There have not been a lot of positive developments concerning the business aviation community in the recent past. So it was welcome news when, on June 30, 2010, the Federal Aviation Administration announced that it was considering a relaxation of its so-called (and long established) “Schwab Interpretation” under Part 91.501(b)(5) of Federal Aviation Regulations (the “FARs”).
Most business aircraft are operated under one of two regulatory regimes under the FARs – FAR Part 91 or FAR Part 135. Part 91 is applicable to general aviation not involving operations for compensation or hire, and is a less onerous regulatory regime than that applicable to air taxi or chartering operations (Part 135). The more relaxed rules applicable to Part 91 come with certain conditions, however. The underlying premise of Part 91 is that the need for regulatory oversight is reduced where an operator of an aircraft is using its aircraft for its own use or for the use of its guests, and not for compensation or hire. Available exclusions from the “no reimbursement” rule are narrow.
One of the exclusions – referred to as the “intercompany exclusion” (FAR Part 91.501(b)(5)) – permits all costs of ownership, operation and maintenance to be reimbursed. However, a condition of the intercompany exclusion is that “the carriage must be within the scope of, and incidental to, the business of the company [i.e., the operator] (other than transportation by air).” Moreover, the FAA has historically taken a narrow view of the meaning of this two‑part “scope of” and “incidental to” test. In 1992, Charles Schwab & Co., Inc. requested an interpretation of Part 91.501(b)(5) that would have permitted Charles Schwab to reimburse the company for flight costs related to certain vacation trips made by Mr. Schwab. The request stressed the need for the company to maintain prompt communications with Mr. Schwab. The FAA was not, as it turned out, at all receptive to this request. It responded (more than a year after the request) that Mr. Schwab was travelling for pleasure and that this sort of carriage was not within the scope of or incidental to the business of Charles Schwab & Co. Reimbursement of these flight costs was not permitted under Part 91.501(b)(5).
Seventeen years later, with the encouragement of the National Business Aircraft Association, the FAA announced it was considering revising the Schwab Interpretation. In its June 30 announcement, the FAA stated that it had tentatively determined that a company could be reimbursed for the pro rata cost of owning, operating and maintaining an aircraft when used for routine personal travel by certain highly-placed officers and employees. The FAA stated that it recognized that these individuals might be unable to reliably schedule personal travel due to the nature of their employment. For such an individual, it might make more sense for the company to provide the company aircraft than to reimburse the individual for the cost of the cancelled commercial airfare. The FAA reasoned that the ability of the company to modify travel plans on very short notice could render a particular flight both within the scope of and incidental to the company’s business.
The proposed interpretation addressed, without getting specific, the criteria that should be used to determine who is a “highly-placed officer or employee.” The FAA stated that a company that expects to take advantage of this interpretation should maintain and regularly update a list of individuals whose positions may require them to change travel plans on very short notice. The FAA indicated that this list may draw from the set of officers, directors and more‑than‑10% owners of a company, but that not all the officers and directors are likely to be subject to the high level of company interference with personal travel plans that is required. The FAA suggested that the company’s board (or equivalent body) decide who belongs on the list.
The proposed interpretation represents a substantial modification to the Schwab Interpretation – and, if ultimately adopted, could be of considerable help to members of the business aviation community.
You may ask why a highly-placed officer or director would seek the privilege of reimbursing his or her company for flight costs. Financial reporting is the principal reason. For public companies, the personal use of corporate aircraft may have to be disclosed in reporting executive compensation (at aggregate incremental cost). That is a disclosure that is likely to attract attention – usually not a good thing where personal use is involved. However, generally no compensation element needs to be reported where the individual is fully reimbursing the company for the cost of the flight – which the FAA’s proposed interpretation would permit.
Comments on the FAA’s proposed interpretation are due by August 9, 2010.