional ownership and then, eventually, whole aircraft ownership. Later in the life cycle, when the consumer’s travel decreased, they moved back into fractional ownership and eventually returned full circle to charter. Typically, a consumer would rely on a single provider until that provider could no longer satisfy their requirements.

For a variety of reasons, including the recent pandemic, this conventional life cycle of the private aviation consumer has drastically changed. There has been a revolution in private aviation options and platforms, creating many new alternatives that did not previously exist. This has led to a decrease in brand loyalty by private aviation users. Also, many first-time aircraft buyers have not flown privately for an extended period and move right into whole aircraft ownership. Many private aviation consumers have become much savvier and use a combination of multiple aviation solutions to fulfill their various travel needs.

WHY IS THIS IMPORTANT?

When a private aviation consumer finds herself in any one or more of the following scenarios: considering private aviation for the first time, looking for an alternative option to a current service provider, contemplating whole aircraft ownership, or resolving dissatisfaction with a current service provider, there is no standard answer as to what program or option(s) would be best. There are many factors to consider when selecting one or more private aviation products and the consumer does not often have the time to fully explore the multitude of available options. Here are some key considerations to keep in mind:

1. Number of hours flown per year

2. Destinations

3. Importance placed on the age of the aircraft

4. Length of flight segments

5. Ratio of roundtrip vs. one-way travel

6. Number of passengers

7. Peak time traveler or business week traveler

8. Acceptable service level (i.e. on time performance, working entertainment systems, interior condition and amenities)

9. Amount of time available to manage private travel solutions

10. Financial stability of service providers being considered

Given the complexities of the offerings in today’s aviation market and the limited research time available to most consumers, it is often advisable to hire a consultant who is well connected in the industry. The consultant can help the consumer consider the key factors mentioned above, explore the various options and propose the solutions that make the most sense for the customer’s travel profile, needs and wants. When selecting the consultant, it is important to confirm that they do not receive any referral fees or other types of compensation by recommending one program over another. The consumer must be sure the consultant is making their recommendation based solely upon their best interests.

It seems that almost monthly there is a new aviation program or offering that I am hearing about for the first time or a new permutation on an old program. It is sometimes exhausting to keep up with all the changes that are occurring in the marketplace. However, even if you read all the marketing literature, you can’t truly understand a program, the “enhancements” it offers and the performance of the service provided unless you place multiple users into a specific program and evaluate its success. That is why an experienced consultant can bring tremendous value to a consumer evaluating private aviation solutions. As I always remind my private aviation clients, please don’t simply select the program that your friend uses unless your friend has the exact same travel needs and service level expectations. If you do, you may be setting yourself up for a costly disappointment.

There is no longer a typical life cycle pattern for the consumer of private aviation. Take the time to evaluate all the options available (with the help of a trusted consultant) and chart your own path based on the solutions that best suit your unique travel needs.