When Does “Sharing” Become Illegal Charter?
The FAA Reauthorization Act of 2018 contains a section entitled “Report on Illegal Charter Flights.” The law includes several requirements to identify and combat illegal charter flights.
The FAA has been revising inspector guidelines. They even sent a letter to every pilot on record about the new emphasis on combating illegal charter.
Where is the line between legitimate Part 91 business aviation operations and illegal charter?
The straightforward options for sharing aircraft under Part 91 are
- Joint ownership and interchange, which are defined in § 91.501.
- Dry leasing or “sharing expenses. This less-than-straightforward options is defined under § 61.113.
§ 91.501 applies to large airplanes (over 12,500 pounds MGTOW) and turbojet-powered multiengine airplanes. However, there is an exemption for NBAA members who want to use the flexibility of § 91.501 for a helicopter or small airplane.
How the NBAA Exemption Works
The NBAA small aircraft exemption, 7897K, has been around in various forms for decades. However, if a corporate operator wants to apply the NBAA small aircraft exemption, the company must now go to http://www.regulations.gov and file a Notice of Joinder. This new requirement is in addition to the numerous previous requirements, including contacting the nearest FSDO. No one may operate under the exemption after September 27, 2020 without filing the Notice first.
Time Sharing Agreements
The easiest way to share a corporate jet with another company or individual is a “time sharing agreement” under § 91.501. “A ‘time sharing agreement’ is a lease of the aircraft with crew, but the reimbursement is limited to 2 x fuel plus the flight specific expenses. Flight specific means crew expenses, but not crew salary.
Maintenance programs cannot be charged as a flight specific charge. If the 2 x fuel plus flight specific expenses is covering the entire cost of the flight, you are probably doing the math wrong. Because a time sharing agreement is a lease, you must also comply with the “Truth in Leasing” notification requirements of § 91.23 as explained in Advisory Circular 91-37B.
Although time sharing flights are conducted under Part 91, they are “commercial” for Federal Excise Tax purposes. After the current Covid inspired tax holiday, which ends at the end of this year, you must collect and remit the 7.5% FET plus segment fees on all time-sharing flights.
Joint Ownership Agreements
If the new flying partner is going to be a regular user of the aircraft, and you want to avoid losing money and paying FET, you may want to consider a joint ownership agreement. Under § 91.501 (c)(3), “A ‘joint ownership agreement’ means an arrangement whereby one of the registered joint owners of an airplane employs and furnishes the flight crew for that airplane and each of the registered joint owners pays a share of the charge specified in the agreement.”
“Registered” is the key to joint ownership. Sharing ownership of an LLC that in turn owns an aircraft is NOT registered joint ownership. Because of the simplicity of registered joint ownership from a FAA enforcement perspective (just look at the registration certificate), joint owners have great latitude in shaping the arrangement to meet their needs.
§ 91.501 also contains an interchange concept that is useful for some, but it comes with strings, and FET. Interchange is an hour-for-hour swap of airplane and crew that is primarily useful for smoothing out the occasional maintenance problem by swapping time with another flight department. The swap is subject to § 91.23 Truth in Leasing requirements, and after this year’s tax holiday, the arrangement is subject to the commercial FET even if no money actually changes hands.
Dry Leasing vs Wet Leasing
Dry leasing is governed by Part 91, but not defined in Part 91. § 110.2 defines “Wet Lease” as “any leasing arrangement whereby a person agrees to provide an entire aircraft and at least one crewmember.” The phrases “dry lease” and “wet lease” have nothing to do with fuel. If you lease your aircraft to another company and their pilots (not your pilots) fly the plane, then you have a dry lease and you can charge whatever the market will bear. However, to the extent that any pilots employed by the lessor end up flying for the lessee, you can expect immediate FAA scrutiny to determine if the lessee truly has operational control, and, next year, IRS scrutiny to assess FET.
“Sharing expenses” is more of a myth than an option. § 61.113(c) states that “A private pilot may not pay less than the pro rata share of the operating expenses of a flight with passengers, provided the expenses involve only fuel, oil, airport expenditures, or rental fees.” Case law doctrine limits this even further, requiring that the pilot and passengers share a “common purpose” for the flight. Under this doctrine, if a pilot offers to fly passengers to wherever they want to go, then the pilot cannot share the expenses of the flight.
If you do not like your Part 91 options, then explore your Part 135 options. Starting your own certificate may not be a timely solution, but there are always Part 135 operators who welcome corporate aircraft to their certificates. This is still the best option if the company wants the company aircraft to earn income whenever the company is not using it. Part 135 comes with FAA paperwork and oversight. But there is no unlimited option for charging for flights under Part 91. The upside to Part 135 is that the company aircraft can earn the going rate, flying for anyone, anytime.
This article appeared in the August, 2020 issue of Business & Commercial Aviation as a Point of Law article.