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Reimbursement For Use Of A Company Aircraft: The FAA Requirements
By: John Craig Weller, Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C.
To the busy executive, the corporate aircraft is a time multiplier. It allows the executive and his staff to travel and work at the same time, in complete privacy and security. Indeed, the recent decline in airline service has made the corporate aircraft an even more valuable business tool. However, the corporate aircraft is also expensive to own and operate. This means that allocation of these expenses becomes important. Is it possible for a company to obtain reimbursement for some of the use of its aircraft?
From the FAA's perspective, the general rule is that any operation of an aircraft carrying passengers or cargo for compensation or hire must be authorized by an air carrier or operating certificate issued under Part 119 of the Federal Aviation Regulations (FAR) and must be conducted in accordance with the appropriate operating rules in Parts 121, 125, or 135. The FAA also takes a very broad view of the term "compensation" to mean anything of value. Compensation does not have to be in cash. Rather, even an accounting charge from a parent to a subsidiary company is considered compensation.
However, for business aircraft, the FAA recognizes certain limited exceptions to its general policy. These exceptions are contained in Section 91.501 of the FAR. The most widely used of these exceptions is in Section 91.501(b)(5). It allows related companies to share the use of a corporate aircraft and to receive certain reimbursement for the cost of owning and operating these aircraft. However, like many FAA regulations, Section 91.501(b)(5) is far from straightforward. The purpose of this article is to highlight the basic issues concerning use of this section and the pitfall that may arise. With this understanding and prudent advance planning, a company can enhance its ability to receive reimbursement for the use of its aircraft and still be assured of FAA compliance.
As with any regulatory interpretation, the logical place to begin is the language of the regulation itself. Section 91.501(b)(5) provides that a company may conduct operations that do not involve common carriage which include:
Carriage of officials, employees, guests, and property of a company on an airplane operated by that company, or the parent or a subsidiary of the company or a subsidiary of the parent, when the carriage is within the scope of, and incidental to, the business of the company (other than transportation by air) and no charge, assessment or fee is made for the carriage in excess of the cost of owning, operating, and maintaining the airplane, except that no charge of any kind may be made for the carriage of a guest of the company, when the carriage is not within the scope of, and incidental to, the business of that company.
Before delving into the specifics of the regulation, some general observations are in order. First, because they are exceptions to its general policy on operations for compensation or hire, the FAA has repeatedly stressed that all of Section 91.501 should be strictly construed. To the FAA, this means that if there is any doubt about whether a company may receive reimbursement for the use of its aircraft, the company should either forego the reimbursement or conduct the operation under the appropriate FAA certificate.
Next, the FAA has also repeatedly emphasized that plain language in the rule should be interpreted as what that language or term obviously expresses. For example, the term "company" used in Section 91.501(b)(5) means a company as opposed to a natural person. Thus, a series of companies commonly owned by one or more individuals cannot operate under Section 91.501(b)(5).
Finally, companies must be aware that the FAA's interpretation of its regulations, including Section 91.501, is not dependent on consistency with the Internal Revenue Code (IRC) or Internal Revenue Service (IRS) regulations. For example, the IRC "affiliated group" provisions require an ownership percentage of 80% to be considered a subsidiary. The FAA has specifically declined to adopt this test. Rather, the FAA maintains that actual control is what it will look at to determine a parent-subsidiary relationship.
The reason for this divergence is simple, albeit sometimes frustrating. The FAA's job is safety. The IRS's job is revenue. Thus, the FAA has historically been unwilling to adjust its regulations or their interpretation to accomodate IRS requirements. This means that a company that mistakenly believes that anything acceptable to the IRS will also be acceptable to the FAA may be in for an unpleasant surprise.
For example, the FAA considers operations under Section 91.501 to be non-commercial. The IRS, on the other hand, deems some of these operations to be commercial and thus subject to a federal excise tax (FET). Failure to collect this tax and remit to the government can result in interest and penalties be assessed after an IRS audit.
Nevertheless, careful analysis of a company's aircraft operating needs and the pertinent FAA regulations can usually result in a structure that satisfies both the FAA and the IRS, and still permits some acceptance of reimbursement.
I. "Within the Scope of, and Incidental to"
Perhaps the most important inquiry required before a company may accept reimbursement for the use of its company aircraft is a determination of whether the transportation is "within the scope of, and incidental to" a business of one of the members of the affiliated group. Indeed, the FAA apparently thought this restriction so important that it is mentioned twice in Section 91.501.
1 Common carriage involves the "holding out" of a willingness to transport persons or property on an aircraft for compensation or hire. The crucial issue is the element of "holding out" which may include advertising or other marketing activities. See, AC 120-12A.
2 14 CFR § 91.501(b)(5).
3 Interpretation 1989-2, 2 Fed. Av. Dec. I-241 (August 8, 1989).
4 Interpretation 1990-11, 2 Fed. Av. Dec. I-280 (May 24, 1990). The FAA has not issued an interpretation addressing the issue of whether an LLC should be considered a "company" in this context.
5 Interpretation 1993-17, 4 Fed. Av. Dec. I-42 (August 2, 1993).
6 For simplicity, the term the "company, or the parent or a subsidiary of the company or a subsidiary of the parent" from Section 91.501 will be referred to as an "affiliated group."
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