Aviation developments in the United States

Author: John F Pritchard, Holland & Knight, New York

Bonus depreciation for new aircraft and new engines purchased in 2008 and 2009

Richard A Crowley, my tax partner, says that the Economic Stimulus Act of 2008 (which was enacted on February 13 2008) amended section 168 of the Internal Revenue Code to allow super-accelerated depreciation deductions for federal income tax purposes for buyers of new aircraft that satisfy the following requirements: (a) the aircraft is eligible for the 200% declining balance method of depreciation under the Modified Accelerated Cost Recovery System (MACRS) and therefore cannot be used predominantly outside the US or leased to a governmental or tax-exempt entity or to a foreign person, subject to exceptions; (b) the aircraft is acquired by the owner thereof (i) after December 31 2007 and before January 1 2009 (but only if no written binding contract for the acquisition of the aircraft was in effect before January 1 2008), or (ii) after December 31 2008 pursuant to a written binding contract which was entered into during 2008; and (c) the original use of the aircraft begins with the owner (or is deemed to begin with the owner under special rules for (i) sale-leaseback transactions within three months after the date the seller-lessee places the aircraft in service and (ii) lessor-to-lessor transfers within three months after the date the original lessor places the aircraft in service); and (d) the aircraft is placed in service by the owner before January 1 2009 or, in the case of certain aircraft, before January 1 2010.

The depreciation deductions allowed to the owner of a new aircraft that satisfies the foregoing requirements are calculated as follows: (a) a bonus depreciation deduction is allowed for the year in which the aircraft is placed in service by the owner in an amount equal to 50% of the owner's cost of acquiring the aircraft; and (b) the remaining 50% of the owner's cost of acquiring the aircraft is recovered in accordance with the regular depreciation method and cost recovery period that apply to the aircraft, commencing in the year in which the aircraft is placed in service by the owner.

Bonus depreciation deductions are also allowed for buyers of new aircraft engines that satisfy the requirements described in paragraph 1 above (substituting the word engine for aircraft).

In accordance with Treasury Regulations Section 10.35 governing tax practice, we inform you that any tax advice contained in this document was not intended or written by us to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Code.

Cape Town Convention status

Aircraft finance and leasing practice under the Cape Town Convention and Aircraft Protocol have continued to mature and become more regularized in the US. As new countries continue to ratify the Convention (20 as of the date hereof), the Convention is coming closer to the vision of its original drafters.

Foreign carriers may lease aircraft and crew to US airlines

Anita Mosner, my aviation regulatory partner, has described the break with longstanding policy by the US Department of Transportation (DOT) and Federal Aviation Administration (FAA) who has announced that non-US airlines will be able to provide US carriers with aircraft and crew for international flights. (See, "Provision of Entire Aircraft With Crew to a US Certificated Air Carrier By A Foreign Air Carrier," Docket OST-2008-00063, February 22 2008, published in 73 Fed Reg 10986 (February 29 2008). While the change applies to all foreign carriers, the US Government took this step to honour its commitments under the new EU-US Open Skies Agreement. This policy change will create significant new market opportunities and give multinational alliance groupings greater operational flexibility.

Notably, the new policy leaves unchanged the FAA rule (14 CFR 119.53(b)) which prohibits foreign carriers from wet leasing aircraft and crew to US carriers. In the new rule, the DOT has defined a contract to provide aircraft and crew and will allow such arrangements to qualify even though they may be called a wet lease.

Non-US carriers must obtain approval from DOT before implementing these arrangements, and will have to demonstrate to DOT that their arrangements meet the applicable criteria, which include:

• Demonstrating that the lessor will retain operational control of the flight;
• Demonstrating that legal and actual possession of the aircraft will remain with the lessor; and
• Demonstrating that the operations would otherwise be in the public interest.

The new policy does not authorize foreign carriers to fly between domestic US points. Foreign carriers performing such aircraft and crew arrangements under the new policy will have to hold DOT economic authority to perform charter services and will have to undergo safety audits by their US partners.

New York Passenger Bill of Rights Legislation

David Harrington, my aviation litigation partner, has summarized the New York Passenger Bill of Rights Legislation. New York has became the first state in the nation to enact a passenger bill of rights requiring airlines to provide basic consumer protections to the flying public who are stranded on aircraft on severely delayed flights operating out of New York. Since the NY law's enactment, approximately 12 more States have introduced similar legislation, including Pennsylvania and California. Similar federal legislation is also now pending.

The NY law requires airlines to provide passengers with basic necessities when the passengers have boarded the aircraft and are delayed for more than three hours before takeoff. Necessities include adequate food, drinking water, and other refreshments; aircraft power for fresh air and lights; and working restrooms. It also provides for the creation of the Office of Airline Consumer Advocate (OACA) to oversee compliance and investigate passenger complaints. The NY law does not create a private cause of action, but does allow for civil penalties of up to $1,000 per passenger per violation.

The ATA challenged the legality of New York's Passenger Bill of Rights in the US District Court for the Northern District of New York in the case of Air Transport Association of America v. Cuomo. The ATA argued that the legislation regulates the services provided by air carriers and, thus, is explicitly preempted by the Airline Deregulation Act (ADA). The Court upheld this new law stating that law implicated aviation health and safety, which is not a service within the meaning of the ADA. The ATA appealed to the US Court of Appeals for the Second Circuit and a decision is still pending.