Plane & Pilot Magazine’s 2012 Top Aviation Attorneys

By Stewart Lapayowker | October 4, 2012
We are excited to be appearing in the November issue of  Plane & Pilot magazine in its section entitled 2012 Top Aviation Attorneys!   Read More

Your Plane Will Punish You… If You Don’t Behave

By Stewart Lapayowker | September 27, 2012

Plan Your Preowned Sales Process With Care

WE SPEND OUR TIME HELPING AIRCRAFT OWNERS NAVIGATE the process of the sale and purchase of new and pre-owned aircraft. And there is one universal truth: You don’t really ever know if your aircraft has been cared for properly until it goes through a pre-purchase inspection in connection with its sale to the next owner. In my experience, there are generally two kinds of aircraft owners. The first wants the aircraft managed and maintained properly and professionally, understanding that quality has a cost. The second likes the idea of having an aircraft and can well afford the purchase, but begrudges every nickel required to manage and maintain it. Often the latter do not understand — or want to face — the difference be-tween “high-quality” and “value” in aviation, both of which require timely performance of all required maintenance. They think that, all things being equal (which experienced owners know is not so), “cheap” means “value.” And while this may seem like shrewd economics at the time, sooner or later the aircraft will deliver a brutal and expensive reminder to the contrary, especially at time of resale.

Let’s review the process for the typical sale of a pre-owned aircraft. Initially, the parties enter into an offer to purchase, setting forth the basic terms of the transaction including the price, deposit amount and, importantly, the required technical delivery condition of the aircraft and identification of the inspection facility that will perform the pre-purchase inspection (typically selected by the buyer and reasonably acceptable to the seller). You will never ever under any circumstance sell a jet aircraft to a retail buyer without a pre-purchase inspection to confirm that the aircraft is in satisfactory technical condition.

Every offer assumes that the aircraft is airworthy, has had maintenance performed as required by the manufacturer’s recommended maintenance program, is current and up-to-date on all calendar and cyclical items, and is in compliance with airworthiness directives (that is, changes to the aircraft mandated by the FAA) and mandatory service bulletins (essentially, changes to the aircraft required by the manufacturer to maintain the airworthiness of the aircraft). The economic impact is that if the aircraft does not meet the delivery conditions it is the seller’s responsibility to pay to have the aircraft brought up to date (at least in the current market).

As part of the preliminary process after the offer is signed, there can be a cursory visual inspection. This usually consists of the buyer going to see the aircraft and also includes a cursory records review to ascertain the status of the aircraft and any upcoming “due” items: that is, inspections that are anticipated in the near future, current airworthiness directives or mandatory service bulletins. The initial review of the written and digital maintenance records contribute to the scope of the inspection that the buyer will include in the purchase agreement, but more importantly, forms the basis for a buyer’s impression of the aircraft. This is not just a technical impression, but rather an impression of whether the aircraft has been consistently, routinely and professionally maintained — quite simply, how the seller has cared for the aircraft. Needless to say, that impression influences the buyer’s opinion as to whether the preliminary purchase price is appropriate for the condition of the aircraft. Deals have fallen apart after the merest visual inspection (and no matter what the reason, everyone will know that the deal crashed even before the formal prebuy, casting a long shadow on the seller’s prospects for a quick sale).

Following the visual inspection, the parties negotiate a more formal purchase agreement which contains the scope of the pre-purchase inspection and other customary terms. For a Bombardier aircraft, this can be as detailed as a “Level III” inspection; for a Gulfstream an “aircraft records and condition survey” (or similar), together with additional inspections that the buyer may desire as a result of the records review along with repair facility recommendations (such as performing an engine and APU boroscope ).

The purchase agreement will provide that following receipt of the inspection report, the buyer will have a number of options. Typically, the buyer will have the option to accept the aircraft conditionally subject to the seller’s correction of discrepancies defined in the agreed-upon delivery conditions. What this means is that if the re-pair facility determined that the aircraft doesn’t meet the technical conditions, the seller will need to pay to rectify the discrepancy(ies) in order for the aircraft to be returned to service so that the buyer is committed to buy the aircraft.

Consider the implications. The seller hasn’t performed inspections on time? The seller needs to pay for it. ADs or MSBs not com-plied with in a timely fashion? Parts out of limits? They need to pay for it. Records missing or not complete? They need to pay to research and fill in the blanks. The maintenance service contract not paid cur-rent? The seller needs to bring it current. And instead of any fixes being done when they should have been — and by the seller’s maintenance facility, flight department or management company — now it will be done at the buyer’s selected facility, under time pressure and, in all likelihood, at a significantly increased cost.

Perhaps the agreement will have an outright rejection right which allows the buyer to have the deposit refunded if the aircraft is not acceptable for any reason. No matter the strength of any confidentiality provisions, there is little doubt that those in the market soon will learn of the rejection and the reasons for it. That can have a severe impact on the seller’s efforts to move the aircraft. And to add insult to injury, no matter why the buyer walked away, the seller will be required to pay to have the aircraft returned to service because the inspection facility is obligated not to release the aircraft for flight until any discrepancies found during the prebuy are corrected. It sounds like a double whammy — and it is! The seller not only lost the deal; but also must pay for any and all discrepancy rectification.

How can the surprises be mitigated? Choose experienced and professional management for the aircraft (whether in-house or management company), use reputable maintenance facilities experienced with your aircraft type, and don’t skimp — or sooner or later, your aircraft will punish you.

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2012 NBAA Tax, Regulatory and Risk Management Conference

By Stewart Lapayowker | September 18, 2012

Please join me and other aviation professionals in Orlando on October 28 and 29, 2012 for the NBAA’s Annual Tax, Regulatory and Risk Management Conference.   The conference is designed to give business aviation professionals and their advisors an opportunity to learn about federal, state and local regulations and tax changes in an interactive format. From breakout sessions to discussion-based workshops on key topics, this conference allows attendees to create a customized learning experience.  Join your peers and the recognized industry experts on business aviation tax and regulatory policy to stay current on these important topics.  Presentations in this year’s conference include:   (i) Background and Basics: Federal Excise Taxes, (ii) Background and Basics:  Personal Use – Imputing Income and Deductions, (iii) FAA and DOT Regulatory Issues, and (iv) the panel discussion that I’ll be moderating:  International Operation and Tax Issues- Focus on the European Union including Value Added Taxes and EU-ETS.

The conference brochure and information about the Convention may be found here: NBAA Events.

We look forward to seeing you at NBAA 2012!

Regards. SHL.

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We Rock to Benefit Stomach Cancer Research!

By Stewart Lapayowker | March 7, 2012

On March 4, 2012, CantStomachCancer had its third annual benefit at the Improv Hard Rock, Hollywood, Florida.  Can’t Stomach Cancer is a charitable foundtion that raises money for stomach cancer research.  Lapayowker Jet Counsel, P.A.., PlaneTalkRadio and Aero Management Solutions, LLC were sponsors of the event for a second year, but instead of a comedy act like Stewart did last year, this year we had a surprise for everyone!  We hope you enjoy!  http://youtu.be/6INmcOcscc0

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Aircraft Transactions Conference February 9, 2012

By Stewart Lapayowker | December 18, 2011

Mr. Lapayowker will be joining other speakers at the NBAA’s Aircraft Transactions Conference to be held in Deerfield Beach, Florida on February 9-10, 2012.  The topic of his presentation with Jeff Wieand of Boston JetSearch, Stewart Pearl, Esq., and Alvaro Pascotto, will be aircraft transactions in transition.  They will be discussing aircraft offers to purchase, purchase agreements and related issues in connection with the acquisition of an aircraft.

To register, go to www.nbaa.org.

We hope to see you there.

 

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BARR Requests – Valid Security Concern No Longer Required

By Stewart Lapayowker | December 18, 2011
BLOCK AIRCRAFT REGISTRATION REQUESTS
“VALID SECURITY CONCERN” NO LONGER REQUIRED

The language of the Department of Transportation’s budget for Fiscal Year 2012  prohibits the Federal Aviation Administration (FAA) from requiring certification of a “valid security concern” as a condition to blocking aircraft tail numbers from tracking by online services.  The National Business Aviation Association is monitoring FAA’s implementation of the revised BARR system.

Until that system is finalized, FAA will no longer need to certify to (or mention) a “valid security concern” in order to have the blocking request accepted.

Regards. SHL.
To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this e-mail, including attachments to this e-mail, is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding penalties under the U.S. Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this e-mail or attachment.
Nothing contained in the foregoing should be relied upon as legal advice appropriate to your situation which can only be given by your own legal counsel.
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APPOINTMENT AS VICE CHAIR OF NBAA TAX COMMITTEE

By Stewart Lapayowker | December 18, 2011

APPOINTMENT AS VICE CHAIR OF NBAA TAX COMMITTEE

In conjunction with the annual meeting of the Tax Committee of the National Business Aviation Association, Stewart was appointed to be Vice Chair of the NBAA Tax Committee serving a two year term.

Having served as Recording Secretary for the past two years, and before that Chair of the Committee’s Aircraft Transactions Working Group and Vice Chair of its Regulatory Working Group, Stewart is flattered by the Committee’s appointment and looks forward to actively working with the leadership team and NBAA liaisons to address significant issues facing business aviation.

    The Tax Committee’s efforts are focused in the area of taxes affecting business/corporate aircraft and the impact of the Internal Revenue Service Rules, Securities and Exchange Commission Rules, and the Federal Aviation Regulations. The Committee explores the implications of these rules and regulations, as well as the differences between IRS and FAA interpretation/definition of business aircraft and develops meaningful resources for NBAA Members in each of these areas.  The Committee addresses topics such as aircraft transactions, aviation insurance, federal tax, regulatory, state aviation taxes and regulatory matters.

The Committee’s “NBAA Tax, Regulatory & Risk Management (two-day) Conference” held each year in conjunction with the NBAA Annual Meeting and Convention is designed to provide a basis for understanding how the appropriate tax laws and other applicable regulations apply to a particular aviation operation. It covers issues such as aircraft registration, ownership options, personal use, leasing options, application of the FARs, enforcement of the FARs and insurance.

For those of you not familiar with the NBAA, the NBAA’s mission is to serve NBAA Members by promoting the aviation interests of organizations utilizing general aviation aircraft for business purposes in the United States and worldwide.  Founded in 1947 and based in Washington, DC, the National Business Aviation Association (NBAA) is the leading organization for companies that rely on general aviation aircraft to help make their businesses more efficient, productive and successful.

It’s cooperative organization No Plane No Gain.org is aimed at educating the public about the benefits of business aviation in the face of media and political attacks on the industry.

The NBAA now provides assistance to 8,000 Member Companies which earn annual revenues of approximately 5 trillion dollars – a number that exceeds 50 percent of the gross national product – and employ more than19 million people worldwide.

NBAA has been in the forefront of efforts aimed at fairly settling problems related to air space access, airports and aircraft noise. Today, NBAA is focused on issues such as aviation safety, operational efficiency, fair and equal access, FAA reform, noise and compatible land use, peak hour landing fees, reliever airports, air support, air traffic control modernization, product liability reform, research and development, business aviation advocacy and various tax issues.

For more information on becoming an NBAA member, see http://www.nbaa.org

 

To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this e-mail, including attachments to this e-mail, is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding penalties under the U.S. Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this e-mail or attachment.
Nothing contained in the foregoing should be relied upon as legal advice appropriate to your situation which can only be given by your own legal counsel.
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IS YOUR NEW AIRCRAFT BEING SENT OUTSIDE THE USA FOR COMPLETION AT YEAR-END?

By Stewart Lapayowker | December 18, 2011

IS YOUR NEW AIRCRAFT BEING SENT OUTSIDE THE USA FOR COMPLETION AT YEAR-END?

Many clients find advantages in acquiring title to “green” aircraft before the end of the year but are unaware of potential pitfalls that could impact the tax depreciation benefits on their lease financing. Green aircraft are aircraft that are delivered from the manufacturer but have not been completed. Typically, an aircraft that has not been painted possesses a “green” tint, hence the moniker.

Lease Financing

When a client purchases an aircraft by way of lease financing, the lease contains certain restrictions and covenants regarding its operation. One of the most common restrictions includes limiting the aircraft’s use outside of the United States. This restriction is most often related to ensuring that the financing company is eligible to receive federal tax depreciation benefits. In fact, many times favorable terms of lease financing are directly related to the ability of the financing company to receive depreciation. What happens if the primary assumptions underlying the depreciation conclusions that the lessor reached are violated and no one in the room saw the issue coming?  Indemnities contained in the lease require that the lessee indemnify the lessor for the lost tax benefits.

Before the closing on a new aircraft, the issue of putting the aircraft “in service” by conducting a business flight is normally discussed among the working group.  In the case of a leased aircraft, the aircraft is placed “in service” once the lessor has entered into a lease with its lessee.  But the analysis should not end there. Depending on the manufacturer, completion of the green aircraft may occur outside the United States. If the aircraft delivers green in December, and is immediately taken outside the USA for completion work, it is entirely possible that the aircraft will spend the majority (50%+) of its time during the tax year outside the USA, resulting not only in a violation of the lease covenant to operate the aircraft “predominantly” in the USA, but where there is bonus depreciation in play, a risk that depreciation cannot be taken.

What to do?

It is imperative that the transaction working group focus on not only the location of closing but the location of the aircraft between closing and the end of the year. If possible, you should include a provision in your purchase agreement that commits the manufacturer to keep the aircraft in the USA for more than 50% of the number of days between closing and the end of the year before it takes the aircraft out of the country for completion.  We have found that manufacturers are amenable to such arrangements (it is unlikely that much work will be done the last 10 days of the year on a newly delivered aircraft anyway).

 

To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this e-mail, including attachments to this e-mail, is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding penalties under the U.S. Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this e-mail or attachment.
Nothing contained in the foregoing should be relied upon as legal advice appropriate to your situation which can only be given by your own legal counsel.
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AMERICAN JOBS ACT COULD CHANGE DEPRECIATION SCHEDULE

By Stewart Lapayowker | December 18, 2011
AMERICAN JOBS ACT WOULD CHANGE DEPRECIATION
SCHEDULE FOR GENERAL AVIATION AIRCRAFT
The much-hyped jobs plan (American Jobs Act) by President Obama was revealed to Congress last week. While we will not debate the potential economic benefits of his plan, how he plans to pay for it is of concern to current and potential owners of general aviation aircraft. The American Jobs Act carries a price tag of over $400 billion dollars will be paid for by a combination of various tax increases, one of which is a modification of the depreciation schedule for general aviation aircraft (or if you are a politician the “corporate jet loophole”).  General aviation aircraft are currently depreciated over 5 years using the Modified Accelerated Cost Recovery System. This will be extended to 7 years consistent with the depreciation schedule of commercial aircraft (see below). This change is only expected to yield $3 billion dollars over ten (10) years!  To oppose the proposal, you can of course contact your representatives or support the efforts of the National Business Aviation Association (www.nbaa.org).

SEC. 421. GENERAL AVIATION AIRCRAFT TREATED AS 7-YEAR PROPERTY.(a) IN GENERAL. —Subparagraph (C) of section 168(e)(3) of the Internal Revenue Code of 1986 (relating to classification of certain property) is amended by striking “and” at the end of clause (iv), by redesignating clause (v) as clause (vi), and by inserting after clause (iv) the following new clause:“(v) any general aviation aircraft, and”.(b) Class life. Paragraph (3) of section 168(g) Internal Revenue Code of 1986 is amended by inserting after subparagraph (E) the following new subparagraph:“(F) General aviation aircraft. In the case of any general aviation aircraft, the recovery period used for purposes of paragraph (2) shall be 12 years.”.(c) General aviation aircraft.–Subsection (i) of section 168 Internal Revenue Code of 1986 is amended by inserting after paragraph (19) the following new paragraph:“(20) General aviation aircraft.–The term `general aviation aircraft’ means any airplane or helicopter (including airframes and engines) not used in commercial or contract carrying of passengers or freight, but which primarily engages in the carrying of passengers.”.(d) Effective date. This section shall be effective for property placed in service after December 31, 2012.

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2011 Aircraft Registration Conference – Aviation Transactions in Transition

By Stewart Lapayowker | January 4, 2011

The 2011 Aircraft Registration Conference presented by NBAA will be held in Naples, Florida on February 3-4, 2011 at the Naples Grande Beach Resort.  The conference will focus on “transition”, that is, changes in the way aircraft transactions are done, including some new trends.  Stewart will be speaking on the topic of Offers to Purchase in Transition, and related matters such as commonly negotiated terms and the perspective of different players in the transaction.  The seminar is not being given at an introductory level, but rather for those already experienced with aviation transactions.

Please join us.  Regards. SHL.

2011 Aircraft Registration Conference Brochure

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