Questions About Structure

For-profit Clubs:

In a simple co-ownership arrangement the members just pay their own taxes as usual, and they don't get to depreciate the aircraft or probably take any other business deductions. If you are incorporated the corp has these advantages, along with the corporate veil which legally protects the members. However unless you're a non-profit the corp has to pay taxes on any excess it has saved up at the end of the year.

If everyone was equally disciplined we could all agree to set aside the reserve for a new engine or prop in our own bank accounts, and then we would only have to pay taxes on that money one time. However the usual way to do this is for the corp to have its own bank accounts and the pilots would pay a higher hourly rate for the plane with the reserve going into one of those accounts. Though, at the end of the year the corp looks like it has made a profit and then it would have to pay taxes on that money a second time. It's even worse than that because when you put that engine into a plane you increase it's value. Is that a capital improvement? Anyway you either pay more taxes, or you get less of a depreciation deduction on the plane.

The only way around this as far as I know, is for the corp to be a non-profit, and indeed this is exactly why a lot of Flying Clubs follow this route. I don't think it means we would have to have unlimited membership, a lot of clubs are closed to new members, if the group wanted to keep it small. In fact the IRS really wants to see a clear distinction between the members and the public, and limit the latter's interaction with the club. On the other hand we would have to act more like a club as in get togethers barbeque's etc...

Non-profit Clubs:

• What classes of NP are possible?
  • 501c(3) and 501c(7), though there are very few 501c(3)s
  • Here are all the NP Flying Clubs Wets of the Mississippi: http://www.flying-club.org/fc/fco_west.asp
• 501c(7)s:
  
  • A 501c(7)s are social clubs, and will protect reserves collected for engine overhauls from taxation, but will not allow for tax deductible donations.
  • We can accept donations, and we don't have to pay taxes on them, the donor still does though.
  • We would have to substantially be a flying club to get this status, which is more work than just being co-owners. So is it worth it?
  • I think any corporation type could apply for 501c(7) status.
  • Purpose of the club for the pleasure and recreations of its members. substantially all activities must be for these reasons.
    • No discrimination, based on Race, Color, or Religion.
  • Though membership is not open to the general public they get reviewed and voted in.
  • No member can make money on the corp, this must be in the articles.
  • Should have a clause for the dissolution of the club, and it should be within the law.
  • To apply use forms 1024 and 8718. The application fee is $850.
    • "Even though an organization considers itself within the scope of this Revenue Ruling, it must file an application on Form 1025, Exemption Application, in order to be recognized by the Service as exempt under section 501(c)(7) of the Code."
• Can a co-ownership arrangement be converted to a non-profit later?
  • Yes one simple way to do this would be to sell or give the capital to the new corporation.
  • Another way would be just to apply for 501c(7) status using the current corporation.
• What type of corporation should you pick based on size?
  • LLCs (Limited Liability Companies) for less than 10 members
    • Strictly speaking they are not corporations.
    • They have Articles of Organization instead of Articles of Incorporation.
    • LLCs have something called an operational agreement, which are equivalent to bylaws.
  • A regular corporation for more than 10 or 15 members
    • They have full articles and bylaws
• What types of members can you have?
  • You can have different classes of members, (Though the FAA disagrees). For example you could have Regular members, Associate members, and possibly corporate members.
• What things do you need first in order to apply?
  • You need a corporation, and an EIN.
  • A website with pictures of club activities is helpful, or perhaps you could include some pictures in your application.
• What about club contests? yes you can have contests with small prizes.
• Can you give scholarships to student pilots? This is tricky, but I think he said if you are careful.
• In your application you will need to estimate the time spent on different club activities.
• As well as what proportion of financial support you will get from members and other sources.
  • Only a small portion of revenue can come from non-members. 15% max.
• It is very important to cite and include in your application the legal determination of Rev. Rul. 74-30, 1974-1 C.B. 137.
  • This makes it clear to the IRS how you intend to operate, and may give you some more leeway.
• You can also have a non-equity club which leases the aircraft, though it might be less desirable.

More 501c(7) Specifics:

• Definition: http://www.irs.gov/irm/part7/irm_07-025-007.html
• Sale of property; examples: Rev. Rul. 69\x96232, 1969\x961 C.B. 154
• You must have social activities:
  • Pass: Rev. Rul. 74-30, 1974-1 C.B. 137.
    • Officers earn two hours of flying time per month.
    • Occasionally outside experts may be hired for certain repair work.
    • ...decisions regarding work to be done and who will be hired to do it...
  • Fail: Rev. Rul. 70-32, 1970-1 C.B. 132
• Redemption of stock in an amount exceeding original cost: Rev. Rul. 68\x96639, 1968\x962 C.B. 220
  • The articles of incorporation of the club provide that each member of the club is required to purchase a minimum of five shares of stock...
  • ...the repurchase of stock based upon book value of the club's assets will not preclude exemption even though the stockholder may realize a gain therefrom.
• Dissolution of the Club and returning assets to the members does not forfeit the clubs non-profit status:
  • Rev. Rul 58-501, C.B. 1958-2, 262
    • The profit from the sale by the club of all its property in conjunction with the termination of its activities and liquidation does not deprive the club of the exemption provided by section 501(c)(7) of the Code.
  • Rev. Rul. 65-64, C.B. 1965-1, 241
    • ...Pursuant to a motion adopted by the club this money was distributed equally among the members as a partial return of monies contributed to the club.
    • ...Accordingly, it is held that the distribution in the instant case did not adversely affect the organization's exemption from Federal income tax as an organization of the type described in section 501(c)(7) of the Code.

FAA Rules about Flying Clubs:

• The property rights of the members of the club shall be equal.
  • Some clubs violate this rule.
• All members must have equal ownership of the club, implying that they all buy in at the same amount.
• No part of the net earnings of the club will inure to the benefit of any individual in any form.
• You can always pay money to non-members for instruction and repairs, If they are members then they can only be paid in time.
  • The AOPA is trying to change this.
• What about paid staff? FAA doesn't allow paid staff. They're also trying to change that.
  • However you can be compensated in rental hours.
• Can you use club aircraft and facilities for personal business use? Yes In general you can.
• In 5190.6b the FAA grants flying clubs the rights of an individual at an airport. They say a club can't be a profit maker.
• If an airport received federal funds they must have rules and set minimum standards, however they may not use 5190.6b verbatim or at all. They may have their own minimum standards document. We should ask for a copy.
• Service providers at an airport have to follow the minimum standards, and there are different classes of service providers.
  • CFIs and mechanics, Should be registered at the airport but often are not.
  • Some classes are: Limited service providers, and specialty service provider.
  • Flying clubs are not service providers but they often contract with them.
• The one cop in all of this is the airport manager, and he may not use the 5190.6b so ask for a copy of their minimum standards.
• In all the flying clubs out there the FAA has only enforced it's strictest rules in one case ever.
  • A lot of clubs have multiple classes of members, which is contrary to 5190.6b.
    • Example: Hillsboro Non-profit flying club, 61 years old.

Eugene Airport Rules about Flying Clubs:

The Eugene airport rules are here: Mahlon Sweet Airport Rules, They start at section 7.11 which just refers to appendix A "Flying Clubs Rules and Regulations". Some important points are:

• A Club is considered as an individual Aircraft Owner.
• They shall be exempt for the minimum standard of FBO's providing aeronautical services to the public.
• The club shall be a legal entity that is not for profit, though not necessarily in the eyes of the IRS.
• Each member must be a bona fide owner of the aircraft or a STOCKHOLDER in the corporation.
  • Most 501c(7)s are non-stock based.
  • The FAA wants all member to have equal ownership, which is hard to do if you are stock based.
• The aircraft access rights of all members shall be equal.
  • This is hard if some aircraft require higher dues or checkout requirements.
• Only members may receive flight instruction in club planes, and only member CFIs can give instruction.
  • It does allow for payment of CFIs if they are approved at EUG. I wonder if they still have to be members?
  • Only members may operate club aircraft.... Looks like it.
  • Member CFIs can only be paid by credit against dues or flight time.
• Members who are qualified mechanics are allowed to work on aircraft even if they are not based at EUG.
  • However, they can only be paid by credit against dues or flight time.
  • It doesn't say anything about other mechanics based at EUG.
• The club shall submit all relevant paper work to the airport manager and update it once a year.
  • Including names of all members, and the contact info of the officers.
  • The number and type of aircraft. Aircraft documents etc...
  • All records need to be available for review in a reasonable time frame.
• Must submit proof of adequate insurance.
• Must comply with all federal, and state requirements including the FAA.
• The Club must indemnify and hold harmless the Eugene airport and city.
  • We might have to pay all legal defense costs of the airport or city. Will our insurance cover that?

Cresswell Airport Rules:

The Cresswell airport rules are here: Cresswell Airport Rules

Follow up Questions:

• How does a charter relate to the articles or the mission statement?
• Can flying clubs hire mechanics or instructors that are not members? Yes
  
  • Could our maintenance officer be a hired mechanic? At the Eugene airport?
• What is Form 1025, Exemption Application? Do we need to file it?
• How do members own a share of a NP club if it doesn't issue stock?
  • Certain members could loan money to the club which would be paid back first before other debts.
  • Or you could have a written agreement.
• Do any flying clubs issue stock?
  • A 501c(7) can issue stock, though the FAA may rather you didn't.
  • There is a Rev Rul stock example for a 501c(7) though it wasn't a flying club.
• From 5190.6B
  
  • The property rights of the members of the club shall be equal...
    • What about different amounts of stock ownership?
    • Can members pay different amounts of dues (fixed costs) depending on their situation?
  • Instructors (or mechanics) can get credit against payment of dues (fixed cost) or flight time.
    • This implies an ongoing account balance.
• How do you subtract your basis from the gross stock sale proceeds? In the usual way?
• Can members get various small credits in hours instead of money, or must all the accounting be done with a USD balance?
• if the interest earned by some members is payed in hours then they are not earning money?
• if extra interest charges are paid by some members, can they be considered additional fixed costs?
• How can members get overpayments out and have them counted against their payments in? eg tax neutral?
  • How would these adjustments be handled in lieu of using stock?
• Can they have a positive balance with the club and "withdraw" excess from time to time?
  • This seems to be a no-brainier if the balance was always in USD.
• Some clubs just have a refundable fixed buy in cost, for others it's non-refundable and goes towards more aircraft.
• What is the time line on the new Class III medical?
  • still under review with FAA collected co-signers prob later on this in the fall
  • Urge your senator or congressmen to sign on to these bills.

-- ClifCox - 10 May 2015