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The Purchase of an Aircraft

At it's core, the purchase of a used aircraft is similar to the purchase of any other major equipment asset. Aircraft transactions do, however, present certain unusual challenges, requiring planning by the purchaser and some expertise. Experienced aviation counsel will be extremely helpful in ensuring that the contemplated transaction is efficiently completed with the end result of the least tax realization and compliance with all applicable regulations.

Although not comprehensive, listed below are ten important considerations in any aircraft acquisition.

How Will the Aircraft Be Used?

This is an obvious, but important question. Federal Aviation Administration ("FAA") regulations set forth strict requirements with regard to the use of aircraft. Depending on the anticipated use (as a carrier-for-hire, scheduled service, or private use), the owner will have to elect to fall within, and comply with, the applicable FAA regulatory scheme.

While most corporate owners will use the aircraft to carry directors, officers, clients and key employees around the country, there are still important issues to consider. Will the aircraft be used to service other subsidiary and affiliated entities of the corporation? Will it be made available to the government officials and political candidates?

These- and related- questions should be addressed early in the process to ensure the owner will be allowed to utilize the aircraft as they anticipated.

Who Will Own the Aircraft, and Who Will Operate It?

For tax, liability and accounting purposes, many corporations feel compelled to create a company with the sole purpose of owning the aircraft- often called a special purpose entity ("SPE"). Depending on how the aircraft purchase is financed, the SPE might then lease the aircraft back to the parent company or simply charge its affiliate entities for use of the aircraft. Alternatively, of course, the corporation or an operating affiliate may simply own the aircraft directly.

No matter what ownership scheme is chosen, important issues must be addressed. Structures that are favorable from a tax and liability perspective often run afoul of FAA regulations. For example, if the SPE will own the aircraft and make it available to operating companies, a lease acceptable to the FAA must be created to establish this right of use and to allocate operational responsibility. This lease must be filed with the FAA Civil Aircraft Registry. A more complex operating lease is necessary if one or more of the aircraft operators is not within corporate affiliated group.

Are You Considering Joint or Multiple Owners/Operators?

There are several ways for a single aircraft to be available for use by two or more affiliated operators. Joint ownership, fractional ownership, timesharing, non-exclusive leasing and charter are among the options, Each achieves roughly the same result, but each has a distinct set of regulatory, tax and operational characteristics.

When there are multiple users of an aircraft, both within a single corporate affiliated group, and outside that group, and independent company may be involved, and an aircraft management agreements will be required.

Tax Opportunities and Risk.

Possible the most important tax consideration (and where the biggest mistakes are made) is the application of state sales tax to the acquisition. It is easily managed, but only if carefully considered prior to the acquisition. For obvious reasons, any sales or use tax on the purchase price of the aircraft will be a costly- and possibly unnecessary- expense. Sales tax can be avoided though proper planning, as there are states with favorable sales/use tax laws with regard to the purchase of aircraft. Operating leases and finance leases (including sale-leasebacks) are not immune from these taxes. Most states have lease and use taxes that close this loophole. It may surprise you to learn that almost every state reviews the FAA's records in order to find and assess sales and lease/use taxes on aircraft transactions having a nexus in their state.

There are additional tax considerations as well to be considered during the ownership of the aircraft, including fuel taxes, document ("stamp") taxes which can be moderated or avoided with proper structuring and documentation.

Aircraft trade-up transactions are excellent candidates for tax-deferredd "like-kind" exchanges under Section 1031 of the Internal Revenue Code. This allows an aircraft owner to defer any taxable gain upon the sale of the depreciated aircraft, by rolling basis into the newer aircraft.

Beyond Kicking the Tires

A great deal of the value in an aircraft (particularly a used aircraft) is a matter of documentation and law. Are there remaining warranties, and will they be assigned? Are the engines under a manufacturer's service program? And if so, is that program fully paid- up and assignable to the new owner? Has the aircraft been updated with all manufacturer service bulletins and airworthiness directive? Are all logs and documentation in English and otherwise complete by FAA standards? These issues are particularly acute when an aircraft is being moved from a foreign (and foreign regulatory scheme) to U.S. registry. There may be equipment requirements and airworthiness certification hurdles to be cleared. This must be factored into the inspection process, and covered by the applicable transaction documents.

Do Not Do the Deal on the Back of a Napkin.

The "courtship" between a seller and buyer requires a balance of caution and trust. Each step in the transaction requires a significant investment- the cost to ferry the aircraft to an inspection site, the cost of test flights, the cost of the inspection, and if applicable, the obligation to remedy discrepancies discovered during the inspection. Allocation of these costs and the buyer's "walk-away" rights must be crystal clear and reflected in written signed documents. Typical documentation starts with a term sheet or offer letter, escrow agreement, discrepancy list and definitive purchase document, each of which must reflect the specific transaction. Aircraft transactions always involve large numbers, and as a result, a deal gone sour is more likely to result in litigation.

The Timing and Logistics of Closing and Post-Closing

For several reasons, the purchase of an aircraft requires more planning than most equipment acquisitions. Importantly, the aircraft will need to be positioned to a tax favorable location for the closing. Additionally, the practices and prcedures of the FAA are an important factor. The FAA requires that all documents affecting title or operation of the aircraft be filed with the FAA Civil Aircraft Registry (such as bills of sale, mortgages and leases) in Oklahoma City prior to any use of the aircraft. Such documents must also contain original signatures(no fax or electronic filing is permitted yet). Additionally, the FAA will require proof of citizenship of the owner of the aircraft and may also examine certain corporate management documentation to establish citizenship.

If properly coordinated, you should be able to engage in full, domestic operation of the acquired aircraft immediately following closing, and international operation within a few business days thereafter.

Financing the Acquisition

More often than not, the aircraft used as security for the loan. Aircraft financings present some unique issues, particularly with respect to the creation and recordation of the mortgages on the aircraft. The mobility of the asset, risk of casualty, potential liability and rapid depreciation require loan and mortgage documents that consider and address these nuances.

Getting What You Paid For- Clear Title

Just like any other piece of property, it is important to acquire clear, unencumbered title. This will be a pre-requisite to financing. Experienced aviation counsel can ensure that you take (and, as applicable, give) clean title to the aircraft, including identifying and clearing liens recorded federally and on the state level.

Clouds on the title can arise without the owner's knowledge or consent, and unlike liens on other properties, liens on aircraft and engines are recorded perpetually, until terminated. You often cannot remove an aircraft from a national registry (e.g. for importation) unless all recorded liens are cleared. Moreover, a foreign registered aircraft or engines being re-imported and put under U.S. registry will reacquire liens that may have existed at the time of it's exportation.

Ownership by Non- U.S. Persons or Entities

U.S. registration of an aircraft requires the owner to be a U.S. citizen (individual or corporate). Multinational or foreign persons or entities can secure the economic benefits of ownership by formation of ownership trusts or through voting agreements giving corporate control to a U.S. person or entity. A suggested above, a proper lease would be required to reflect the relationship between this trust or entity and the person actually operating the aircraft.