compose a 150 - 200 word response in MS Word explaining "green deliveries"

As each year progresses, certain signs indicate the arrival of fall and approaching year-end. College Football games begin. Talk around the water cooler turns to the World Series. Negative ad campaigns appear on television. And questions about green deliveries of aircraft abound. This year is no exception and, with Bonus Depreciation benefits at stake for some prospective owners, green delivery questions are being posed once again. Many potential purchasers of business aircraft

Are anxious to acquire their aircraft in calendar year 2010. They are motivated by a desire to begin MACRS Depreciation of the aircraft and to accelerate recently enacted Bonus Depreciation benefits into the current year.1 MACRS Depreciation and Bonus Depreciation benefits may be used to offset income earned in the taxable year in which the benefits arise. However, even with the current downturn in the economy many of the most desirable models of business aircraft are

Sold out for 2010 while aircraft delivery positions remain available for 2011 and beyond. In order to begin depreciating an aircraft in 2010 and in order to realize the benefits of Bonus Depreciation with respect to certain business aircraft, a qualifying aircraft must be placed in service in 2010.2 The Internal Revenue Service Regulations state that an aircraft shall be considered as placed in service at the time the [aircraft] is placed in a condition or state of readiness and availability for a specifically assigned function. Demonstrating that an aircraft has been placed in service almost always involves the flying of an actual mission in the year in which depreciation benefits begin. In an effort to satisfy the placed in service requirement, potential buyers of business aircraft may schedule a green delivery of an aircraft in 2010. Green delivery involves taking delivery of an aircraft in some degree of completion short of a totally finished aircraft. Typically, a green delivery involves an aircraft that has been completed to the extent that an airworthiness certificate has been issued and the aircraft is capable of flight. However, much or all of the interior or paintwork remains incomplete. A green delivered aircraft may have exited the main production line and be bound for the completion center.4 Does a green delivery aircraft satisfy the Services requirement that it be placed in service in the year in which it is delivered? Under ordinary circumstances, probably not. A common tactic employed by purchasers of aircraft in green condition is to take delivery of an aircraft in Tax Year 1 after the aircraft has left the main production facility, place a jump seat in the otherwise unfinished cabin and fly a pro-forma mission in the aircraft, such as a delivery of documents. The aircraft is then returned to the completion center, the interior finished and the aircraft is delivered in final and completed form to the taxpayer in the following year, Tax Year 2. The Service ruled on a scenario such as this in a 1982

Private Letter Ruling.5 The aircraft in the 1982 Private Letter Ruling was delivered to the taxpayer in an unpainted condition, without insulation, with an unfinished interior and three seats, two for the crew and one for the FAA inspector. The aircraft lacked long range navigation and communications equipment. Immediately following acquisition by the taxpayer, the aircraft was flown to an independent construction and service center for the purpose of completing the interior and the installation of electronic equipment and avionics. The Service denied the taxpayers attempt to begin depreciation in Tax Year 1. The Service reasoned that (al) though the green aircraft could actually fly in [Tax Year 1],

Its ability to serve as a corporate jet, capable of

Transporting passengers will not come into existence until the interior of the aircraft has been completed. Consequently, the aircraft will not be considered placed in service until [the taxpayer] has completed its work on the aircrafts interior. Despite the unfavorable ruling in the 1982 Private Letter Ruling, there are ways to realize the benefits of MACRS Depreciation and Bonus Depreciation for green aircraft delivered in 2010. The first possible solution is a facts and circumstances based analysis. Simply stated, some aircraft are greener than others. That is, while an aircraft may not be totally completed, it may be complete enough to satisfy the ability to serve as a corporate jet test stated above. For example, an aircraft that is substantially completed but needs to undergo a series of tests prior to final acceptance by the purchaser could, under the proper circumstances, qualify for depreciation benefits.6 Furthermore, it may be possible to

Demonstrate that an aircraft has been placed in service if certain cosmetic or comfort items have not been finally installed or if a squawk list of completion items remains at the time of delivery. Potential purchasers are cautioned that attempting to take such a position relies heavily upon the actual facts and circumstances of the condition of the aircraft at the time of delivery. Another method of realizing depreciation benefits on a green aircraft is to have a financial institution purchase the aircraft in green condition and lease the aircraft back to the intended user. The Lessor, as the owner of the green aircraft, is entitled to take the MACRS Depreciation and Bonus Depreciation benefits of owning the aircraft.7 The Lessor will typically pass a portion of these benefits back to the Lessee/ User in the form of lower monthly rents. However, depreciation benefits are realized over a greater period of time and the Lessee/ User does not achieve the heavy first year benefits available with Bonus Depreciation. The Lessee/User does improve its cash flow as a result of lower monthly rents. Of course, rent payments under the lease will begin in the year that the aircraft is acquired by the Lessor and before the Lessee/User begins their use and enjoyment of the new aircraft. Creative taxpayers may be tempted to form

Their own leasing company for the purpose of leasing an aircraft to an affiliated company and thereby accelerating depreciation benefits. Such a scheme has not, to the best knowledge of the writer, been scrutinized or approved by the Service. Employment of such a tactic would most likely be considered to be aggressive tax planning by the Service and may not ultimately achieve the desired results. The particular facts and circumstances relating to the acquisition and use of an aircraft continue to have a significant impact on a taxpayers eligibility to utilize MACRS Depreciation and/or Bonus Depreciation. Those considering the acquisition of a new aircraft should consult their tax and legal advisors to determine if depreciation benefits will be available with respect to their newly acquired aircraft and to verify that they will be

Able to utilize MACRS Depreciation and/or Bonus Depreciation to full advantage.