AERLEX LAW GROUP regularly publishes articles and presents seminars on aircraft ownership, leasing and operation for clients, C.P.A.s, bar associations, business managers, and aviation groups. Our articles and seminars assist such counselors and advisors in their due diligence efforts on behalf of their clients and customers.
This section of the website repeats some of the most Frequently Asked Questions put to us by clients, their other advisors, and the public. These questions generally fall into one or more of the following categories:
- How does "Fractional" work?
- How is fractional different from chartering or time sharing?
- What does fractional ownership cost?
- Are contract terms and prices negotiable?
- Who are some of the typical buyers of fractional interests?
- Who are the major sellers of fractional interests? (The operators or program managers)
- Can fractional interests be bought and sold?
- Can a fractional ownership acquisition be financed?
- What is a fractional owners responsibility for the actions of others?
- What are the tax implications for mixed business and personal use?
- Other frequently asked questions
Q: What are the distinguishing characteristics of Fractional Ownership?
A: Fractional ownership combines the ownership, usage, and maintenance of both a single airplane and a fleet of many airplanes among the many owners and lessees. Fractional ownership programs operate via a series of intricate agreements between the aircraft owners or lessees and the operator, all of which meet the varied requirements and restrictions of the Federal Aviation Regulations (“FARs”). These agreements allow one to purchase or lease a fractional interest in a single aircraft and receive on demand availability to that airplane or another from an entire fleet of aircraft on relatively little advance notice. Usage charges are based on a set “monthly management fee” reflecting fixed costs, and another fee based on hours in the air, beginning at any departure point you wish, rather than from an airline or charter operator’s base of operations. Each fractional owner has a depreciable asset on the books for tax and financial reporting purposes.
Q: What if I need my airplane and it is not available because some other fractional owner is using it?
A: If your aircraft is not available, another aircraft will be taken from the fleet operated by the operator under a "master interchange” or “dry lease exchange” agreement, which provides that any owner of the fleet may “dry” lease another's aircraft (i.e., without crew services, which are provided by the lessee under its agreement with the manager). If another aircraft is not available from the interchange or exchange fleet, the operator will charter a third party aircraft to provide "supplemental lift".
Q: Will I be able to use my aircraft (or another) anywhere in the United States? How about Canada, Mexico or Europe?
A: In general, you will be able to use your aircraft anywhere in the Continental U.S. Your ability or inability to use your aircraft or hours outside the Continental U.S. in Alaska, Hawaii, Canada, Mexico or Europe will depend on the operator and type of aircraft you select and the deal you negotiate.
Q: What are major differences between Part 91 and Part 135 of the Federal Aviation Regulations (“FARs”) and how does that affect fractional ownership?
A: Greatly oversimplified, Part 91 of the FARs applies to a aircraft operated by an individual or company which is under their "operational control" during recreational use, or some business other than aerial transportation. Part 91 operation can be called “private carriage.” By contrast, FAR Part 135 regulates “common carriage” operations – i.e., the business of “holding out” aerial transportation services to the general public as a business in its own right.
Historically, Part 135 common carriage operations were more heavily regulated than Part 91 flights, in order to protect the general public. For example, Part 135 carriers operated under runway length, weather, visibility, and crew duty time restrictions not applicable to private carriage operations. Part 135 operators were also subject to fairly rigid procedural and documentation obligations, including the maintenance of “operations specifications” defining and controlling all phases of aircraft operation.
This changed somewhat with the promulgation of FAR 91K governing operations on behalf of fractional owners. Before February 17, 2005, fractional programs had operated under a series of regulations at FAR 91.501 governing private or “noncommon carriage”, which were intended to authorize turbojet flight operations of relatively limited scope. Because the fractional management companies had far outgrown not only such limited operations, but also most Part 135 operators, the FAA and industry stakeholders developed the new regulations at Part 91K (14 Code of Federal Regulations 91.1001 et seq.). “91K” requires fractional managers to maintain Part 135-like procedures and documentation, which most fractional managers had already implemented in a search for business aviation’s “best practices.”
In layman’s terms, Part 91K might be considered a kind of block charter arrangement, with a sale and leaseback to the flight services provider – with one critical difference. In most fractional operations, the owner is deemed to be in “operational control” of the aircraft.
Q: What do the FARs mean by "operational control"? Isn't that really a fiction? After all, the aircraft is maintained by a third party and the pilots are also hired and paid by a third party. The owner’s airplane might not even be available for the flight. In what sense does an owner exercise "operational control" of a flight?
A: FAR 1.1. defines “operational control” as “the exercise of authority over initiating, conducting or terminating a flight.” A fractional owner exercises such authority over initiating and terminating a flight – she decides when and where the aircraft takes off, and when and where it lands. These decisions comprise much of the authority over flight operations, and define many of their risks; most aviation accidents occur just before, during or after takeoffs and landings. Hence, Part 91K imposes a measure of “operational control” and liability for flight operations on the fractional owner.
Some view such "operational control" as somewhat coextensive with the “possession, command and control” indicating ownership of an asset for tax purposes such as depreciation, or Federal Excise Tax on transportation by air. Hence, there are good reasons for maintaining that fractional owners exercise some operational control over their aircraft, and it should not be considered a legal fiction.
Q: What are the principal differences between chartering and fractional programs?
A: There are many. To summarize them briefly, in fractional the buyer owns an asset on its books which qualifies for depreciation and other tax benefits, and which may have value at the end of the (typically, 5 year) program agreements. When chartering, the chartering party only has a business expense deduction (if eligible), and a canceled check or credit card charge at the end of the flight.
Charter agreements rarely guarantee the availability of aircraft or crew, unless the itinerary is settled well in advance. In fractional programs, aircraft and crew availability is guaranteed for almost any itinerary, on relatively short notice.
Tax depreciation for aircraft operated in a fractional program is typically 5 years, but it is 7 years for aircraft placed in a charter arrangement with a Part 135 operator.
In chartering there are usually explicit charges for "deadhead" or ferry time needed to get an aircraft to or from the charter operator's base for a flight by the customer. In fractional programs, flights to or from customer flights are nominally at the fractional operator’s cost, although they are effectively hidden in monthly management and hourly fees.
Charter flights are usually operated under the “common carrier” rules of FAR Part 135, which can involve differences in available airports, weather approach procedures, crew duty time rules, and security procedures. Passengers on most Part 135 flights are required to carry picture ID. Passengers on most (but not all) Part 91 or 91K flights are not.
Q: How is fractional ownership different from time sharing?
A: Typical aircraft time sharing arrangements involve the usage of a single aircraft or small pool of aircraft, which is subject to prior or conflicting usage by other time share participants. Time sharing arrangements typically don’t provide on demand availability. FAR [i.e., 14 Code of Federal Regulations] 91.501(c)(1) defines a Part 91 time sharing agreement as a wet lease (i.e., with crew services) by an aircraft owner to a lessee, with specified permissible charges. Fractional ownership is typically regulated by FAR 91K at 91.1001 et seq., and is not subject to such economic regulation.
Q: Is there a reason why the operators offer fractional shares of an airplane, rather than incorporating an aircraft and selling shares in the corporation?
A: Yes. The primary reason is to avoid the problem of the ownership certificate being deemed a security under various Federal and state securities laws. However, there is also restriction on this type of structure at FAR 91.501(b)(5), which essentially prohibits the formation of a "flight department company” with no business other than providing transportation by air. Theoretically, syndicating or incorporating an airplane can lead to FAA and/or DOT civil penalties for unlicensed charter operations, especially if the organizers or participants “hold out” either membership in the company or flight services to the general public by any form of solicitation or advertising.
Q: If I don't need the depreciation, or don't want to show aircraft ownership on the financial statements, can I lease a fractional interest instead of buying one?
A: Yes, you can sometimes lease a fractional interest. For example, the Marquis Jet Card program is structured as the sublease of a fractional interest in a NetJets fractional lease. Fractional companies will also lease you an interest on an interim basis until they have a share for purchase in inventory. However, most fractional companies do not prefer fractional leasing because profit margins on leases tend to be more narrow. In addition, various equipment lenders and financiers offer finance, operating and “synthetic” lease products (under a synthetic lease, the lessee retains the tax benefits of ownership). How such a lease appears or does not appear on your books and financial statements depends on IRS rules and regulations.
Q: If I don't need the depreciation or lease expense, can I try Fractional Ownership at a lower cost?
A: Yes. Most fractional managers now offer “jet card” programs that allow you the opportunity to “test drive” a fractional interest at a reduced initial commitment cost. For example, Marquis Jet Partners can provide as little as 25 hours on a fixed cost basis without you having ownership, but having many of the advantages of the NetJets program.
Q: Who supplies the maintenance and the pilots?
A: The operator is obligated to maintain the aircraft and to provide two pilots for each flight. If the aircraft is damaged due to the negligence of the operator or another owner, or is undergoing routine periodic maintenance, the operator is still obligated to provide you with another from the fleet or charter one for you.
Q: What does it cost to buy into a program and what do I get for my money?
A: The purchase price of buying into a fractional jet ownership ranges anywhere from around $400,000.00 for a 1/16th interest in a Beechcraft 400A small jet to about $22,000,000.00 for a one half interest in a Gulfstream 550 corporate airliner. Monthly management fees for the same aircraft types and shares would range from around $6,500.00 to over $130,000.00. Hourly fees may range from $1,200.00 to $3,700.00 per hour, exclusive of fuel and other surcharges, which vary by program.
For a typical mid-size jet, such as a Hawker 800XP, Lear 45, or Citation Sovereign, the purchase price of a 1/8 share would be between $1,200,000.00 and $2,500,000.00, with monthly management fees of between $15,000.00 and $19,000.00, and hourly fees of between $2,200.00 and $2,700.00, exclusive of fuel surcharges. The owner would be entitled to 100 hours per year or more of flight time, depending on the program manager.
All pricing information above is estimated, based on variations between new and used aircraft, mid-2007 market pricing for same, and abridged program terms and conditions. Please conduct your own pricing research, or contact us for further, more specific information.
Q: Is there a cheaper way to try Fractional Jet Ownership?
A: Yes. As mentioned above, all the major fractional operators now offer “jet card” programs, which sometimes allow the balance for unused flight hours to be allocated towards the purchase price of a fractional share.
Q: How will my hours of usage be calculated? Do I pay for "deadhead" or ferry time to pick me up at my destination?
A: In most programs, you are charged for hours in one tenth hour increments, from 6 minutes before "wheels up" to and including 6 minutes after "wheels down" to account for fuel and other charges incurred while taxiing. You are not normally charged for ferry within the Continental U.S. or any other point within the “prime service area”, which varies slightly by operator. There may be special charges if you wish to keep the aircraft on the ground waiting for you, rather than allowing it to take off for use by another customer.
As a purely practical matter, the costs of deadhead or ferry time are absorbed by program monthly and hourly fees, and the actual physical depreciation of your aircraft at the end of the term of your agreements, when it is repurchased by the manager.
Most programs charge ferry fees to deliver or return aircraft to or from flights to points outside the Continental U.S. These fees are charged for flights to the nearest international airport within that “primary service area.”
Q: Is there a monthly cost?
A: Yes. In addition to hourly usage costs (including surcharges for fuel cost increases), there is typically a monthly management fee reflecting aircraft fixed costs, such as maintenance, hangaring, insurance premiums, etc.
Q: Are there any economies of scale in buying fractional interests?
A: Sometimes. Some programs charge a “premium” for a “stand alone” 1/16th share – i.e., the costs are not one-half those of a 1/8th share in the same program.
Q: How negotiable are fractional deal terms?
A: Some provisions are very negotiable and some are not negotiable at all. What is or is not negotiable varies by aircraft, buyer, operator and prevailing market conditions. Most operators track deal concessions by some form of internal pricing or cost controls, and prohibit sales personnel from exceeding such guidelines. Nevertheless, all programs make efforts to fit a customer’s economic circumstances, special needs, and/or “mission profile.”
Q: Do the purchaser or the purchaser's advisors need assistance in the purchase of a fractional interest?
A: Yes, unless the buyer and its advisors are sophisticated in matters of aviation and aviation law and have experience in negotiating aircraft transactions. Most buyers, even if sophisticated, will want help on what amounts to a multimillion dollar, multi-year commitment. Most other buyers need help in deciding which is the best aircraft for their existing and anticipated needs and then deciding how to acquire flight hours. Finally, fractional aircraft operation presents novel liability, corporate, tax and insurance issues that a buyer’s usual advisors may not be familiar with.
Q: How complicated is the paperwork in buying a fractional interest?
A: Very. Fractional ownership represents a tenancy in common in a highly mobile asset which requires significant capital, infrastructure and procedure to operate and maintain. Moreover, aviation is a highly regulated industry; fractional ownership is subject to Federal Aviation Regulations that may seem arcane to the uninitiated.
None of this is beyond the expertise of reputable aircraft or heavy equipment operators, their counsel, or their advisors. Nevertheless, it is a highly specialized field that can be confusing to those unfamiliar with it. On occasion, Aerlex has been asked to sit “second chair” to other attorneys (including marquee firms) for the sake of their fractional transaction clients.
Q: What was the NBAA White Paper, and why was it important?
A: The National Business Aircraft Association (NBAA) hired an independent consulting company to study whether the use of business aircraft resulted in benefit to the shareholders of the company. The extent and findings of the study, published in 2001, were beyond any previous expectations.
The study covered a period of 7 years, from 1992 through 1999, and 335 companies which were continuously part of the Standard and Poor's 500. Of the 335 companies, 214 regularly used business aircraft and 121 did not. There was a 343% Return on Equity (ROE) in those companies which regularly used business aircraft, compared to only 177% among those which did not, a difference of 166% over the seven year period. Similarly, the companies that used business aircraft showed a superiority in asset utilization and EBITDA.
The central finding of the White Paper was:"...business aircraft can make a substantial difference in how a company performs its mission, in many cases generating significant gains in the drivers of shareholder value."
Q: What type of individuals (as opposed to companies) typically benefit from fractional programs?
A: Business, entertainment and sports figures all find fractional programs a useful transportation tool. Fractional has been described as “the ultimate upgrade” from First or Business Class. Athletes, entertainers and other VIPs typically need privacy and security when they travel, and frequently are on itineraries not easily served by airlines. Although charter contracts can satisfy such needs, they usually carry transactional complications and costs that make them inconvenient compared to a long term arrangement with a single flight services provider.
Q: What other characteristics do buyers of fractional ownership interests exhibit?
A: There probably are as many reasons for buying fractional ownership interests as there are buyers. However, after assisting so many famous and not so famous companies and individuals, and their attorneys and agents, we have been able to identify some of the general characteristics of buyers.
In too many cases this is virtually their first experience with private air transportation. They may have taken a few charter trips or fractional demonstration flights, but they are not familiar with the costs and complications of aircraft operation or ownership. Fractional ownership can be a good way to test the waters and explore private air travel without incurring the costs and commitment required to buy, operate, maintain and staff a whole aircraft, and the organization necessary to enable it.
That said, fractional owners are typically sophisticated, highly scheduled investors, whose itineraries typically change on relatively short notice. Because their time is precious, leveraging it justifies the investment and expense of private air travel.
Q: Where do I look to buy a fractional jet interest? (Who are the major players?)
A: Until fairly recently, there were 4 major players: NetJets (owned by Warren Buffett's Berkshire Hathaway); FlexJet, a subsidiary of Bombardier, which manufactures FlexJet’s aircraft; Flight Options, which formerly dealt only in used aircraft, but which now operates used and new aircraft manufactured or maintained by its owner, Raytheon; and CitationShares, a joint venture between Cessna and a charter services provider.
Another company, Avantair, offers fractional interests in the Piaggio Avanti turboprop. There are also a number of smaller, regional fractional ownership providers, such as New England-based PlaneSense, offering shares in the Pilatus PC-12 turboprop.
Most (if not all) of the national and regional fractional operators or programs started before the implementation of 91K, and were “grandfathered” into compliance by the FAA. 91K had the (perhaps unintended) effect of making fractional program startups slightly more difficult. As of this time, most high profile business aviation startups seem to be gravitating towards “air taxi” models involving Part 135 operation of “very light jets.”
Q: Which companies sell what types of aircraft?
A: In general, FlexJet only sells interests in new or used Bombardier aircraft including LearJets and Challengers. NetJets sells new and used fractional interests in the Cessna Citation series, Hawkers, Falcons, Gulfstreams, and Boeing Business Jets. Formerly a dealer in a wide variety of used aircraft, Flight Options now sells only new and used fractional interests in Hawkers, Beechjet 400As, and the Embraer Legacy. CitationShares sells new and used shares in the Cessna Citation series. Avantair sells only shares in Avanti turboprops, although it has been reported to have purchase options on a number of Embraer Phenom “very light jets.”
Q: Is it safe to purchase or use a "used" jet?
A: Yes. The manufacture and maintenance of jet aircraft is very heavily regulated. Most of the thousands of parts of the aircraft, its engine and electronics must be inspected, overhauled, and replaced at specified usage intervals and times. The FARs require detailed log books be kept by the owners, companies and experts who work on any part of the aircraft, which are inspected regularly by FAA inspectors, who often conduct unannounced spot or “ramp” checks.
As a result, modern business aircraft should have a useful life exceeding 15,000 hours and 10 years. They can operate for decades without significantly compromising safety. Only commercial airliners, military aircraft, or purpose built agriculture or “bush” aircraft are more robust.
Q: How big are the fractional fleets?
A: NetJets has a fleet of approximately ____ planes with approximately ____ on order. FlexJet has a fleet of approximately ____ planes with approximately ____ on order. Flight Options has a fleet of approximately ___ planes with approximately ____ on order. CitationShares has a fleet of approximately ___ planes with approximately ____ on order.
Avantair has a fleet of approximately 25 planes with approximately 78 on order.
Compare this to the fleets of American Airlines (____ planes), United Airlines (____ planes) or Delta Airlines (___ planes) (2006 figures).
Q: Are aircraft other than jets available for fractional ownership?
A: Yes. Although most fractional programs involve turbojet powered business aircraft, fractional or joint ownership interests are also available in helicopters, turboprop and piston aircraft.
Q: Can one lease or charter fractional hours from a fractional owner without being an owner or making a five year commitment?
A: Yes. As mentioned elsewhere on this site, each of the major fractional providers has a “jet card” program of some kind which allows the lease or sublease of flight hours with less of a financial commitment.
Q: Can we sell our fractional interest?
A: Yes. Fractional shares can usually be sold to an affiliated individual or entity with few restrictions other than similar creditworthiness and/or “mission profile.” However, because a share represents a tenancy in common with many other owners, fractional managers typically prohibit any other sale unless it is approved by the manager (for example, with regard to the buyer’s creditworthiness and mission profile). That being said, fractional shares are occasionally sold through brokerage services.
Any sale of a share, even a sale back to the program manager, may be subject to brokerage or transfer fees paid to the manager. These fees can be substantial (for example, 7% or more of the share’s appraised value), especially on early exits from the program (for example, at less than 24 months from inception).
Q: If the prices of aircraft go up, can I make a profit on the sale of my fractional interest?
A: It depends what you mean by "profit". Historically, the physical and price depreciation of business aircraft has outpaced inflation and market speculation. Business aircraft have rarely, if ever, appreciated over time. Although some aircraft hold their value very well, others do not.
If you define "profit" as getting more for your fractional interest than the remaining book value after 5 years of depreciation, then the answer is often "yes." Fractional owners can be subject to depreciation recapture at the end of their contract terms, if they do not roll their tax basis in the asset over into another fractional interest.
Q: If I sell my fractional interest back to the manager, how do we calculate what credit I will receive?
A: The agreements usually provide for resale to the manager at “fair market value” (“FMV”), subject to some form of third party appraisal in the event of a dispute. A common provision is a three party appraisal, with one appraiser chosen by the buyer, one by the manager, and the third by the other two.
In addition, if the owner is not trading in the share for a “roll over” into another share, the manager will typically charge a “brokerage” or “remarketing” fee on the repurchase. Brokerage fees typically run 4-7%, and can exceed 10% in cases of early program exits, or breach of contract.
These brokerage fees are controversial, even within the industry. Although some fractional managers appear to use them as a hidden profit margin, the use of brokerage fees can be justified as a hedge against unexpected aircraft depreciation and program overhead and inventory costs.
Q: Can I sell my fractional interest to a third party?
A: Maybe. Generally, the third party would have to be approved by the operator. Various factors would be considered including the purchaser’s financial, intended use, geographic location, and “mission profile”.
Q: Can one get financing on the purchase or lease of a fractional interest?
A: Yes. Most of the major fractional ownership programs have a direct or second party financing program. However, these have stringent requirements, including creditworthiness and financial review and reporting. In our experience, a reputable private or merchant bank with a prior relationship with the buyer can provide an alternative to program financing.
Q: As a co-owner does the fractional owner have responsibility to third parties for the negligence of another co-owner?
A: The insurance provided by the aircraft management company typically contains a "breach of warranty endorsement" protecting one owner from claims brought by third parties for negligence by the management company or other owners.
Q: Is it all right to set up a subsidiary, affiliated corporation or special purpose entity to own and operate the aircraft, for liability reasons?
A: Yes, this is a common ownership structure. However, the company created should be involved in a line of business separate from providing air transportation, such as consulting, logistics or asset and risk management in the same business as the parent, and/or its affiliates. Companies with no business purpose other than owning and operating aircraft are subject to regulation and certification by the FAA. In addition, if such an affiliate is reimbursed by its parent or affiliates, such as beyond its actual operating expenses, it may be deemed a de facto charter operation and be subject to FAA civil penalties.
Q: What sort of insurance is typically provided?
A: The operator will ordinarily carry large amounts of insurance on the aircraft (typically full hull value and hundreds of millions of dollars for liability, depending on the management company and aircraft type). War and terrorism related coverage was sharply limited by the events of September 11, 2001, and most programs now index increases in their monthly management fees to insurance premium boosts.
Q: Does the purchaser need an additional insurance policy?
A: That depends on the buyer’s tolerance for risk. There have been few, if any, high profile fractional accidents. Without such a claim history, there is little basis for either trust or doubt in the adequacy of fractional program insurance.
In the past, excess or supplemental coverage was freely available from supplemental carriers, particularly in the London reinsurance market. That coverage became harder and more expensive to procure after 9-11. However, the market is rebounding, and it is still available, sometime from the same carrier which provides the program manager’s “fleet” policy.
Q: Can I rely on the operator's coverage information?
A: Any fractional owner should get a copy of the operator's policy (not just a certificate of insurance) and confirm that typical users of the aircraft will be covered as named or additional insureds. The policy should be reviewed by an insurance agent or broker to be sure that the purchaser has optimum coverage. Note that much commercial insurance (such as Commercial and General Liability, Directors’ and Officers’ or Errors and Omissions) excludes the risks of aircraft operation. Owners may well consider such issues before buying fractional shares.
Q: What are the tax differences between owning a fractional interest and owning a 100% interest?
A: Very few. In general, the benefits and burdens from a tax point of view are exactly the same for ownership of a whole or fractional interest in and aircraft. There may be slight differences in Federal Excise Tax (“FET”) for “taxable transportation by air” provided to affiliates on a wholly owned aircraft, if they are not members of the same “affiliated group.” Most fractional programs charge FET on the hourly fee.
There can be other differences in owning whole aircraft, especially in state sales, use and/or property taxes for locally based aircraft, or aircraft operated under charter management. Generally speaking, operating a whole aircraft or a fractional share should be the same for most Federal tax purposes.
Q: If a fractional interest is used essentially for business and incidentally for personal use, how is the personal use taxed for income tax purposes?
A: Formerly, the individual would include an amount in personal income as a fringe benefit calculated under a formula known as “the SIFL rate” (for Standard Industry Fare Level) which is revised periodically by the IRS. This tax treatment was extremely beneficial to the individual as opposed to allocating actual aircraft operating expenses.
However, as of 2004 Congess passed the Jobs Creation Act, which disallowed deductions taken by aircraft operation to the extent of personal use by “specified individuals” or employees. Personal use can also result in SEC fringe benefit valuation and reporting issues for publicly owned companies.
Q: What exactly is SIFL and where can I find the published rates?
A: See above. SIFL stands for Standard Industry Fare Level. It is periodically recalculated by the Department of Transportation’s Office of Aviation Analysis and republished by the IRS (for example, by an Internal Revenue Bulletin) pursuant to Internal Revenue Code Regulation 1.61-21(g). This usually happens twice a year, in March and September. It is then republished by various professional or tax services, such as the National Business Aviation Association (“NBAA”), or the aviation press. Internet searches (for example, “SIFL” and “2006”) will usually bring up the most recently published rates on one or more websites. Searches on the IRS website will usually bring them up as well.
The SIFL rate is more related to the cost of a airline ticket than the actual out of pocket costs of operating a business aircraft. The use of SIFL rates normally provides a significant tax break to company officials who use its airplane for personal and family usage.
Q: Will the purchase or sale of a fractional interest be subject to state sales or property taxation?
A: Most states have looked to where a whole aircraft is delivered (for example, where title passes) and/or it is principally operated, maintained, or hangared, and/or where it is located on a given date, or given length of time for purposes of state sales, use, or property taxation. Approaches vary from state to state.
Since aviation is virtually inseparable from interstate commerce, Federal supremacy and the interstate commerce clause of the Constitution dictate that instrumentalities of interstate commerce are to some extent exempt from state taxation. States vary in their approach to this issue as well. For example, many have “fly away” exemptions – passage of title in such a state will be exempt from sales or use tax if the aircraft is immediately removed from the state for use elsewhere. Others do not tax an airplane if the owner and/or operator(s) can show it is not based or used in that state, and/or operated primarily outside that state in interstate commerce.
Because fractional shares are rarely located in any particular state for any length of time, and are usually used in interstate commerce, few states have successfully pursued sales or property tax claims against fractional owners. However, fractional owners are sometimes presented with state tax assessments, and forced to pursue exemption or appeal proceedings. Accordingly, it is always wise to take common sense precautions against state taxation, such as maintaining registration out of state, having title pass out of state in a sales tax free or “fly away” state, and maintaining a clear claim to business usage in interstate commerce.
Q: Can we take a test flight?
A: Yes, you can. “Demo” flights are a common sales tool, but don't expect them to be free. Costs vary by operator and aircraft type, and the length of the trip. The FARs allow fractional companies to charge either a fair market value charter rate, or twice the hourly fuel cost of the trip, plus expenses.
Q: If the purchaser cannot use all its hours and wants to lease or charter the aircraft to third parties, can it be deemed to be an unlicensed air carrier or charter broker even if the chartering is only for small periods of time?
A: Yes. One must be very careful; the FARs applicable to permitted reimbursement arrangements can be very complicated. One cannot “hold out” or advertise flight time for sale under any circumstances. Generally speaking, cost reimbursement is permitted only from direct parents or subsidiaries of a company or their officials, employees and guests, only in the course of the company’s business, and reimbursement should not exceed direct out of pocket costs. Although FAR 91.501(c)(1) also permits the lease of an aircraft with crew under a “time sharing agreement” allowing a charge of two times direct fuel costs, plus miscellaneous expenses, this can be cumbersome to calculate, and/or less than direct cost. Time sharing agreements are only used occasionally by fractional owners.
One program (Flexjet) allows its owners to contribute excess hours into a “pool” to be purchased for use by other owners. Otherwise, fractional companies have been slow to embrace innovations in selling or trading hours. They are not only wary of potential FAA violations, but have no interest in encouraging secondary trading of flight hours.
Changes in tax law and SEC reporting have created some pressure to liberalize permitted reimbursement arrangements. For example, some companies and executives would prefer reimbursement for trips on company aircraft, rather than imputed income, SEC disclosure of fringe benefits, and limitation of aircraft deductions. Some fractional managers allow owners to elect the FARs under which a flight is operated – either Part 91K, or 135. Flights under 135 may not be subject to the same reimbursement limitations as Part 91 flights. However, the company receiving the reimbursement still cannot be a “charter broker” or agent of both the fractional manager and the end user.
Q: Can a foreign individual or company own a fractional interest?
A: By law, only statutory “citizens of the United States” may register ownership interests in U.S. civil aircraft. It is possible for a foreigner to have the benefits of fractional ownership via complex corporate planning or registration by a trustee “citizen of the United States”, but this requires some familiarity with the FARs and FAA registration procedures.
As an unintended consequence of the rules regarding aircraft registration only by statutory “citizens of the United States”, some US-organized entities do not qualify. For example, partnerships with corporate partners, corporations or LLCs owned by family trusts (rather than the trustees, on behalf of the trust), or companies with significant foreign ownership or officers may not be statutory “citizens of the United States”, no matter where they were organized, or may be located.
Q: Is it true that fractional ownerships have been around for a long time?
A: Interestingly enough, the concept of fractional ownership as a means of transportation ownership is hundreds of years old. In the 1500s and into the 1800s it was common practice for owners of trading vessels to use fractional ownerships. Ships were loaded with trading goods and sent out to sell or trade those goods for items that could be sold on return. On liquidation of the goods acquired, the profits would be divided. A certain fraction would go to the Captain and crew of the ship, and the balance would be divided among the owners of the ship. This would be done on a voyage to voyage basis. The term moiety means a one half interest. A moiety of a moiety was a 1/4 interest. A moiety of a moiety of a moiety was a 1/8th interest and so on. Trading ship ventures were commonly sold in 1/64th shares. A merchant might buy anywhere from 1/64th to 32/64ths of the ship's profits and losses. Even in the 21st century, many national ships registries record ownership in 1/64ths. Today in the sale of fractional jet ownership interests, the common ownerships range from 1/16th to1/2 with a few operators offering 1/32nd interests as well.
Q: Can I fly the aircraft if I am properly licensed and certificated?
A: In theory, yes. As a practical matter, no. Under the agreements, only the operator can provide pilots. If you can meet the stringent requirements of the operator in terms of experience etc. (not likely), in theory you could pilot the aircraft.
Q: If I buy an interest, will I have any license obligation to the FAA or any other government agency?
A: Yes, you will have to register your interest as a fractional owner with the FAA.
The above information as to prices, laws and economic conditions is believed to be accurate, based on information received from sources deemed to be reliable. No warranty or representation can be made as to the accuracy of any of the above information. Conditions change from time to time and the reader is advised to get professional assistance before making decisions.