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Tax Question- Experimental Airplane related

B

bkthomps

Well Known Member
I wanted to bring this up for discussion to what I call a well informed audience, some of you have maybe even been down this path before.

I was served with paperwork from the Department of Revenue after my recent airplane acquisition, it was purchased from a LLC that the previous seller held for liability protection, and sold to my LLC which I have for the same purpose.

A signed affidavit from the seller stating that it was not used for business operations was submitted to the state, along with a copy of the bill of sale which they requested. Furthermore we indicated that the airplane is "experimental" and thus cannot be used for compensation, hire, or "business operations"

Here's what the state responded:

"...the State's position is because the seller had this registered in his business name, it is not Exempt. Even if the only "business use" is to protect the owner from personal liability, that is still a business use..."


This really gets me worked up, and I am being faced with two choices- fight it, or just pay it. Ideally, AOPA, EAA, NBAA, etc would all be interested in solving this confusion at the state level.

What do you guys think? Any other states that I can reference that have a differing opinion on this?

Here's the state's clause on what constitutes a "casual sale" which is the basis of our argument:

(a) A sale in which the tangible personal property involved was not acquired or held by the seller for use in the operation of his business or for resale; or
 
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Non lawyer view --

Who owns the plane? You or the LLC?

If it's the LLC then it is owned by a Company (the C bit of LLC)

It will be interesting to see a final resolution...
 
I'm sure it varies state-to-state, but my neighbors here in Texas have gotten similar bills if their planes are registered to corporations or LLCs even if they only use the aircraft privately. Most re-registered in their own names to avoid the tax.
 
Cannot help you. CA taxes everything (sales, 'use', property tax) with no casual sales exemptions. I presume you have spoken with an attorney. If others fly your aircraft an LLC is a good idea; if you are the sole pilot the protection is minimal.
 
az_gila said:
Non lawyer view --

Who owns the plane? You or the LLC?

If it's the LLC then it is owned by a Company (the C bit of LLC)

It will be interesting to see a final resolution...
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it is owned by my LLC, I did this for liability protection- same as the previous owner, also, the problem is not MY LLC, it's the fact that the plane came FROM an LLC
 
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bkthomps said:
I wanted to bring this up for discussion to what I call a well informed audience, some of you have maybe even been down this path before.

I was served with paperwork from the Department of Revenue after my recent airplane acquisition, it was purchased from a LLC that the previous seller held for liability protection, and sold to my LLC which I have for the same purpose.

A signed affidavit from the seller stating that it was not used for business operations was submitted to the state, along with a copy of the bill of sale which they requested. Furthermore we indicated that the airplane is "experimental" and thus cannot be used for compensation, hire, or "business operations"

Here's what the state responded:

"...the State's position is because the seller had this registered in his business name, it is not Exempt. Even if the only "business use" is to protect the owner from personal liability, that is still a business use..."


This really gets me worked up, and I am being faced with two choices- fight it, or just pay it. Ideally, AOPA, EAA, NBAA, etc would all be interested in solving this confusion at the state level.

What do you guys think? Any other states that I can reference that have a differing opinion on this?

Here's the state's clause on what constitutes a "casual sale" which is the basis of our argument:

(a) A sale in which the tangible personal property involved was not acquired or held by the seller for use in the operation of his business or for resale; or
Click to expand...

I'm not sure what there is to fight...corporations get certain benefits, but have certain other restrictions and constraints. Seems like you just found one.

IANAL, but it sounds as though you (or the previous owner) are looking for the benefits of a corporation (protection from liability) but want to avoid the full gamut of regulations on corporations (such as certain taxes).
 
Just my opinion, but legal matters should be determined by legal personnel in the respective state.

Illinois taxes the plane as I buy the parts. I had to file and pay tax for my panel. I just listed "a" payment date not thinking it would matter. They wanted to charge me over $400 for a penalty. After discussing with the state, I just filed an amended statement and changed the date to the current quarter and it passed. I could not fight the logic of the penalty, but they allowed me to change the date so there was no penalty. Do what works.

Logic seldom prevails over legal mumbo. My logic would say, what constitutes the USE of the property. A business purpose is to make money. Did it? What is the meaning of is?
 
Can you not just purchase the LLC ?
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That would generally be the way to go. Sell the entity (not the aircraft) and do a change of address. (Many people sometimes don't want to do that because there might be past "baggage" - tax issues, etc.)

In any event, it would be good to discuss the S-Corp / LLC approach with an attorney in your respective state before forming these - in many states sole-owner/member entities are disregarded for liability purposes.

It really only works when there are others (ie., partners) and you want to limit your liability for their actions.

Dan
 
purchasing the LLC is no longer an option- i agree with that being a sound method for future transactions.

The real issue here is that, the state claims that liability protection constitutes the "business use" of an aircraft

Nevermind the Federal FAA regulations stating that experimental aircraft cannot be used for business operations, etc, etc..
 
I am not a lawyer or tax guy. Nor did I sleep in Holiday Inn last night, but I think you are stuck. It has been a couple of years but from what I remember: for it to be a "casual sale" and therefore no use tax, the aircraft must be sold individual to individual. No LLCs involved on either end.

IIRC, There was a loop hole of some sort in that: if the selling LLC was solely for the aircraft and the LLC was dissolved and the sale happened with regard to some time frame to an individual then the use tax could be avoided. Luckily we wound up buying our RV-10 from an individual. Incidentally we did and still live in Georgia. This is sure to be a state by state issue.

Good luck.
 
n981ms said:
I am not a lawyer or tax guy. Nor did I sleep in Holiday Inn last night, but I think you are stuck. It has been a couple of years but from what I remember: for it to be a "casual sale" and therefore no use tax, the aircraft must be sold individual to individual. No LLCs involved on either end.
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I have a lawyer hired to look at this, I was just fielding the opinions of others

My RV4 was bought from an individual to my LLC, they didn't care at all about that
 
best way to get rich!

the best proven way to get rich is to start a government or a religion.
 
LLC nonsense...

I think the whole idea of trying to hide your home built under a LLC is nonsense...

I would make the same determination as the State for anyone who insisted on a LLC registration...
 
[email protected] said:
I think the whole idea of trying to hide your home built under a LLC is nonsense...

I would make the same determination as the State for anyone who insisted on a LLC registration...
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Mimi not an attorney nor did I stay at a Holiday Inn last night......

I agree with Stephen and that's why I didn't register my RV under my LLC. Probably too late for the OP.

If I was an attorney, my logic would be, since the FAA prohibits commercial or business use of an experimental, then it can only be for personal use. Who's the person getting this benefit? Then go after that person. I don't think that an LLC adds much protection for experimental aircraft unless you are a CFI with a LODA.
 
[email protected] said:
I think the whole idea of trying to hide your home built under a LLC is nonsense...

I would make the same determination as the State for anyone who insisted on a LLC registration...
Click to expand...

That is nice to say when you live in a state where the vehicle sales tax is 0.3 %, in Illinois one must pay 7.5% on my airplane and its associated parts, even on mail order. One should walk in anothers shoes before condemning their actions. An LLC is not illegal is it? The OP simply asked what others did.
 
How are the regs worded? I thought it said that an experimental cannot be flow "for compensation or hire." I always understood that to mean you couldn't charge for the use of the plane for hauling passengers or cargo, but it could be used for hauling yourself (& passengers) to a different location through the course of doing business or running a business. This would be a business use within the regs, as I understand it.

An LLC, from an accounting point of view, serves one of two purposes. One, to give the option of joint ownership without changing registration and paperwork with the FAA, especially if ownership changes regularly. Two, to allow an individual to sell an aircraft (or boat) without actually selling it, as was mentioned below. You can transfer ownership if the stock in an LLC without there being a taxable event, and then just change the address.

Buying from an LLC into an LLC, even though both are single owner, would be hard to argue with a government person as a casual sale, even though we know it was.
 
use tax...

BillL said:
That is nice to say when you live in a state where the vehicle sales tax is 0.3 %, in Illinois one must pay 7.5% on my airplane and its associated parts, even on mail order. One should walk in anothers shoes before condemning their actions. An LLC is not illegal is it? The OP simply asked what others did.
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Soooo you suggest an LLC as a tax dodge?

Washington State, along with others, imposes a use tax that is equivalent to the State sales tax rate... 9% here, and it involves an interview with the Department of Revenue along with all of your receipts...
 
[email protected] said:
I think the whole idea of trying to hide your home built under a LLC is nonsense...

I would make the same determination as the State for anyone who insisted on a LLC registration...
Click to expand...

hiding? who is hiding? you realize if it was registered to a personal entity on both ends, it would be tax free....where is the benefit of "hiding" in your eyes by incorporating a LLC?

Did you ever consider the effects of probate court and divorce on assets? There are many reasons to bundle assets into LLC's or other entities (trusts, partnerships, etc)

What is ridiculous is that the state considers liability protection a "business use" and I plan to challenge that
 
I choose what day to buy gasoline, so it cost less, where to shop for parts, they cost less, ad infinitum. It is not illegal (or anything else bad) to choose the path that cost less and leaves the most of my hard earned $ for the last 50 years in my hands and those of my family. The same applies to investments, long or short term capital gains, no taxes on dividends, etc. It is simply good shopping. If the LLC, or any other straight forward and legal path, provides good value for me, lowers the risk and allows better balance of life, funds, and fun then I am (currently) free to choose that. After all, would it not be better for me to buy a new Cessna and provide all that those taxes, and litigation coverage, value to their shareholders, and development $ for all those employees, investors and their families? I am proud that most of what has been spent on my plane has gone to hard working Americans and especially pleased to buy from many small businesses who have a great attitude that shows in the quality of their product.

Is it trickery when one designs a lower cost part and keeps the profit? Was some one cheated?

NO. I choose not to. It is my duty to pay what is owed, in a timely manner, and to lend a hand to help others (individuals) when possible. I consider it my duty to pay no more taxes than is legally required. Dodging would not be in that vocabulary.
 
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"...Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes...." - Judge Learned Hand - Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).
 
DanBaier said:
"...Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes...." - Judge Learned Hand - Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).
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Thank you for this fundamental reference.
 
Translation:

Judicious financial planning is when I do it; Tax dodge is when someone else does it!
:)
 
rleffler said:
I don't think that an LLC adds much protection for experimental aircraft unless you are a CFI with a LODA.
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Just to be clear, most cfi's operate without coverage. Available liability insurance is expensive and low limits. An LLC might protect the owner/operator but not the PIC and/or a CFI on board (even if one of those is also the owner)
 
Papa said:
Translation:

Judicious financial planning is when I do it; Tax dodge is when someone else does it!
:)
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Exactly. I have this argument frequently with my sister who is a payroll analyst for banks. She tries to catch people who are "gaming the system".

No, we are not gaming the system. We are doing EXACTLY what the system incents us to do. If the designers of the system want different behavior they need to implement a different set of incentives.
 
Tax Avoidance: Using any legal means to reduce tax liability.

Tax Evasion: Using illegal means to reduce tax liability.

Understanding both and practicing only the former (knowing the laws required) will keep you out of jail (at least as it relates to the IRS and DOR) and flying your RV into the future.
 
The operating limitations I just received last week state the use as "Recreation & Business". I did not ask for this. It is the standard issue.
Also I believe in Florida all sales are taxed. I don't know what a casual sale is.
It is either a use tax of 6% or a sales tax of 6%.
 
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