Losing money was built into the rule
POINT OF LAW
The FAA issues press releases about multi-million-dollar civil penalties on a regular basis. All too often, these cases involve aircraft time-sharing agreements. Although the FAA has allowed time-sharing agreements since 1972, misunderstandings about these agreements still persist. FAA 14 C.F.R.- § 91.501(c) defines a time-sharing agreement as “an arrangement whereby a person leases his airplane with flight crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified in paragraph (d) of this section.” Subsection (d) allows the following charges “as expenses of a specific flight” under a time-sharing agreement:
Fuel, oil, lubricants, and other additives;
Travel expenses of the crew, including food, lodging, and ground transportation;
Hangar and tie down costs away from the aircraft's base of operation;
Insurance obtained for the specific flight;
Landing fees, airport taxes, and similar assessments;
Customs, foreign permit, and similar fees directly related to the flight;
In flight food and beverages;
Passenger ground transportation;
Flight planning and weather contract services;
An additional charge equal to 100% of the expenses listed in paragraph (d)(1) of this section.
If your company is making good money by time sharing your jet to others, you are doing it wrong. For instance, the second item allows travel expenses of the crew, but does not mention salary. According to the comments that the FAA published in the Federal Register when the rule was first published, the FAA allowed time share operators to charge double the fuel cost in order to recover (1) salaries of flight crews, (2) aircraft depreciation, (3) insurance premiums (hull and liability), (4) crew training costs, and (5) maintenance costs. Since all of these items are supposed to be covered by the additional fuel charge, they cannot be charged separately. For example, hourly charges under a maintenance service program may not be charged under a time-sharing agreement. Many operators mistakenly believe that they can charge prorated costs for these items as long as they don’t charge a profit. It is a mistaken belief that can result in large civil penalties and the revocation of the airman certificates of the pilots involved.
Who can enter into a time-sharing agreement? The FAA has issued very strict interpretations that are not well known. For instance, 14 C.F.R. 91.501(a) limits the applicability of the rule to large and “turbojet-powered multi-engine civil airplanes of U.S. registry.” According to FAA Advisory Circular AC 91-38A, “turbopropeller-powered airplanes are not turbojet powered and [14 C.F.R. § 91.501 is] not applicable unless the turbopropeller-powered airplanes are large.” In other words, a King Air B200 cannot be part of a time-sharing agreement, simply because it is a turboprop instead of a turbojet.
There is a simple solution for operators of aircraft that want to time share their aircraft that don’t meet the strict applicability of the rule. NBAA has an exemption available to all of its members so that they can take advantage of time-sharing agreements and the other cost recovery methods found in 14 C.F.R. § 91.501. However, it is vital for members to obtain a copy of Exemption 1637 and comply with each of its provisions, which include contact with the local FAA Flight Standards District Office. At least one pilot has suffered a 90-day suspension for failing to follow the exact provisions of the exemption.
There are several other restrictions on the applicability of time-sharing arrangements.
The FAA has stated that 14 C.F.R. § 91.501(b)(6) prohibits a time-sharing agreement from being used for the transportation of cargo. Relying on the same provision, the FAA has also stated that only a “company” may provide an aircraft and crew under a time-sharing agreement. An individual may be on the receiving end (“lessee”) of the deal but cannot provide the aircraft (“lessor”).
Because a time-sharing agreement is a lease, the “Truth-In-Leasing” requirements of 14 C.F.R. § 91.23 apply to these agreements when the aircraft involved are over 12,500 lbs. MGTOW. 14 C.F.R. § 91.23 requires several steps to ensure that the lessee understands the arrangement, and that the FAA can verify that the lessor has complied with the rule. However, unless the lessee is not a citizen of the U.S., it is the lessee who is responsible for (1) mailing a copy of the lease to the FAA Aircraft Registry, Technical Section, in Oklahoma City, within 24 hours after it is signed, (2) carrying a copy of the lease in the aircraft, and (3) notifying the nearest FAA Flight Standards District office at least 48 hrs. before the first flight of the aircraft registration number, as well as time and location of departure.
According to FAA guidance, when an inspector receives a notification phone call under 14 C.F.R. § 91.23, the inspector must determine whether a ramp inspection is appropriate. Therefore, it would be wise to make sure that the flight crew and passengers understand the basic elements of the lease. Specifically, the passengers should be advised that this is not a charter flight.
14 C.F.R. § 91.23 also requires specific language at the end of the lease. Among the required elements is a statement of which party has operational control. In a time-sharing agreement, the provider of the aircraft and crew (“lessor”) retains operational control. If the lessor were only providing the aircraft, then the arrangement would be referred to as a “dry” lease, and the cost restrictions of 14 C.F.R. § 91.501(d) would not be applicable.
Another required element is a statement identifying the regulations under which the aircraft has been maintained and inspected under for the preceding 12 months, and a statement of which regulations the aircraft will be maintained and inspected under during the term of the agreement. FAA Advisory Circular AC 91-37B gives sample language to comply with 14 C.F.R. § 91.23, and suggests that simply identifying the 14 C.F.R. Part (91, 121 or 135) is sufficient. However, over the years, a number of FAA Flight Standards District Offices have required operators within their realms to state the specific regulation under which the aircraft will be maintained. If the operator intends to use a “current inspection program recommended by the manufacturer,” then the proper reference to insert in the lease is “14 C.F.R. 91.409(f)(3).”
Participants in a time-sharing agreement should also be aware that the IRS considers a time-sharing agreement to be subject to the 7.5% federal excise tax (commercial FET); although credit would be given for the fuel FET paid on the time-sharing flights. This means that the lessor will be required to collect the taxes (along with the appropriate segment fees) and remit them to the IRS on a quarterly basis, using IRS FORM 720.
Properly done, time-sharing agreements can be a useful tool for flight departments that have an occasional need to provide the aircraft to executives and receive some reimbursement. The key is to understand and comply with the FAA’s strict requirements.
—Kent Jackson is founder and managing partner of Jetlaw. He has contributed this legal column to BCA since 1998 and is also a type-rated airline transport pilot, flight instructor and repairman.
