Territorial Limitations - Aviation Insurance & Risk Management ...
Territorial Limitations - Aviation Insurance & Risk Management ... Territorial Limitations - Aviation Insurance & Risk Management ...
Louis M. Meiners, Jr. Louis M. Meiners, Jr. is an attorney and CPA who serves as president of Advocate Aircraft Taxation Company. Advocate's practice is limited to serving the needs of owners and operators of aircraft. Services include aircraft operational analysis, sales and use tax management on aircraft acquisitions, income tax planning, federal excise tax planning, and representation before taxing authorities. Louis M. Meiners, Jr. can be reached at: 800-787-8112 or loum@advocatetax.com This article is designed to provide information of general interest to the public and is not intended to offer specific legal advice. You should consult Advocate Aircraft Taxation Company or your tax and aviation advisor if you have a matter requiring attention. 14 Aviation Insurance & Risk Management AIRCRAFT TAX PLANNING Electing to Group Your Aircraft with Your Operating Business May Yield Income Tax Savings by Louis M. Meiners, Jr. STRUCTURING TRANSAC- TIONS TO CONTROL LI- ABILITY AND FAA LIMITA- TIONS MAY REQUIRE TAX ELECTIONS There are often compelling reasons to own an aircraft outside the core business entity. These might include interests as diverse as complying with Federal Aviation Regulations, controlling liability, managing sales and use tax issues, as well as state and federal income tax issues. Regardless of the motive for the structuring, transactions that are not properly planned may result in adverse income tax consequences. If an aircraft owner is selected for examination by the Internal Revenue Service they should anticipate a two-pronged attack. First, that the aircraft represents a hobby and not a trade or business, and second, that the aircraft activity is a passive activity and therefore generally not available to offset a taxpayer’s other deductions. The general rule provides that any deduction resulting from an undertaking of the taxpayer is considered on a standalone basis. However, in certain circumstances a taxpayer may elect to group his various undertakings for the purpose of determining both whether or not they constitute a trade or business, and whether or not they are a passive activity. Most taxpayers find that grouping their aircraft within their underlying business is much easier to defend as a trade or business in which they materially participate than the treating of the aircraft as a separate for-profit enterprise in which they materially participate.
SCHUMACHER V. COMMISSIONER (TCS 2003-96) Gene Schumacher owns 90% of the shares of Pro Flight Center, Inc., a fixed based operator (FBO) located in Beaver Falls, Pennsylvania. Because he had a minority partner who did not have sufficient capital for the additional aircraft purchases, he acquired them separately. Upon examination the Internal Revenue Service asserted that the aircraft leasing business was separate and apart from the FBO business, and Mr. Schumacher’s loss in the rental business was passive. Mr. Schumacher asserted, that in considering his undertaking of leasing the aircraft to his undertaking of operating an FBO, he should be allowed to group the two as a single activity. The Tax Court sided with Mr. Schumacher, finding the most significant fact to be that he created the leasing activity solely to benefit the FBO activity. RABINOWITZ V. COMMISSIONER (TC MEMO 2005-188) Leonard Rabinowitz worked in the high-end women’s clothing industry throughout California. He and his partner established a second company to acquire a Mitsubishi Diamond Jet. His business advisors recommended that he not acquire the aircraft in his clothing business due to the impact it would have on his debt/equity ratio. He ultimately traded the Diamond for a Falcon 200 and his principal use of the aircraft shifted to charter. The Tax Court refused to allow the taxpayer to group his activities under the “Hobby Loss” rules because they lacked an economic interrelationship. The Court found that the clothing company was a mere charter customer, as were numerous other third parties. Although Rabinowitz prevailed in his trade or business argument, he was required to prove it without the benefit of grouping. MISKO V. COMMISSIONER (TC MEMO 2005-166) Fred Misko was a trial attorney who operated out of a C corporation which focused on class action lawsuits. In connection with these lawsuits, he required the most modern computer graphics and videotape equipment. His accountant advised him that he should acquire the equipment in a separate entity to help control Medicare tax on his AIRCRAFT TAX PLANNING “...transactions that are not properly planned may result in adverse income tax consequences. ” wages. Mr. Misko attempted to group his C corporation and his leasing activity to show that the leasing company was operated for profit. The Tax Court acknowledged that a C corporation cannot be grouped with an individual; grouping is limited to flow-through entities. Nonetheless, for purposes of determining if the taxpayer had a profit objective, his law firm earnings were examined because the use of the equipment was integral to his practice. His salary was considered even though his C corporation earnings were not. The passive activity limitations did not present a problem because the rent was incidental to his law practice. Mr. Misko succeeded because he could show sufficient interrelationship between the two activities. WHY GROUP? One of the factors in determining whether an undertaking is a trade or business, or a hobby, is the potential to derive personal pleasure from the activity. I have had the opportunity to meet many aircraft owners that love their work; but none that love their work more than they love their airplane. � Aviation Insurance & Risk Management 15
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Louis M. Meiners, Jr.<br />
Louis M. Meiners, Jr. is an attorney<br />
and CPA who serves as president<br />
of Advocate Aircraft Taxation<br />
Company. Advocate's practice<br />
is limited to serving the needs of<br />
owners and operators of aircraft.<br />
Services include aircraft operational<br />
analysis, sales and use tax<br />
management on aircraft acquisitions,<br />
income tax planning,<br />
federal excise tax planning, and<br />
representation before taxing authorities.<br />
Louis M. Meiners, Jr. can<br />
be reached at:<br />
800-787-8112<br />
or<br />
loum@advocatetax.com<br />
This article is designed to provide<br />
information of general interest to<br />
the public and is not intended to<br />
offer specific legal advice. You<br />
should consult Advocate Aircraft<br />
Taxation Company or your tax<br />
and aviation advisor if you have<br />
a matter requiring attention.<br />
14 <strong>Aviation</strong> <strong>Insurance</strong> & <strong>Risk</strong> <strong>Management</strong><br />
AIRCRAFT TAX PLANNING<br />
Electing to Group Your Aircraft<br />
with Your Operating Business May<br />
Yield Income Tax Savings by Louis M. Meiners, Jr.<br />
STRUCTURING TRANSAC-<br />
TIONS TO CONTROL LI-<br />
ABILITY AND FAA LIMITA-<br />
TIONS MAY REQUIRE TAX<br />
ELECTIONS<br />
There are often compelling reasons to<br />
own an aircraft outside the core business<br />
entity. These might include interests<br />
as diverse as complying with<br />
Federal <strong>Aviation</strong> Regulations, controlling<br />
liability, managing sales and use<br />
tax issues, as well as state and federal<br />
income tax issues. Regardless of the<br />
motive for the structuring, transactions<br />
that are not properly planned may result<br />
in adverse income tax consequences.<br />
If an aircraft owner is selected for examination<br />
by the Internal Revenue Service<br />
they should anticipate a two-pronged<br />
attack. First, that the aircraft represents<br />
a hobby and not a trade or business,<br />
and second, that the aircraft activity is a<br />
passive activity and therefore generally<br />
not available to offset a taxpayer’s other<br />
deductions. The general rule provides<br />
that any deduction resulting from an<br />
undertaking of the taxpayer is considered<br />
on a standalone basis. However,<br />
in certain circumstances a taxpayer<br />
may elect to group his various undertakings<br />
for the purpose of determining<br />
both whether or not they constitute a<br />
trade or business, and whether or not<br />
they are a passive activity. Most taxpayers<br />
find that grouping their aircraft<br />
within their underlying business is much<br />
easier to defend as a trade or business<br />
in which they materially participate than<br />
the treating of the aircraft as a separate<br />
for-profit enterprise in which they materially<br />
participate.
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