800.999.1109 - Aviation Insurance & Risk Management Magazine

egardless of lack of abusive intent. Another important characteristic of partnerships is that treatment of property as
business or personal is determined at the partnership level, not the individual partner level, which means that personal
use by one partner may result in disallowance of deductions to other partners who use the aircraft only for business.
Th e sale of an interest in a partnership that holds an aircraft will generally result in ordinary income treatment to the
extent that the tax depreciation claimed on the aircraft exceeds its economic depreciation. Subject to certain partnership
elections, the purchaser of a partnership interest will generally be entitled to step up the basis of the underlying
purchased aircraft interest and begin depreciating his proportionate cost, regardless of the remaining bases of the other
partners.
A corporation taxed under Subchapter S provides for fl ow-through taxation to the owners rather than entity-level
taxation. Although, in this regard, S corporations are similar to partnerships, an important diff erence is that S corporations
cannot allocate specifi c elements of income and loss among the shareholders/co-owners; all elements are allocated
proportionately. Th e sale of stock of an S corporation that holds an aircraft will generally result in capital gain
tax, rather than ordinary-income recapture by the seller. Th e purchaser, however, will not generally be allowed to step
up the basis of the underlying aircraft to his new purchase price.
A co-owned LLC is normally taxed as a partnership. However, the LLC may elect to be taxed as a corporation, either
under Subchapter C, or Subchapter S.
CO-OWNERSHIP BY ELECTING OUT OF SUBCHAPTER K OF THE INTERNAL REVENUE CODE
Aircraft co-owners utilizing a co-ownership, partnership, or a limited liability company often have an opportunity
for an alternate method of taxation accomplished by electing out of Subchapter K. Th e election out of Subchapter
K, eliminates the problem of one co-owner’s personal use creating disallowance to the other partners, as well as certain
anti-abuse provisions that may result in unintended adverse tax consequences. Th e decision should be made in
close consultation with your tax adviser, but if an entity or co-ownership is formed merely to hold title to property
for the benefi t of its owners, by electing out of Subchapter K it may be possible to treat each partner as holding an
undivided interest in the aircraft itself. Such treatment requires an election under Regulation §1.761-2 of the Internal
Revenue Code and prohibits the joint conduct of a trade or business. Th is treatment will be particularly appropriate
28 | Aviation Insurance & Risk Management