Who Should Own My Aircraft?

No area of aviation law is more subject to well-intentioned error than the decision about how to take ownership of an aircraft. Owners often opt for a shell company to avoid tort liability and then pay into that company to cover the cost of ownership and use. This common approach generally creates FAA and IRS problems and rarely provides the desired liability protection.

There are two ways the owner of an aircraft may be liable in tort. The first is a result of the owner’s own acts — e.g., not allowing proper maintenance to be performed or ordering a pilot to fly in unsafe weather. In either case, the owner is liable for his own acts; a shell corporation does nothing to reduce that liability.

The second potential liability is where an owner is responsible for the negligent act of an employee pilot under the doctrine of respondeat superior, otherwise known as vicarious liability. This is why the owner of a truck line is responsible if a truck driver causes an accident by running a red light. The intervention of a shell corporation may limit vicarious liability, but this same formality may subject the use of the aircraft to higher taxes and FAA violations.

Generally, if payments from the owner into the shell are sufficient to cover the costs of ownership and use, the FAA will consider the flight “for hire” and result in an FAR violation unless the shell operates under a more stringent and expensive PART 135 (“Air Taxi”) or 121 (“Air Carrier”) operating certificate. FAR 91.501.

There are two taxes which are applicable to aircraft use—1) a transportation tax which is a percentage excise tax based upon the price (or fair market value) of transportation for hire, and 2) a much cheaper fuel tax priced like the tax on automobile gasoline at cents per gallon assessed on personal use. The transportation tax and the fuel tax are generally alternatives and not totally applicable to the same transportation.

The IRS generally takes the position that if one entity owns an aircraft and allows its affiliate to use the aircraft it is transportation for hire and subject to the higher transportation tax. The courts have upheld the IRS’ position and extended this position to assess the transportation tax on fractional ownership interest aircraft use.

Placing an aircraft in a shell corporation to limit potential liability may therefore create FAA violations and subject aircraft use to additional taxes. No one solution maximizes the liability, tax and FAA positions, but for most general aircraft owners, avoiding corporate shell aircraft ownership and obtaining reasonable insurance protection is the best and most cost-effective solution.

Jack Scott McInteer is a business attorney who specializes in aviation law at Depew Gillen Rathbun & McInteer, LC. He may be reached at 316.262.4000 or .

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