Most everyone in the business aviation industry has heard that the 2017 Tax Cuts and Jobs Act (the “Act”) permits a 100% write off of the purchase price of new and used aircraft in the year of their purchase.  However, many people do not realize that this provision of the Act is subject to a myriad of “gotchas” that may limit or completely eliminate this 100% write off opportunity. 
 
Following is a description of several of the significant "gotchas" that could limit or eliminate the new tax benefits, including the 100% purchase price write off, that business aircraft owners need to consider:

Listed Property Rules:  The “listed property rules” may cause a business aircraft purchase to be ineligible for accelerated depreciation, including 100% depreciation, in the year of purchase or a subsequent year.  If you, as a business aircraft owner, want to take the 100% write off in the year you purchase your aircraft, you must have at least 50% “Qualified Business Use” of that aircraft in the year you purchase it and in all years that you own it. 

Although, in many cases, the Qualified Business Use requirement is clearly met, there is an important “trap” to be aware of that could unexpectedly lead to the application of these rules to prevent you from taking the 100% write off. This “trap” is referred to in the business aviation industry as the “leasing company trap.”
 
A typical illustration of the application of the leasing company trap involves a principal who owns his or her business through multiple “brother-sister” LLCs, S corporations, partnerships, etc.  One of these brother-sister entities owns the aircraft, and leases it to another brother-sister entity that uses the aircraft primarily to transport the principal owner of both entities.  We also see this issue arise when a CEO wants to own the aircraft himself or herself and lease it to his or her operating business – this structure may be necessary due to having minority shareholders, or other growth/stock value issues.
 
The use of this structure leads to the failure of the “Qualified Business Use” requirement.  Although this is clearly a “form over substance” problem, this type of improper structuring of business aircraft ownership and operations can lead to loss of accelerated depreciation deductions including the 100% write off. 

Passive Loss Limitation Rules:  Renting or leasing your aircraft may lead to the inability to utilize the 100% write off in the year of an aircraft purchase because rental and leasing activity is, by definition, a “passive” activity.  Therefore, if you lease your business aircraft to another person, the 100% write off could be characterized as a passive loss.  For example, placing your aircraft on a charter company’s certificate for use in charter is a leasing activity (regardless of the title of the agreement between the aircraft owner and the charter company).  Aircraft related losses are therefore characterized as passive and may be deducted only against passive income.  Without passive income, deduction of the passive loss is deferred until passive income exists or the aircraft is sold, which defeats the goal of generating a 100% deduction in the year the aircraft is purchased.

Loss of Investment Expense Deductions:  Under the Act, an individual is no longer permitted to deduct expenses he or she incurs in connection with managing his or her investments.  A typical fact pattern involves an individual who manages his or her investments through a family office entity that is not clearly conducting an active trade or business.  Alternatively, the management entity may be the general partner of a partnership that includes other investors.  Typically, the family office or management entity does not earn material management fee income, if any.  The company typically uses the aircraft to allow its principal owner to visit and conduct on site management of investments, and to conduct due diligence on other prospective investments.  

Although the company uses the aircraft in connection with activities that will appreciate in value and generate income, under the Act, in general, use of the aircraft in such activities will no longer be tax deductible.  Instead, an individual must be engaged in a “for profit” trade or business activity, for which the use of the aircraft is “ordinary, necessary and reasonable" to avoid this new limitation. 

Loss of Unreimbursed Employee Business Expenses:  Under the Act, expenses related to an aircraft owned by an individual (or in a wholly owned disregarded entity) and used in connection with a business in which the individual is an employee, are no longer deductible by the individual in excess of the amount that the individual is reimbursed.  Excess aircraft related expense deductions, consisting mainly of depreciation and, perhaps, some unreimbursed fixed costs are therefore lost.

Limitation on Excess Business Losses and NOL’s:  Under the Act, business losses (meaning, essentially, trade or business losses in excess of trade or business income) of more than $500,000, for a married taxpayer filing a joint return, and $250,000 for a single filer, must be carried forward as a Net Operating Loss (NOL) to the next succeeding tax year.  In the succeeding tax year, the NOL deduction is limited to 80% of the taxpayer’s income, computed without regard to the NOL.  The Act creates other potential “gotchas” related to these two new loss limitation rules.

New Entertainment and Commuting Disallowance Provisions:  The Act created new provisions disallowing deductions of aircraft depreciation and operating expenses as they relate to business entertainment and commuting.  Business entertainment generally consists of travel on a business aircraft to a destination, where the aircraft passenger’s primary purpose at the destination is to engage in an entertainment activity with clients, customers, vendors, etc.  However, since the Act did not change the definition of entertainment, which continues, in general, to reference activities such as golfing, attending sporting events, hunting and fishing, and engaging in recreational activities at a country club or hotel/resort type location, the taxpayer continues to control the threshold determination and classification of whether the activity is primarily entertainment related.  

The Act also did not define “commuting” and, therefore, the taxpayer continues to control the threshold determination and classification of an activity as being primarily related to commuting.  Therefore, planning opportunities exist to ensure that an activity is not treated as primarily entertainment related or primarily related to commuting.  It is nonetheless necessary to analyze the specific facts, including a discussion regarding the overall travel schedule of the executive being transported on board the business aircraft, to determine whether or not it is possible to avoid such a characterization.
 
Clearly, the tax rules applying to aircraft are complex.  Aircraft marketing that states that the purchase of an aircraft will create an immediate 100% write off is a teaser that needs to be carefully examined, with proper planning and implementation of an aircraft ownership and operating structure that will enable you to avoid the pitfalls described above.  

GKG Law attorneys are able and available to assist with this process to help you achieve your goals and avoid these gotchas. Please contact us to discuss further by contacting:

• Keith Swirsky, kswirsky@gkglaw.com or 202.342.5251
• Troy Rolf, trolf@gkglaw.com or 763.682.6620

Previous GKG Law insight and information on the TCJA and tax changes affecting business aviation can be read in Troy Rolf's legislation alert found here. 

Note:  GKG Law's Steven John Fellman serves as General Counsel to the TRSA.  This article was published in a June 2018 edition of the TRSA's Textile Services Weekly.

On June 12, Judge Richard Leon of the U.S. District Court of the District of Columbia approved AT&T’s $85.4 billion merger with Time Warner.

The case was significant in that the proposed transaction was not a horizontal transaction, i.e., the merger of two companies in the same line of business, but a vertical integration of two companies in the same supply chain. It also involved a recognition by the court that historical market definitions may not be applicable in the digital world.

The Department of Justice argued that the proposed transaction would injure consumers as the combined company would have the power to raise prices and would raise prices.

In a 172-page opinion, Judge Leon disagreed. He rejected the government’s economic argument and warned the Department of Justice not to attempt to seek an injunction prohibiting the parties from continuing the transaction pending an appeal¹. The Judge found that the scope of the media business has expanded dramatically, and DOJ’s arguments did not fully appreciate the change.

Immediately after the decision was announced, Comcast made a $65 billion offer to purchase certain assets of 21^st Century Fox which Fox had agreed to sell to the Walt Disney Co.

The AT&T opinion opens the door for more vertical transactions. Large corporate buyers will be looking for companies in other industries with good cash flows and which give the buyer the potential of using its existing platform to expand the scope of the seller’s operations. Traditional market definitions that formed the basis of previous antitrust case law may no longer apply in an economy dominated by Amazon, Apple, Google and similar companies.

Linen, uniform and facility services companies could become takeover targets as they have large customer bases and established delivery systems that could be expanded to include additional product lines.  Further, they have good cash flows and in many instances are of a size that would attract buyers. Major linen, uniform and facility services companies service millions of workers every day and have hundreds of production facilities all across the country. Furthermore, those workers aren’t one-time purchasers, but they are under contract to purchase services for a multiyear period. What a great target!

Traditionally, increased concentration in the linen, uniform and facility services industry has been the result of one horizontal competitor buying another horizontal competitor.

But after the AT&T decision, the floodgates may open. Nontraditional buyers may seek out linen, uniform and facility services companies as a way of expanding their existing business platforms. If a company such as Amazon can buy Whole Foods, isn’t it reasonable to expect it to consider buying a company serving several million customers per day under multiyear contracts?

For more information, please contact Steve Fellman at sfellman@gkglaw.com.

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¹ The acquisition was closed on June 13, 2018, the day after the decision was announced.  The DOJ did not file an injunction.

Note:  GKG Law's Steven John Fellman serves as General Counsel to the TRSA.  This article was published in a June 2018 edition of the TRSA's Textile Services Weekly.

If it hasn’t already happened, you may soon get a notice from one of your major customers advising you that in order to continue serving the customer, you must be in compliance with the General Data Protection Regulation, or GDPR. You may ask what is the GDPR and why is my customer asking me if I am in compliance. Below is some basic background information.

Recently, the European Union enacted a new data-privacy regulation that took effect on May 25. This regulation requires that every company that has a presence in the EU or offers goods or services to persons residing in the EU must implement a comprehensive Data Privacy Protection Program to protect personal data provided by EU individuals to the company. “Personal Data” is defined broadly.  It includes such basic information as a person’s name and address. Essentially, if your company has an office or agent in the EU, has customers who are individuals in the EU or sends promotional information to individuals in the EU, you are covered by the GDPR. Companies and other organizations that violate the provisions of the GDPR are subject to substantial fines.  In certain cases, a company’s board members may be held personally liable.

You are probably all aware of the GDPR because you have been receiving privacy notices from a great variety of companies, some of which you have never dealt with and some of which you have never heard about.  Why are they sending you this information? First, they believe that they have your personal data in their files. Second, they are sending privacy notices to all the individuals in their database, regardless of where they are located. Third, and of most interest to TRSA members, they are sending these notices because they want to demonstrate to their customers that they are GDPR compliant.

Let’s pick up on the third point. The GDPR not only requires that companies covered by the GDPR adopt a data privacy protection program, but the GDPR also requires that companies covered by the GDPR not exchange personal information with other companies, including service providers, subcontractors, or other vendors unless such service providers, subcontractors or other vendors are also GDPR compliant.

The major requirements of GDPR compliance include:

• Providing detailed notices describing how your company collects and processes personal data.
• Ensuring that you provide personal data only to companies that are GDPR compliant.
• Having written GDPR compliance agreements with all service providers that will process your personal data.
• Having a system to protect all EU residents’ privacy rights.
• Having an internal company policy in place to address data-protection issues.

In some industries, international companies that are required to comply with the GDPR have found that it’s impossible to limit GDPR compliance to facilities in the EU or information transfers involving only EU residents. These large companies have adopted a policy of international companywide GDPR compliance. Under such a policy, all of the company’s service providers, which would include linen, uniform and facility services companies, subcontractors and other vendors must provide written certification to the company that they are GDPR compliant. Since one element of GDPR compliance is to only use GDPR-compliant service providers, subcontractors or other vendors, we also expect to see many U.S. companies require GDPR compliance in their contracts with other U.S. partners in order to maintain business relationships with large international partners, even where the U.S. companies are not directly covered by the GDPR.

Let’s take it one step further. Assume your client, an automobile manufacturer, takes a position that it’s not covered by the GDPR. However, the automobile manufacturer enters into a contract to sell a fleet of vehicles to a customer located in the EU. The EU customer must comply with the GDPR. As part of this compliance, it must show that all of its suppliers, including the automobile manufacturer, have certified that they are in compliance. In order to certify that it is in compliance, the automobile manufacturer must certify that all of its contractors and service providers are in compliance. As a linen, uniform or facility services company, you may be one of those service providers.

Recently, some of our clients have received contracts from their customers that have a clause requiring them to certify that they are GDPR compliant. When they object, arguing that they do not receive any personal data from EU residents from the customer, they are told that it is the customer’s corporate policy that all of its service providers, subcontractors or other vendors must provide this certification – without exception.

If you are a linen, uniform or facility services company doing business with an international company such as an auto manufacturer or energy company, you may receive a GDPR compliance request. You may be told that if you do not become GDPR compliant, you will no longer qualify to do business with that customer.  Are you prepared to show that you are in compliance?

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GKG Law, P.C. has published a comprehensive GDPR Client Alert. For more information on this Client Alert, please contact Steve Fellman at sfellman@gkglaw.com.

In response to a petition filed by Ed Greenberg on behalf of the National Customs Brokers and Forwarders Association of America.

On June 6, 2018, the Federal Maritime Commission voted unanimously in its Docket 17-10 to approve groundbreaking relief for NVOCCs by significantly expanding the Negotiated Rates Arrangement (NRA) and NVOCC Service Arrangement (NSA) exemptions.  Although the expanded exemption will not become effective until the agency is able to issue a formal decision (which we expect to be done in about a month), the vote by the commissioners made it very clear that the agency would no longer be content to let early 20th century regulatory theory impede the dynamic nature of the ocean shipping industry.

What does this mean for NVOCCs? With respect to NSAs, it means that NVOs will no longer be required to file their NSAs or amendments with the Commission.  Nor will they be required to publish the so-called essential terms of the NSAs in their tariffs.

As to NRAs, it means a number of things.  First, the prohibition against amending NRAs will be lifted.  Accordingly, NVOCCs and their customers will be able to enter into longer term negotiated agreements and be able to amend them at will so they can be more responsive to changes in the ocean shipping marketplace.  Second, there will no longer be a prohibition on including other economic terms in an NRA, so that an NVOCC can agree with its customer on a broad range of issues, including but not limited to:

• Minimum volumes
• Liquidated damages
• Credit
• Service guarantees
• Surcharges and GRIs
• EDI services
• Dispute resolution terms
• Liability for loss and damage

Third, recognizing that it is often difficult for an NVOCC to get a shipper to acknowledge in writing its acceptance of the terms of an NRA, the new rule will make it clear that the tender of cargo in response to an NRA will constitute acceptance and the formation of a lawful contract (just as would be the case in non-regulated industries).

It is important to understand the significance of the changes that were voted on by the FMC.  While NVOCCs can still publish rate tariffs if they so choose, and can still enter into formal NSA contracts with their customers if that is how they prefer to do business, they are now also free to do business with their customers in a virtually deregulated manner.  Although an NRA must still be in writing and must be given to customers, that is not surprising and would be a prudent business practice even if rates were totally deregulated.

In other words, by using NRAs, NVOCCS can enter into virtually any arrangement they wish with their customers without having to memorialize it in a tariff or otherwise being concerned about regulatory requirements.

If you have any questions, do not hesitate to contact GKG Law.

FMC Grants Petition to Broaden NRA and NSA Exemption

During annual meetings, conferences, educational courses, and other events, associations are frequently asked to provide special accommodations to members and other attendees that have qualified disabilities, as required under the Americans with Disabilities Act (the “ADA”).  However, associations often wonder what auxiliary aids and services are acceptable accommodations under the ADA.  Is an association required to provide the accommodation requested by the attendee?  Or can it provide an easier and/or less expensive accommodation?

The recent case Tauscher v. Phoenix Board of Realtors, Inc. provides clear guidance regarding what type of accommodations should be provided by an association in these circumstances. 

The facts of the Tauscher case are undisputed.  On September 28, 2012, Mark Tauscher, a licensed real estate agent who is deaf, notified the Phoenix Board of Realtors (“PBR”) that he intended to attend PBR classes and would need accommodations due to his disability.  Specifically, Mr. Tauscher requested that PBR provide an American Sign Language (“ASL”) interpreter.  PBR explained to Tauscher that, because of the cost, it could not provide an ASL interpreter.  However, PBR agreed to provide a FM loop system or real-time captioning.  Tauscher refused these accommodations.

In February, 2013 and October, 2014 Tauscher signed up for additional PBR courses and requested an ASL interpreter.  Each time PBR denied Tauscher’s request for an interpreter, but stated it was willing to discuss less burdensome alternatives.  Tauscher refused to discuss alternative auxiliary aids. Because PBR would not provide an ASL interpreter, Tauscher sued PBR stating it had violated the ADA, as well as the Arizonans with Disabilities Act.

Under the ADA, associations and other entities that provide public accommodations are required to “furnish appropriate auxiliary aids and services where necessary to ensure effective communication with individuals with disabilities.” 28 C.F.R. §36.303(a).  

Additionally, the ADA states that an association “should consult with individuals with disabilities whenever possible to determine what type of auxiliary aid is needed to ensure effective communication, but the ultimate decision as to what measures to take rests with the public accommodation, provided that the method chosen results in effective communication.” 28 C.F.R(c)(ii) (emphasis added).

The United States District Court for the District of Arizona reviewed the Tauscher case and issued its opinion on September 29, 2017. The court held that PBR did meet its obligation under the ADA because: (i) it engaged in a dialogue with Tauscher about his accommodation request; and (ii) it offered to provide alternative accommodations that would facilitate effective communication.  At no point was PBR obligated to provide Tauscher with the auxiliary aid of his choice – it was only obligated to ensure the aid provided ensured effective communication.

Therefore, as long as an association consults with the member requesting the accommodation to determine the type of auxiliary aid required, and provides an accommodation that ensures effective communication, it is complying with its requirements under the ADA¹.

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¹ Credentialing organizations should be aware that the ADA requires a higher standard for testing accommodations.  In those situations, the organization is required to provide an accommodation that “best ensures” the examination results accurately reflect a person’s aptitude.  We recommend consulting with an attorney prior to denying testing accommodations, to ensure the association is complying with the ADA.

Associations and the ADA