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Everything is legal / airworthy. Except: Transponder is installed. It does work. It has NOT been inspected in any time frame that would show it is properly maintained.
Flight is Golf, Echo, Delta < 2500 AGL
Can I shut off the transponder and fly legally?
Yes, you can in the US in Class D, E & G airspace according to 14 CFR 91.215. You will need to placard the transponder INOP, and make a note in the aircraft logbook. But, you must stay out of any Mode C Veils, and further than 30 miles from Class B airports. Also, stay below 10,000 feet MSL unless that means you are below 2,500 feet AGL. However, you can request a deviation to 91.215 from ATC in advance.
NO.
The FARs are pretty clear about this. If it is installed it must be inspected within 24 months—otherwise you can’t fly (with some exceptions e.g. ferry permit). If it passed inspection, it must be on. If it fails then you may fly with an inoperative transponder (with some exceptions and notifications as described in the FAR). You can’t turn it off and fly legally.
In your case you cannot fly because you have an operable transponder that has not been inspected (and passed) in the previous 24 months and you want to fly in controlled airspace.
§91.413 ATC transponder tests and inspections.
(a) No persons may use an ATC transponder that is specified in 91.215(a), 121.345(c), or §135.143(c) of this chapter unless, within the preceding 24 calendar months, the ATC transponder has been tested and inspected and found to comply with appendix F of part 43 of this chapter; and
§91.215 ATC transponder and altitude reporting equipment and use.
(c) Transponder-on operation. While in the airspace as specified in paragraph (b) of this section or in all controlled airspace, each person operating an aircraft equipped with an operable ATC transponder maintained in accordance with §91.413 of this part shall operate the transponder, including Mode C equipment if installed, and shall reply on the appropriate code or as assigned by ATC, unless otherwise directed by ATC when transmitting would jeopardize the safe execution of air traffic control functions.
(d) ATC authorized deviations. Requests for ATC authorized deviations must be made to the ATC facility having jurisdiction over the concerned airspace within the time periods specified as follows:…
