The A to Z of Tax Depreciation for Aircraft Owners: How to Maximize Deductions and More

GKG Law's Keith Swirsky conducted a National Business Aviation Association (NBAA) CPE webinar on Tuesday, October 13. During his session, The A to Z of Tax Depreciation for Aircraft Owners: How to Maximize Deductions and More, Keith discussed how best to maximize allowable depreciation deductions — a critical part of any tax planning strategy. Understanding the complex tax regulations surrounding business aircraft deprecation is important for all aircraft owners and operators. Attendee takeaways included:

  • Determine the applicable depreciation schedules for business aircraft, including the potential availability of immediate expensing. 

  • Structure aircraft operations to maximize depreciation deductions.

  • Identify and navigate potential limitations to depreciation deductions. 

NBAA's recap of the session can be found here.

GKG Law Wins Circuit Court Decision Affirming Summary Judgment in In re Containership Co.

In a case spanning more than nine years and involving claims of more than $8 million, GKG Law’s Litigation Group recently prevailed on behalf of more than 20 clients in the U.S. Court of Appeals for the Second Circuit. The Court affirmed the U.S. District Court for the Southern District of New York’s grant of summary judgment against The Containership Company (TCC). GKG Law principals Brendan Collins and Edward D. Greenberg served as lead counsel for the firm's clients in this matter.

“We are extremely pleased with this result, and proud of our clients who remained strong and resolute throughout the tenure of this long-term matter. We worked hard to achieve this success and we are grateful to our clients for trusting us with such important work,” said Collins.

Litigation began in 2011 after TCC, a steamship line, filed for bankruptcy in Denmark and then filed 77 adversary proceedings against Non-Vessel Operating Common Carriers (NVOCCs) and beneficial cargo owners in the U.S. Bankruptcy Court for the Southern District of New York. The adversary proceedings alleged breach of pre-petition service contracts and sought liquidated damages plus interest and attorneys’ fees. Essentially, the TCC bankruptcy trustee sought to collect liquidated damages due to the failure of those parties to satisfy their respective minimum contract requirements.  In 2016, the bankruptcy court, relying on pleadings that GKG and other law firms filed, granted summary judgment against TCC, which was then affirmed by the District Court in 2019.

Throughout the course of litigation, many defendants opted to settle, but GKG Law encouraged its clients to continue litigation based on the strength of their defenses. In its October 8, 2020 decision, the Second Circuit affirmed the District Court’s finding that TCC failed to provide service and accordingly itself breached the relevant service contracts. As a result, GKG Law’s clients are not liable to TCC for any damages.

Treasury Expands Sanctions on Iranian Financial Institutions; Census Confirms BIS Rules for EEI Filing Requirements Under New MEU Rule

Secondary Sanctions on Iranian Financial Institutions
On October 8, 2020, the U.S. Department of the Treasury designated 18 Iranian banks under Executive Order (E.O.) 13902 (2020), which effectively extends secondary sanctions to Iran’s entire financial sector. As a result, foreign financial institutions and companies may be subject to secondary sanctions, Specially Designated National (SDN) designations, or enforcement actions for engaging in significant transactions with Iranian banks designated under E.O. 13902. As part of this action, the Office of Foreign Assets Control (OFAC) issued General License L and FAQs 842 through 847 on their website. The major takeaways from this action are:

  • General License L authorizes U.S. and foreign companies to continue engaging in activity involving Iranian banks if that activity is authorized or exempt under the Iranian Transactions and Sanctions Regulations (ITSR). Remember, many Iranian banks are SDNs under multiple sanctions programs (e.g., Bank Markazi, Bank Saderat, Iran Overseas Investment Bank, Iran Export Bank, Ansar Bank, Mehr Bank, Bank Hekmat, Bank Mellat, Parsian Bank, Sina Bank, Bank Melli, Bank Sepah, Post Bank of Iran, Day Bank, Bank Tejarat, and others) and cannot be used for activity under ITSR licenses and exemptions. Those banks are still restricted even if an ITSR license or exemption applies.
  • OFAC is providing foreign banks and companies with a 45-day wind down period to end all activity prohibited under the E.O. 13902 designation action (i.e., by November 22, 2020).
  • OFAC’s policy regarding non-U.S. humanitarian activities remains in effect. Under this policy, foreign companies and banks would not generally risk exposure to U.S. sanctions for engaging in transactions for the purpose of supplying goods to Iran to ensure the protection of life, health, and safety, provided that the goods are intended solely for use in Iran. These types of goods include products for sanitation, hygiene, medical care, medical safety, manufacturing safety, soap, hand sanitizers, ventilators, respirators, personal hygiene products, diapers, infant and childcare items, personal protective equipment, manufacturing safety systems, safety devices, alarm systems, and ventilation systems.
  • While the E.O. 13902 secondary sanctions and designation criteria target significant transactions with Iranian banks, OFAC has yet to issue guidance on what types of activity would be considered significant or non-significant here. OFAC expects to issue additional guidance on what types of activity may be non-significant and, therefore, non-sanctionable even after the end of the wind down period. Based on OFAC’s prior guidance on defining “significant” transactions in other contexts, we expect that high value transactions, patterns of a high volume of transactions, and investments may be deemed significant.

As E.O. 13902 provides specific secondary sanctions for foreign financial institutions, we expect that foreign banks will take an increasingly strict stance against Iran-related transactions. Foreign banks may send out inquiries to forwarder customers that handle Iran-related activity as the banks conduct internal risk assessments.

In light of these new secondary sanctions, it would be prudent for foreign forwarders to review any Iran-related business to determine:

  1. The extent of Iran-related business and the involvement of Iranian financial institutions in those transactions;

  2. The lines of Iran-related business that are authorized under ITSR licenses or exemptions;

  3. The lines of Iran-related business that involve the supply of goods to Iran to ensure the protection of life, health, and safety; and

  4. Any steps needed to wind down Iran-related business that involves Iranian financial institutions and does not fall into categories (b) or (c) above.

Once OFAC releases its guidance on how to distinguish between significant (i.e., sanctionable) and non-significant (i.e., non-sanctionable) activity, forwarders could then take steps to fully wind down business that would be prohibited after November 22, 2020. We will send out another alert once OFAC issues additional guidance on these issues.

Census Guidance on EEI Filings Requirements Under New BIS MEU Rule
On October 8, 2020, the U.S. Census Bureau (Census) issued guidance related to questions it had received concerning the new EEI filing requirements for exports to the People’s Republic of China (PRC), Russia, and Venezuela that came into effect on June 29, 2020, and September 27, 2020. Census’s guidance below is consistent with guidance previously provided by BIS on these issues:

  • EEI filings are required for the export of all non-EAR99 items from the U.S. to the PRC, Russia, and Venezuela, unless the shipment is eligible for License Exception GOV. This requirement is set forth in 15 CFR § 758.1(b)(10).

  • This rule does not apply to EAR99 items. EAR99 items may still require EEI filings under other Export Administration Regulations (EAR) or Foreign Trade Regulations (FTR) rules.

  • If EEI filing for exports to the PRC, Russia, or Venezuela is required, then the ECCN must be reported in AES.

FMC Reviews Carrier Billing Practices

During the course of the Federal Maritime Commission’s (FMC) investigation of the demurrage and detention practices of the vessel operators in Docket No. 19-05, Interpretive Rule on Demurrage and Detention Under the Shipping Act, several parties raised concerns about why they should have been invoiced for any of those or other charges in the first place. More specifically, these commentators questioned the propriety of how the VOCCs’ bills of lading define the term “Merchant.” As those definitions generally include parties such as anyone acting on behalf of the shipper or consignee, the comments included complaints about having been dunned for these charges even if their only role was to act as an ocean forwarder or customs broker.

These comments, and similar complaints forwarded by the National Customs Brokers & Forwarders Association of America (NCBFAA), resonated with the FMC. And, on October 7, 2020, the FMC issued a Notice of Inquiry (NOI) seeking public comment as to whether this was a normal experience and whether the trade industry regarded it as problematic. The new proceeding is entitled Docket No. 20-16, Notice of Inquiry – Vessel Operating Common Carrier Definition and Application of the Term “Merchant” in Bills of Lading.

As noted in the NOI, general contract law principles provide that a party cannot properly enforce a contract against another party who has not agreed to be bound by its terms and conditions. By expanding the definition of “Merchant” in this fashion, the carriers appear at times to be holding non-contracting parties—who have no interest in the cargo, are acting only as agent of the beneficial cargo owners and/or typically appear on the bills of lading only as a Notify Party or Forwarding Agent—liable for unpaid charges.

The FMC has accordingly initiated this NOI to determine whether VOCCs are unjustly or unfairly assessing charges on third parties with whom they have no contractual relationship. The FMC is seeking public comment on the following:

  • How VOCCs apply the term “Merchant” in their bills of lading
  • Whether the definition, as applied, subjects third parties who are not in contractual privity with the carrier to joint or several liability
  • Whether carriers have enforced the definition of merchant against third parties such as customs brokers and freight forwarders that have not consented to be bound by, or otherwise accept, the terms and conditions of the bill of lading

The FMC also intends to contact certain VOCCs to provide information on their billing practices and their application of the definition of “Merchant.” The FMC has opened this NOI to all industry stakeholders. VOCCs, shippers, ports, maritime terminal operators, ocean transportation intermediaries, truckers, stevedores, and customs brokers are encouraged to submit comments.

Comments are due by November 6, 2020 and should be submitted by email to secretary@fmc.gov, with the subject line: “Response to FMC NOI—Merchant Clause.” It is important to note that these comments can be filed confidentially, so that anything stated would not be made available to the carriers or other parties. Consequently, if this is an issue that your company has experienced, it is worth considering the submission of comments, so that the FMC can have a record on which it can put an end to what seems to be an unreasonable practice.

A copy of the notice of inquiry is available on the FMC’s website at www.FMC.gov.

Of course, if you have any questions or wish assistance in drafting comments, please feel free to contact us.

How to Ensure Compliance With GDPR When Drafting Vendor Agreements

GKG Law's Oliver Krischik led the Lorman webinar "How to Ensure Compliance With GDPR When Drafting Vendor Agreements" on October 6. Webinar attendees learned how to draft agreements with vendors and customers in a manner that is compliant with the GDPR, how to recognize when a vendor agreement needs to address GDPR compliance, and the GDPR requirements for different types of agreements. A full description of the webinar can be found below. Anyone interested in accessing the full recording can purchase on demand at 50% savings through Lorman here.

The EU’s General Data Protection Regulation (GDPR) imposes new data privacy obligations and restrictions on many U.S. companies that handle personal information about individuals located in the EU. The penalties for noncompliance with the GDPR are severe, and failure to maintain compliant data privacy and data security can hinder a U.S. company’s ability to do business internationally. As data privacy regulators enforce these new laws and individuals become more familiar with their new data privacy rights, businesses need to ensure that their vendor agreements and relationships do not expose them to GDPR liability for inadvertent noncompliance.

 

Business Aviation Update from Trusted Advisors: Separating Fact from Fiction

GKG Law's Keith Swirsky was invited to serve as a panelist for the Aviation International News (AIN) webinar "Separating Fact from Fiction," which took place on October 6.

Keith and his co-presenters, Mesinger Jet Sales CEO/President Jay Mesinger and Solairus Aviation Chairman/CEO Dan Drohan, shared candid insights and opinions on the real state of the business aviation market, what to expect through 2021, and strategies for managing during a crisis while targeting new business opportunities. The session was moderated by AIN Editor-in-Chief Matt Thurber. This webinar was well suited for first-time buyers and seasoned owners and operators. Attendees learned:

  • The new baseline for business aviation operations and sales
  • What are companies doing to survive and thrive in today’s market
  • How to qualify for bonus depreciation
  • Liability protection planning, plus use of LLCs and their true benefits
  • Whether charter use of an aircraft provides benefits in addition to subsidizing fixed costs

A recording of the webinar can be found here and AIN's written recap of the session can be found here.

"…GKG Law president Keith Swirsky said he too is seeing a lot of first-time buyers, particularly in the area of fractional ownership. 'Those tend to be buyers that do not have business use for aircraft and they are specifically having conversations with me about not wanting to fly commercial.' The customers have not experienced much private aviation, he said.

'They're looking for other options such as block charter from a management and charter company or any other kind of products or derivative products that are in the marketplace today,' he said.

Also, he is seeing a lot of tax-, financing-, and pricing-motivated purchase decisions. 'I'm seeing a lot of strategic buyers, trying to obtain a big write-off, low cost of financing, and an attractive pricing environment,' he said.

Swirsky said there have been incorrect assumptions associated with how quickly a deal can get done because, with much more financing ongoing, the process has slowed. 'Financing has become the long pole in the tent,' he said."

STB: Effects of Board Expansion & Change

SURFACE TRANSPORTATION BOARD RISING TO FULL STRENGTH JUST AS BEGEMAN'S TERM CLOSES AND THE POLITICAL SEAS (POTENTIALLY) CHANGE.

The United States Surface Transportation Board (STB) is on the verge of a significant transition. Coming changes are in the Board’s composition and the possible effects on its regulatory process. Rail transportation professionals should consider ways in which these changes may impact their business decisions.

The Background

In 2015, Congress passed an amendment expanding the STB from three members to five. Partisanship has prevented the full complement from being confirmed thus far. (Ironically, in January 2019, after Vice Chairman Deb Miller’s term expired, the STB was briefly reduced to a single member, Chairman Ann Begeman.) In mid-January 2019, the Senate finally confirmed Republican Patrick Fuchs, an Office of Management and Budget and Senate Commerce Committee veteran, and Democrat Martin Oberman, a career trial attorney from Chicago, who had served as an alderman and as Chairman of Chicago’s Metra commuter railroad.

Begeman, Fuchs, and Oberman have fostered a more proactive culture, encouraging greater interaction between Board members and stakeholders. Further, Begeman has elevated the level of discipline and accountability in the STB’s processing of cases and regulatory proceedings. The current Board has distinguished itself by holding comprehensive public hearings and oral arguments, during which all three members have aggressively questioned railroad and shipper witnesses for lengthy periods of time. Dynamics aside, it’s evident that the current STB listens to its stakeholders well and is genuinely striving for improvement. Under Begeman, the STB has held numerous proceedings to address key issues identified by rail shippers – such as demurrage and accessorial charges, and the need to improve rate reasonableness review standards and procedures.

On Deck

The next chapter of the STB’s story involves two additional players: Michele Schultz and Robert Primus are expected to be sworn in soon, bringing the STB to its full quota of five members. Schultz is a Republican and former deputy general counsel for the Southeastern Pennsylvania Transportation Authority. Primus is a long-time Democratic Congressional staffer, and has served Sen. Frank R. Lautenberg and Rep. Michael Capuano, two lawmakers esteemed in the railroad community. On 16.September, Primus was reported favorably out of the Senate Commerce, Science, and Transportation Committee. He and Schultz are expected to be confirmed and take their seats on the STB soon.

What to Watch

The STB expansion comes at a time of uncertainty at the STB:

  • Begeman’s second term expires at the end of 2020, and there has been no indication that she intends to remain for a permitted “holdover” year while her replacement is found. Thus, the major proceedings before the STB could be slowed or stalled while a new-member majority is brought up to speed. This also raises the likelihood that the STB would be composed of two Democrats and two Republicans, for a period.

  • The 2020 presidential election outcome will affect the STB’s operations, as the winning party appoints the Board’s Chairman. Accordingly, one could expect that Fuchs would be named chairman if President Donald Trump is reelected, and that Oberman would be named chairman if former Vice President Joe Biden is elected. Each would bring a very different approach to the role. It is also quite possible that the next Chairman is not currently serving on the Board.

  • Under the “sunshine laws,” a majority of the STB currently may hold a meeting on official agency business that is “not open to public observation,” only if the meeting attendees are disclosed and a summary of the meeting is posted on the STB’s website. This rule has substantially chilled and even prevented STB members on a three-person Board from communicating with each other. A five-member Board will free members to communicate discreetly about official agency business and pending matters.

  • It is unknown how Primus’s and Schultz’s policy views will mesh with those of the current members, or how Begeman’s replacement will relate with the incumbents. Undoubtedly, the STB’s internal dynamic will change once its full complement is reached.

Shared with permission from Atlantic Northeast Rails & Ports. To request a sample issue, email editor@railsandports.com.

Oliver Krischik Participates in AMBA Sanctions Webinar

GKG Law's Oliver Krischik was invited to serve as a featured panelist for an American Muslim Bar Association (AMBA) webinar that took place on September 30 at 8:30 pm ET. Oliver, a member of the AMBA’s Legal Resource Network, spoke about various aspects of U.S. sanctions law. 

NBAA & NATA Submit Comments Addressing NPRM on FET Exemption for Business Aircraft Management Services

The National Business Aviation Association (NBAA) and National Air Transportation Association (NATA) joined forces to draft and submit to the IRS and Department of the Treasury detailed comments in response to the July 31, 2020 proposed Excise Taxes; Transportation of Persons by Air; Transportation of Property by Air; Aircraft Management Services regulations. This notice of proposed rulemaking (NPRM) involved legislative exemption from federal excise taxes (FET) on aircraft management services paid for by aircraft owners.

As noted in this NBAA press release, the joint comments from NBAA and NATA raise “several significant issues, including suggesting a broader definition of aircraft leases to qualify for the FET exemption. With the wide variety of lease structures utilized by business aircraft owners and operators, the IRS should provide additional flexibility in applying the exemption and deeming that lessees are owners for purposes of the exemption.”

The comments also contain:

  • A request for the IRS to amend its explanation of disqualified leases so as to better conform with the statute enacted by Congress and to ensure that common types of leases are not disqualified from the exemption;
  • Reinforcement that aircraft owners should qualify for the FET exemption whether flights are conducted under Part 91 or Part 135 of the Federal Aviation Regulations;
  • Prompting for the IRS to develop documentation standards that allow management companies to substantiate that payments they receive from aircraft owners to meet the requirements to qualify for the exemption;
  • Suggestions for improved regulations as to how FET is collected and remitted for charter flights arranged by a broker.

Please do not hesitate to contact a member of GKG Law’s Business Aviation team with questions about the NPRM or the NBAA/NATA comments as they relate to your business needs and decisions.

Recommended Practices for Avoiding Discrimination in Hiring and Termination Decisions

GKG Law Principal Katie Meyer authored an article published by the American Society of Association Executives (ASAE) on September 24. See complete article here and below.


Association HR staff should review policies and practices around hiring and termination to reduce the likelihood that implicit bias is influencing their process and leaving their staff less diverse.

The recent Black Lives Matter protests have made many people look more closely at racism in the United States. While, presumably, every employer is aware that it is illegal to discriminate against employees based on race or color, many are now educating themselves as to how implicit bias and structural racism can play a part in employment decisions. Associations should review current policies to identify unconscious biases in standing employment procedures. By conducting this analysis, associations can take steps to create a more diverse workforce and safeguard against future possible discrimination claims. Below are recommended practices that can help limit discrimination in hiring and termination decisions.

Hiring Procedures

Many employers and HR managers are unaware of how implicit bias can affect every part of the hiring process. To limit the impact of such biases, associations may want to consider the following when revising their hiring policies:

Job postings. Carefully review each job posting to determine the actual qualifications needed to perform a job. For instance, before requiring a certain level of education, make sure that type of education is needed to perform the job. There may be qualified applicants who have a great deal of experience but have not taken the traditional route to get to the position they are in now.

Associations also may want to re-evaluate and broaden where they list job postings. There may be other educational institutions, listing sites, and publications that cater to a more diverse group of qualified applicants. Additionally, in the association world, it is common for employers to learn about possible job applicants through word of mouth or referrals. While this may be an easier and less expensive way to hire, it greatly limits the ability of individuals outside the association’s network to learn about job opportunities.

Resume review. Resumes contain information about applicants that can be used to deduce their racial or ethnic background. Several studies show that individuals who have more ethnic-sounding names are less likely to make it to the interview stage of the hiring process. To help ensure that every candidate has an equal shot at the position, associations can create a “blind” resume review process. Before giving resumes to the person or committee reviewing them, remove the applicant’s name, address, education, and other information that could help identify a person’s race or ethnicity. By reviewing blind resumes, employers will be more likely to evaluate applicants based on their experience and accomplishments.

Interviews. The hiring process can go very wrong at the interview stage. Inexperienced interviewers sometimes make inappropriate comments or ask off-the-cuff questions that could be viewed as offensive or discriminatory. Additionally, conversational, unstructured interviews tend to focus less on the abilities of the applicant and more on the rapport between the interviewer and applicant.

A job interview should be about determining whether a person has the proper qualifications for the position, not whether the applicant will fit into the interviewer’s social circle. While fitting in to the “corporate culture” can be important, in order to keep the interview focused on the job, it is prudent to use the same list of preapproved questions for each interview. Structured interviews help employers base their decision on the skills and abilities of each applicant, as opposed to whether they have a lot in common with the interviewee.

Termination Procedures

Reductions in force. Unfortunately, over the past six months we have seen an overwhelming number of layoffs and firings due to the COVID-19 pandemic. While these terminations may be unavoidable, associations need to be careful to ensure that people of color are not disproportionately affected by them. The Equal Employment Opportunity Commission recommends that, prior to implementing a layoff or reduction in force, an organization conduct an adverse impact analysis to determine if it will result in a disproportionate dismissal of a protected group.

Terminations. It is crucial to carefully examine the reasons for terminating an employee of a protected class. While a person might be an “at will” employee, he or she still cannot be terminated because of discriminatory reasons. To help protect against an improper-termination claim, associations should have clear evidence that a termination was due to nondiscriminatory reasons. Therefore, it is important that the association document all performance issues or disciplinary actions of an employee at the time they occur.

Additionally, the reasons for termination must be uniformly applied. If a person is being terminated due to a violation of employment policy, such as tardiness, absenteeism, or conduct, the action must be consistent with past termination decisions. For instance, if a company terminates an African-American woman for chronic lateness but takes no action against a Caucasian woman who is frequently late, the termination may be viewed as discriminatory.

Any employer who has concerns or questions about hiring or terminating employees should consult legal counsel before taking action in order to assess potential risks.

 

This article originally appeared on ASAEcenter.org. Reprinted with permission. Copyright ASAE: The Center for Association Leadership (September 2020), Washington, DC.

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