A “Flight Department Company” usually refers to an entity that has no other business except operating an aircraft. No specific form of entity is required; it can be a corporation, partnership, or limited liability company. The most common scenarios differ in structure, but they typically involve:
A newly formed entity or subsidiary (“Newco”) designed to protect the principals or primary company against the risk of third-party liabilities. This Newco, whose sole reason is to own and operate the aircraft, purchases the aircraft, obtains insurance, hires the pilots, and operates the business flights under FAR Part 91. Contributions into Newco, or reimbursements to cover direct operating costs, are made.
This common scenario makes sense from a business law perspective because it concentrates all the assets and operations in one entity and isolates the associated risks from exposure to the principals or main operating company. From an aviation law perspective, this scenario defeats the very benefit it was intended to create.
Not only would the principals or main company be operating the aircraft illegally under this scenario, but they could also lose their insurance coverage, thereby completely exposing themselves to the full risk of liability.
The principals or main company is exposed to more risk because its subsidiary is not eligible to operate under Part 91 of the Federal Aviation Regulations. The subsidiary is providing flight services for compensation without the required air carrier certificate. The FAA will view this operation as an illegal charter operation which, if discovered, would subject the operator to up to $11,000 for each segment of an illegal flight. If a loss occurs, the insurer would likely deny coverage because the flight violated the FAR. Also, because the principals or main company had “operational control” of the aircraft, they become easy targets for liability.
Other common risks encountered concerning the flight department company trap include:
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- loss of federal tax exemptions or deductions
- triggering of federal excise tax obligations
- failure to pay mandatory state sales tax on the purchase of an aircraft or to pay the tax when it could have been avoided
- invalid aircraft registration (which can occur when the controlling officers of the company owning the aircraft are not U.S. citizens)
- unintentional defaults on loan covenants (this often happens in relation to prohibited charter operations)
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Both tax laws and the FAR are highly technical and are constantly changing. When business aircraft are used, the best practice for general counsel, financial advisors, or owners is to consult a business aviation attorney. A qualified business aviation attorney will be able to structure an aircraft’s ownership, and operation to (i) comply with FAA and DOT regulations, (ii) maximize tax deductions by, for example, taking Federal bonus depreciation and claiming Section 162 expenses, (iii) minimize taxes by, for example, utilizing common exemptions to state sales and use taxes applicable to aircraft, and (iv) minimize liability. Dealing with these four issues in isolation is fairly simple; however, creating a structure that addresses all of these issues requires an experienced attorney with a background in aviation transactions.”
If you are concerned about the flight department company trap or would like assistance with your aircraft ownership and operating structure, please call us at the number below or email us at Counsel@BizjetLaw.com.