Tax-Free Exchanges of Aircraft Under Section 1031
Seeking Professional Assistance; Choosing a Qualified Intermediary
Under Section 1031
© 1999 KEITH G. SWIRSKY
Although the 1991 Regulations provide guidance, there are many detailed and/or procedural rules and traps for the unwary. A taxpayer who is able to comply with these rules can be reasonably confident of getting the desired, and favorable, tax treatment.
There are, however, a variety of complex issues which invariably come up in the process of planning and implementing an exchange. For example: the old or replacement aircraft may be, or become, subject to debt or operating leases, or contractual rights and obligations associated with a fractional ownership program (the fractional ownership documentation issue being whether or not the taxpayers' contractual rights in the replacement aircraft are "like-kind" to the old aircraft); the old aircraft may be held by one entity and the replacement aircraft is targeted to be held by a different entity (generally due to state sales tax considerations); the buyer of the old aircraft may tender notes instead of cash, or, if a "parking" mechanism is used, in connection with a possible "reverse" exchange, no cash proceeds will exist until ultimate resale and the taxpayer will not want to give up the economic upside in the aircraft value; there may be nonrefundable deposits that have been previously tendered or the replacement aircraft contract requires progress payments prior to the old aircraft being sold and/or which are so large that the final payment is less than the proceeds from the sale of the old aircraft; there may be multiple aircraft bought and/or sold; the seller of the replacement aircraft may require transfer of title to the taxpayer prior to the aircraft interior completion or modifications, raising issues of timing and "reinvestment" of the proceeds from the old aircraft; or there may be avionics, spare engines (typically in commercial deals) or other items that are part of the deal.
Recent years have seen a proliferation of organizations in the business of serving as qualified intermediaries, qualified escrow account agents and qualified trust trustees. Typically, these organizations supply initial drafts of all of the documents necessary to effect a deferred like-kind exchange. These documents should be closely scrutinized, however, as they are likely to be "form" documents only and are not guaranteed to satisfy all of the requirements of Section 1031 and the Regulations there under In fact, the documents will almost always contain a provision in which the organization explicitly disclaims any responsibility for compliance with the requirements of Section 1031.
Choosing an experienced tax/aviation attorney will allow the taxpayer to obtain the necessary documentation, which will be customized for the particular deal circumstances, as well as proper tax advice and planning concerning the innumerable issues that may have to be considered. Further, it is normal for a variety of regulatory (Federal Aviation Regulations) issues to arise and experienced aviation counsel will be able to guide the taxpayer through these and other issues.