Sharing a jet

Business Jet Traveler » June 2008
Sunday, June 1, 2008 - 5:00am

The cost of buying an aircraft is rivaled only by the expense of maintaining it. If someone gave me a Gulfstream G550 for Christmas, I'd have to sell it immediately because just the expense of hangaring and insuring the aircraft, let alone flying it, would far exceed what I can afford. No wonder many people want to figure out a way to share the cost of business jets.



The easiest and best-known way to do this is to sign up with a fractional ownership program. It's called "ownership" because participants actually own undivided interests in the jet, and it's called "fractional" because they almost never own the whole aircraft.

But fractional programs may not really provide what you want from shared ownership. Arguably, the only reason that fractional programs involved ownership was to facilitate operation under Federal Aviation Regulation 91.501, which enabled the providers to avoid the commercial operating rules of Part 135. Moreover, selling and then repurchasing shares of aircraft is a major source of revenue for the fractional programs. But most fractional owners rarely if ever set foot on their "own" aircraft. When you come down to it, many people, including apparently the Internal Revenue Service, believe that fractional programs provide a transportation service more like charter than an opportunity to share ownership and operation of an aircraft.



Joint Ownership

At the outset, fractional programs availed themselves of a provision in the Federal Aviation Regulations that permitted shared ownership of a jet through a "joint ownership agreement." In such an arrangement, each owner must satisfy FAA citizenship requirements and be registered with the FAA as an owner of the aircraft. (The aircraft must also be of a certain size; most business jets qualify). The FAA permits one of the joint owners, typically a corporation or other entity, to operate the aircraft for the other owners, and the costs of ownership and operation are allocated among the owners by the joint-ownership agreement, which (helpfully) does not have to be filed with the FAA.



This arrangement may sound rather like a classic limited partnership where the general partner is a corporation or other entity. But while FAA regulations specifically permit the joint ownership arrangement I described, they expressly prohibit any partnership not comprised solely of individuals from registering ownership of an aircraft. Hence, having the aircraft owned by a limited partnership with a corporate general partner is not an option for sharing a jet.



Joint ownership offers several advantages. First, you can operate the aircraft under Part 91-no tangling with cumbersome or expensive commercial operating rules. Second, you can isolate the liability associated with operating the aircraft in the joint owner responsible for doing so. The owners can still have liability as owners for damages caused by the aircraft, but that's usually better than being liable as the operator. Third, the joint owners can share fixed and variable costs based on ownership and usage.



But joint ownership also has drawbacks. None of the joint owners may relish being the one that assumes responsibility and liability exposure associated with operating an aircraft. Some operators try to protect themselves from such liability by putting operational responsibility in a single-purpose corporation or other entity, but the FAA prohibits such companies from operating an aircraft without a commercial certificate. And the IRS may regard a joint-ownership arrangement as involving taxable transportation and charge the transportation excise tax. Even the FAA could find fault with the arrangement if the ownership percentages of the various joint owners get seriously out of whack with how the aircraft is actually used.



Shared Ownership

This brings us to a third alternative: shared ownership. To avoid some of the drawbacks of fractional and joint ownership, shared ownership offers a custom solution. And therein lies its greatest problem: trying to figure out a structure that works legally.



Suppose Bill and Bob want to share ownership of a jet. Their first idea will probably be to set up a company to purchase it; Bill and Bob would then own the company, which would be registered with the FAA as the owner of the jet. So far so good, but FAA rules say this newly formed company (with no assets or business other than the aircraft) can't operate the jet without a commercial certificate. Consequently, assuming Bill and Bob want to operate the jet noncommercially (Part 91), the company could lease the aircraft to each of them so they could use it themselves. Bill and Bob would each then have to retain pilots and be exposed to liability as the aircraft operator.



Does this mean there is no point to having a company own the aircraft, and that Bill and Bob should just share ownership themselves? Not if they care about liability as an owner. As with fractional and joint ownership, shared ownership can expose you to liability as an owner resulting from operations of the aircraft by other owners. If another owner flies the aircraft into a school, all the owners are likely to be sued, and in that event, you'll be glad that your interest is held in a corporation or other entity rather than individually.



Practical Problems

Developing a structure for sharing an aircraft that works for the FAA and for tax and risk-management purposes can be challenging-almost as challenging as working out the nuts and bolts of using and paying for the aircraft. First, there's scheduling. Bill and Bob buy a jet together, and it seems that every time Bill wants to use it, Bob is using it. On many occasions, the aircraft could deadhead back to pick up Bill and run a trip for him, and then return to fetch Bob. Even if the logistics work, who pays for the deadhead flights? Is it Bob's problem because he's using the aircraft when Bill wants it, or Bill's problem because Bob got there first?



Moreover, Bill and Bob split ownership of the aircraft equally. But it turns out that Bob uses it twice as much as Bill. Bill is apt to get cranky about covering more than his fair share of the capital costs and depreciation relative to his use. He may get so cranky he wants out of the deal...and how will that work? Planning for when and how a shared ownership arrangement can be unwound is often the hardest problem of all.



These concerns point to the need for a well-thought-out, written shared ownership agreement, preferably drafted by an aviation lawyer familiar with the issues. Problems like these can be resolved, but often they test the patience of even great friends. Like Fred C. Dobbs in John Huston's Treasure of the Sierra Madre, you might start out with the best intentions of being a model partner, only to wind up having made a serious enemy.



Jeff Wieand welcomes comments and suggestions at: jwieand@bjtonline.com.

 

 

 

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