A COMMUTER AIRLINE FLC DEPARTED A NON TWRED ARPT VFR; AND AFTER RECEIVING AN IFR CLRNC; ENRTE; FAILED TO ACTIVATE XPONDER.

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OUR FLT DEPARTED FRM VFR. AS PNF I MADE STANDARD VFR DEP RADIO CALLS ON UNICOM. AT 3000 FT AGL; I SWITCHED TO ZMP ON 127.75 MHZ TO OBTAIN IFR CLRNC FROM FRM TO MSP. THE CTLR GAVE US CLRNC AND I READ IT BACK. NEXT; THE CAPT PROCEEDED ON COURSE AND I WAS RESPONSIBLE FOR PUTTING THE SQUAWK CODE IN THE XPONDER. SINCE WE WERE SQUAWKING 1200; I NEEDED TO PUT IN THE NEW CODE. I SELECTED THE STANDBY POS ON THE XPONDER; PUT IN THE NEW CODE; AND FORGOT TO PLACE THE XPONDER BACK INTO THE ALT POS THUS IT STILL REMAINED IN THE STANDBY POS. THE CTLR WAS BUSY; SO WE KNEW IT WAS COMMON FOR SEVERAL MINS TO PASS BEFORE THE CTLR IDENTED US AS 'RADAR CONTACT.' THE CTLR EVENTUALLY CALLED US AND ASKED IF WE WERE EVEN AIRBORNE YET. KNOWING IT WAS AN IRREGULAR RADIO CALL; THE CAPT ELECTED TO RESPOND TO THE CTLR; 'YES WE DEPARTED FAIRMONT AND WE ARE NOW 18 MI NE LEVEL 9000 FT.' THE CTLR SAID HE DID NOT HAVE US ON RADAR. THE CAPT THEN SAW I HAD LEFT THE XPONDER IN 'STANDBY'; SWITCHED IT TO 'ALT' THEN REPLIED TO THE CTLR; 'SORRY SIR; XPONDER WASN'T ON -- YOU SHOULD BE RECEIVING IT NOW.' CTLR RESPONDED 'RADAR CONTACT' AND ALL COMS WERE NORMAL FROM THERE ON. MY CONCERN IS THAT WE ADMITTED ON THE ATC FREQ THAT WE ACCIDENTALLY HAD IT OFF IN CTLED AIRSPACE; THUS CONFLICTING WITH THE REQUIREMENT OF 49 CFR 91.215(C) STATING IT MUST BE ON IN CTLED AIRSPACE. THE IMPORTANCE OF THIS RPT IS THAT OFTENTIMES; IN FEAR OF VIOLATION; PLTS LIE TO ATC BY SAYING; 'OH; NOT RECEIVING XPONDER? WE'LL TRY THE OTHER ONE; HOW'S THAT?' THE FEAR IS REAL AS THERE IS A PARTICULAR INSPECTOR AT MSP FSDO THAT IS KNOWN FOR EXCEPTIONS VINDICTIVE TENDENCIES TOWARDS PLTS (IE; NO WARNINGS OR COUNSELING; JUST VIOLATIONS; WHICH HAS LONG LASTING IMPACTS ON PLTS' CAREERS). SO WHICH MISTAKE DID THE CAPT AND I MAKE? 1) TELLING ATC THE TRUTH; OR 2) SHOULD WE HAVE SAID 'WE'LL TRY THE OTHER XPONDER?' MISC: NO CREW FATIGUE; PLENTY OF REST. WX NO FACTOR; CLR; UNRESTR VISIBILITY. CREW RELATIONS WERE GOOD; NO FRICTION. FLT WAS AHEAD OF TIME; SO THERE WAS NO PRESSURE TO 'GET GOING.' RELUCTANCE TO TELL ATC WHAT'S REALLY HAPPENING DUE TO 'ZERO TOLERANCE' OF SOME INSPECTORS AND SUPVRS. CALLBACK CONVERSATION WITH RPTR REVEALED THE FOLLOWING INFO: THIS RPTR HAD DEVELOPED A HABIT OF PLACING XPONDER TO STAND BY WHILE ENTERING CODES; AND HAD FORGOTTEN TO PLACE IN ALT (MODE C) POS AFTER SELECTION. THE FLC WAS OPERATING A BEECH ACFT 1900C AIRLINER. SO; EXPLAINS THE ERROR; THEN THE MSP CTR SUPVR RPTED THE SIT TO THE FAA; WHICH WAS MONITORING RPTR'S COMPANY. THE FAA CONTACTED THE AIRLINE DOE; AND BEGAN INVESTIGATION. THE FAA ASSERTED THAT THE FLC WAS IN VIOLATION OF PART 135 CREW AND CHKLIST PROCS; AND PART 91 XPONDER OP IN CTLED AIRSPACE. THE DOE RESOLVED THE SIT BY PERSONALLY DISCUSSING THE MATTER WITH THE INSPECTOR; AND THE INVESTIGATION WAS CLOSED.