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.