Delaware corporation purchase

[Djpayne07]

Good evening everyone,

I reached agreement with a friend today to purchase a 1981 Mooney m20J. The plane is solely owned by a Delaware C corporation. So I will be purchasing 100% of the stock of the Delaware corporation. I know that it is fairly common for people to use a Delaware corp to avoid sales tax but has anyone on here specifically purchased a plane this way? Any guidance/experience you are willing to share is greatly appreciated.

 

Thanks,

 

Dustin

[EricJ]

45 minutes ago, Djpayne07 said:

Good evening everyone,

I reached agreement with a friend today to purchase a 1981 Mooney m20J. The plane is solely owned by a Delaware C corporation. So I will be purchasing 100% of the stock of the Delaware corporation. I know that it is fairly common for people to use a Delaware corp to avoid sales tax but has anyone on here specifically purchased a plane this way? Any guidance/experience you are willing to share is greatly appreciated.

 

Thanks,

 

Dustin

You don't have to do it that way if you don't want or if it disadvantages you somehow depending on your own state tax laws.    The corporation can sell you the airplane with a Bill of Sale just like anything else.    This may not be advantageous to the seller, but you should sort out what's best for you.

I used to own a silver mine via an LLC, and when we sold the mine the LLC just sold the mine rather than selling the LLC, even though it was the LLC's only asset.   

Figure out what's best for you.

[kortopates]

1 hour ago, Djpayne07 said:

fairly common for people to use a Delaware corp to avoid sales tax

As Eric said, you need to do what's best for you. You don't have to inherit the Corp or LLC by buying the stock, you can also just buy the plane from the Corp/LLC which is more common.

Its also not true that this is done to avoid sales tax, because your Sales Tax liability (or property tax after sale) has everything to do with the State and county where it will be based at. For example, in California it would do nothing for you except protect you from liability only when a partner in the Corp/LLC was flying. But won't protect you when your the pilot. And if your the sole owner, the only thing it may do from you is hide your home or business address from being displayed on your FAA registration.

So I'd highly recommend speaking to a local tax consultant or CPA to get advise to fit your needs. But personally I would not be interested in buying the Corp/LLC, just the plane. I am pretty confident it won't save you from sales tax in FL either but we have lots of folks in FL that can share tax details in FL.

Edited August 7, 2022 by kortopates

[Fly Boomer]

6 hours ago, Djpayne07 said:

fairly common for people to use a Delaware corp to avoid sales tax

As Tennessee Ernie Ford sang (with his basso profundo voice), "One fist of iron, the other of steel, If the right one don't get you, then the left one will."  If you don't pay sales tax, you will almost certainly pay use tax.  Talk to a professional.

[ArtVandelay]

Don’t corporations have to be renewed (and fees paid) every year?

[Djpayne07]

9 hours ago, EricJ said:

You don't have to do it that way if you don't want or if it disadvantages you somehow depending on your own state tax laws.    The corporation can sell you the airplane with a Bill of Sale just like anything else.    This may not be advantageous to the seller, but you should sort out what's best for you.

I used to own a silver mine via an LLC, and when we sold the mine the LLC just sold the mine rather than selling the LLC, even though it was the LLC's only asset.   

Figure out what's best for you.

Good morning,

I am aware I do not have to purchase it this way. If I don’t I will be establishing a Delaware C corp prior to finalizing paperwork. I’m in Florida and this absolutely does save on the taxes. Simply looking for thoughts on which would be easier, buy the corp, and it’s only asset or start a corp and go that route.

[Fly Boomer]

25 minutes ago, Djpayne07 said:

absolutely does save on the taxes

Use Tax

Use tax is due on the use or consumption of taxable goods or services when sales tax was not paid at the time of purchase.  For example:

- If you buy a taxable item in Florida and did not pay sales tax, you owe use tax.
- If you buy an item tax exempt intending to resell it, and then use the item in your business or for personal use, you owe use tax.
- If you buy a taxable item outside Florida and bring it into (or have it delivered into) Florida, and you did not pay sales tax on the item, you owe use tax.

This was from the first hit when searching for "florida use tax"
https://floridarevenue.com/taxes/taxesfees/pages/sales_tax.aspx

[LANCECASPER]

Just thinking out loud, I'm not a tax advisor. But if you buy the corporation and the corporation has owned the airplane for a few years I would ask for original airplane purchase documents to be included with the sale of the corporation.  If you ever are found liable for sales tax, it should be on the price that the corp. originally paid for the airplane. There may even be a statute of limitations so that the corp would no longer owe the tax. But as others have said, check with a professional. We have Delaware CPA @Danb on Mooneyspace that you might be able to hire to look into this for you. (Any advice you get for free is worth exactly what you paid.)

[M20F]

2 hours ago, LANCECASPER said:

Just thinking out loud, I'm not a tax advisor. But if you buy the corporation and the corporation has owned it for a few years I would ask for original airplane purchase documents to be included with the sale of the corporation.  If you ever are found liable for sales tax, it should be on the price that the corp. originally paid for the airplane. There may even been a statute of limitations so that the corp would no longer owe the tax. But as others have said, check with a professional. We have Delaware CPA @Danb on Mooneyspace that you might be able to hire to look into this for you. (Any advice you get for free is worth exactly what you paid.)

I would add when you buy a corp you could be buying other liabilities aside from the plane that the corporation has incurred.

The only time I would recommend going the business route is if you have a business already and want to put the plane into it.  Doing any type of incorporation solely for the purpose of aircraft ownership has not benefits that I have ever been able to discern. 

[ArtVandelay]

Many states require marinas and FBOs to report tenants to the state government. What happens is you buy the plane or boat, then sometime next year you’ll get a notice from the state telling you owe (sales, use, property) taxes, and because you’re late, interest…somewhere between 12-18% is normal.
Now if you have your own hangar home, they may not catch on, unless of course they start using technology (ADSB for planes, AIS for boats).
The people with yachts registered in the islands to avoid taxes have to move them around so not to get taxed.

[Frank B.]

Dustin,

Welcome to the exclusive club know as “Mooney Aircraft Ownership”. As I am sure you already know you have joined a very elite group when you became a Mooney owner yesterday. Having know the aircraft that you purchased yesterday for many years I think that you have purchased one of the best examples in existence of a low time, virgin, un-molested J model 201. I am anxious to watch you transform this already prime example of an aircraft into a modern 21st century time travel machine. You will never climb behind the wheel that you won’t have a big smile on your face. YEAH … even after you just wrote that check for the annual airworthy inspection. 
 

I hope that you will get some really good cross over training from a qualified Mooney instructor and some day …. way down the road … you will pass that little time travel machine down to your sons. 

Congratulations …. Frank

[Danb]

Always remember when doing a stock purchase for a company you’ve bought the assets, the plane in this case plus any and all liabilities hidden or disclosed. This isn’t tax advice nor advice on the purchase of a company vis stock…just saying 

 

[Marauder]

What Dan is saying is pretty important. Since it is a private company not subject to GAAP rules, if they used the company as a shell company to hide liabilities, you’ll get saddled with them.

It would be to your advantage to buy the asset from the company and leave the ownership of the “company” with the seller.


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[Danb]

C totally agree..

[1980Mooney]

13 hours ago, M20F said:

I would add when you buy a corp you could be buying other liabilities aside from the plane that the corporation has incurred.

 

4 hours ago, Danb said:

Always remember when doing a stock purchase for a company you’ve bought the assets, the plane in this case plus any and all liabilities hidden or disclosed. This isn’t tax advice nor advice on the purchase of a company vis stock…just saying 

Spot on.  @Djpayne07 If you are buying a C Corp then you need to do due diligence on the Corporation.  You are "stepping into the shoes" of the prior owner.  You are acquiring the assets and all the liabilities (both on and off the balance) since its inception.  If, in the future, there is any claim for anything that is claimed to have happened prior to your ownership of the stock of the company, the company will have to defend itself.   Remember you don't own the plane, you own the stock in the C Corp.

Why own a plane in a C Corp?

First think about how you will set it up - How will you fly a plane that you don't personally own.  I assume that you will lease the plane from the C-Corp when you want to fly

Pros

• Liability for any claim is limited to the C-Corp (it protects you the owner of the stock in the C corp from a lawsuit related to the plane in the C-Corp)
  • If there is a lawsuit or claim against the C-Corp the most a party can get is the plane and any cash you put into the company

Cons

• Double taxation if your sell the plane in an asset sale (First the C Corp pays sales tax locally on the sale and then income tax on any gain and Then when the C Corp dividends the proceeds of the sale out to you (the shareholder) then you pay income tax individually on dividends received (i.e. what's left after the C-Corp pays its income taxes on any gain in sale).
• Everything you do as an individual is at arms length and must be recorded - you will pay hourly rental
• Bookkeeping
• I assume you will be the sole Officer of the C-Corp so, in the event of a claim (i.e. accident) you will be sued personally as a company officer (the C Corp will need to buy Directors and Officers Insurance)
• And, in the event of a claim (i.e. accident) since you will be flying and the PIC then you will still be sued personally for damages outside the C-Corp.
  • Two insurance policies for the plane will be required - The C Corp will need Liability and Hull and you personally will need to buy Liability 

And if there is any claim for anything from the past period of ownership - How will the company be able to defend itself?  The Company has no assets other than the Airplane.  Since the C Corp has no funds then how will the C Corp be able to hire tax accountants and lawyers in order to defend itself? 

• You, as the Sole Owner of the Stock of the C Corp, will need to either loan the C Corp some cash or buy more stock in the C Corp in order to infuse it with cash
• I assume that you will be the sole Officer and not an employee of the C Corp but you will be doing all the leg work
  • You are not an employee because the C -Corp is not paying you
• It will be your cash and your time/effort consumed to defend or settle any claim that arises from the past since the inception of the C Corp.

What types of claims or off balance sheet liabilities might arise after you buy the stock?  This could be any claim by a government entity, another company or an individual for anything that happened in the past

• Improper filings, not paying taxes - Federal, local, property, sales and use etc,
• Audit and challenge of past years taxes by IRS
• Claims for unpaid hangar, fuel or maintenance charges
• Claimed injury or damage during a flight that occurred during the past ownership
• Claims of Transporting contraband in the past (you may beat the criminal rap personally but the C-corp will need to defend you by spending your money that you need to put into the C-Corp for lawyers)
  • And the plane could be impounded even though it did not occur when you owned the stock in the C Corp

OK - So how do you protect yourself in the Acquisition of the C-Corp

1. Exhaustive Due Diligence on the entire past of the C-Corp (review all books, accounting, tax filings, claims, etc)
2. Indemnification by the Seller

Indemnification sounds great but.......Just try and collect after there is a claim.  Good luck on that.

Edited August 8, 2022 by 1980Mooney

[Will.iam]

I’m not very savvy on lawyer speak but that looks like a shit show waiting to happen to me. 

[Marauder]

I’m not very savvy on lawyer speak but that looks like a shit show waiting to happen to me. 

Don’t you love it when a lawyer talks dirty.


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[ArtVandelay]

If you just want liability protection ( for when you have a partnership), you want a simpler LLC instead of a C corp.

[kortopates]

17 hours ago, 1980Mooney said:

Liability for any claim is limited to the C-Corp (it protects you the owner of the stock in the C corp from a lawsuit related to the plane in the C-Corp)

• If there is a lawsuit or claim against the C-Corp the most a party can get is the plane and any cash you put into the company

 

My understanding is that is true only if someone else, like partner, is flying it. The corporation will not protect the pilot flying from any liability exposure. Which raises the question of whether there will be others partners to make it worthwhile to benefit from the protection.

Not lawyer or tax professional

[Fly Boomer]

42 minutes ago, kortopates said:

My understanding is that is true only if someone else, like partner, is flying it. The corporation will not protect the pilot flying from any liability exposure.

My understanding is that if it goes to court, the corporation won't protect anybody from anything.  Plaintiff will quickly pierce the veil and add anyone connected to the airplane or the corporation to the suit.

[ArtVandelay]

My understanding is that if it goes to court, the corporation won't protect anybody from anything.  Plaintiff will quickly pierce the veil and add anyone connected to the airplane or the corporation to the suit.

No.

It can’t protect you if you’re flying or doing the maintenance.

But it can protect you if your partner is responsible.

It can only be pierce if you don’t use due diligence. If your partner is unlicensed, then you be held responsible for example. Always have it worked on by a professional mechanic, not your buddy. All expenses should be paid by corporation, not your personal account.

There are rules…your lawyer should go over this. If it gets pierced then you’ve done something wrong.

I’m not a lawyer, only relaying information told to me by a lawyer.

[Danb]

I’m running out of popcorn..

[midlifeflyer]

On 8/7/2022 at 7:55 AM, Djpayne07 said:

Good morning,

I am aware I do not have to purchase it this way. If I don’t I will be establishing a Delaware C corp prior to finalizing paperwork. I’m in Florida and this absolutely does save on the taxes. Simply looking for thoughts on which would be easier, buy the corp, and it’s only asset or start a corp and go that route.

A number have mentioned it us more typical to buy the airplane than the company. There's a reason that is not specific to aviation. The typical business/legal concern with buying the entity as opposed to the asset is this: when you buy the entity you are also buying all of its liabilities, including ones you (nor maybe even the seller) know about. 

[midlifeflyer]

20 hours ago, Fly Boomer said:

My understanding is that if it goes to court, the corporation won't protect anybody from anything.  Plaintiff will quickly pierce the veil and add anyone connected to the airplane or the corporation to the suit.

A few  things.

Corporations and other limited liability entities are not intended to protect us from our own misdeeds or negligence. Holding a pilot who causes a crash legally responsible is not "piercing" anything.  Corporations don't manipulate the controls of an airplane. People do.

As others said, however, setting up an entity can provide some protection from the acts of partners, borrowers, etc. It is also a way of protecting the asset - the airplane - from creditors of individual members/shareholders. So, if I am in a 4-pilot aircraft co-ownership LLC, and one of the others crashes and injures someone, the pilot who crashed is responsible. The company may be responsible. I am probably not responsible unless I did something that contributed  to the crash in some meaningful way.  

A corporation or  limited liability company is,  legally speaking, a "person." "Piercing" takes place when the members of the entity don't treat the entry as separate from themselves. No separate bank account. No formalities. No mechanism for funding. Company expenses paid individually. In non-technical terms, piercing the veil comes down to, "you guys don't  treat it like a separate company. Why should anyone else?"

Plaintiffs looking for deep pockets in cases with significant damages will, of course, name any potentially liable party with significant assets to the suit. Trying to get a court to pierce the veil of an entity is going to be part of that strategy. 

 

 

Edited August 9, 2022 by midlifeflyer

[Z W]

This thread is full of inaccurate statements about the law and some not-so-good advice.  Source: I am an aviation and business lawyer, but not your lawyer.

You should talk to a lawyer and likely a CPA of your own before proceeding in this fashion.  Anyone considering a similar plan should do the same.

The laws on sales tax, use tax, and piercing the corporate veil vary greatly from state to state.  You cannot just Google this, or read about it on an internet forum.  You get just enough half-truths to be dangerous, mixed in with a lot of inaccurate information.  I'll give some big picture information below, but do not consider this as advice for your situation, because it is not.

Purchasing someone's stock has implications for taxes.  First, you inherit the company's depreciation schedule.  If the plane is already 50% or 100% depreciated, you do not get the benefit of that for your purchase price, if you would otherwise be able to depreciate the aircraft.  Second, it effects your tax basis, and that of the seller.  They generally will pay capital gains (or losses) based on their basis in the stock compared to your purchase price, which is the lowest and best tax rate.  A stock purchase favors the seller and punishes the buyer, tax-wise.  If you sell the plane later, your corporation may have to re-pay some of the depreciation benefits the previous owner enjoyed and used to offset his or her income.  So, you may pay $150k for the company, for example, and sell the plane (its sole asset) for the same $150k some years later, where you actually have no gain, but since the company previously fully depreciated the asset, you must repay some or all of that depreciation, and you owe taxes on the transaction to repay the depreciation the former owner enjoyed.

On the plus side, purchasing stock is typically treated as the purchase of a security and is not taxable under sales or use tax, which applies to the purchase of assets.  Your individual state laws may vary.  Your company will however still have its liabilities.  Unpaid maintenance bill for that last $10k annual?  The company owes it, and now you own the company.  A small risk in the context of a single airplane, but one to be considered.

Piercing the corporate veil is usually much harder than people make it out to be, but again, it varies greatly from state to state.  You never know what state you might crash in.  It might help for claims of negligent maintenance or entrustment (letting someone unqualified fly the plane).  Corporate structuring does little to help you if you are the one operating at the time of the crash.  Corporate structuring does have additional benefits, the primary factor for most people who use it being privacy.  It is also has useful features for shared ownership and use, including the ability to use a buy-sell agreement.

No attorney I know sets up a C corporation these days unless it's intended to be publicly traded or otherwise does not qualify to be structured as an LLC or S-corporation.  Seeing a closely-held C corporation is a big red flag that someone has been doing their own legal work and may have really screwed something up.  If you don't know the difference between those three types of entities, you really should reconsider setting anything up yourself.

This "buy the stock" technique to avoid the sales or use tax is not often used, in my experience, with people buying and selling turbine aircraft, where they could easily afford the attorney and tax consultant fees to do it right.  I really only see the idea put out there by people trading piston singles and doing the legal work themselves.  I believe it's because the lost depreciation quickly offsets the ability to avoid sales/use tax, and you're buying unknown liabilities.  If the big players aren't using this "tax loophole" you can be sure there's a reason.

Take all of the above for what it's worth, which may be less than you paid for it.

Good luck with your purchase and welcome to Mooney ownership.