FAA Offers Official Reinterpretation of ‘Schwab Letter’
|Date Posted: March 16, 2011|
The Federal Aviation Administration (FAA) has eased its stance on employers seeking reimbursement from their executives who use the corporate airplane for personal trips, without jeopardizing the employer’s legal standing to operate as a non-commercial carrier. The reinterpretation also is welcome news for many employees looking to ease their personal income tax situation, as most prefer to reimburse their employers in order to avoid taxable income inclusion resulting from personal use of the aircraft. Even under the FAA’s reinterpretation, making a payment to an employer for air transport can conflict with the FAA regulations that govern the employer’s flight operations, but the agency made it easier to use an exception that Part 91 of the Federal Aviation Regulations (FAR) provides to permit reimbursement in certain limited circumstances.
After announcing last summer that it would revisit a longstanding legal stance, known as the “Schwab Interpretation,” (see www.thompson.com/FAA) the FAA issued an official reinterpretation on Dec. 30, 2010, that reverses some of the restrictions described in the 1993 Schwab letter.
Personal use of the company plane is a common fringe benefit. Many employers would prefer reimbursement from the employee -- usually an executive, who is sometimes traveling with a spouse or other family member. Indeed, executives often would like to reimburse the company for such flights, said Mike Nichols, vice president, operations education and economics at the National Business Aviation Association (NBAA). He made these comments last summer in a telephone interview with Thompson Publishing Group about a letter he wrote to the FAA Office of Chief Counsel in March 2010. In that letter, the NBAA asked that the agency review the 1993 Schwab Interpretation. But FAA regulations make reimbursement difficult, if not impossible.
Two-part Test for Exemption
The FAA has set a high bar for the exception to the general rule prohibiting reimbursement. FAR §91.501(b)(5) defines the exemption as: “carriage of officials, employees, guests and property of a company on an airplane operated by that company or the parent or subsidiary of that parent when the carriage is within the scope of, and incidental to, the business of the company … and no charge, assessment or fee is made for the carriage in excess of the cost of owning, operating and maintaining the airplane…” The operative phrases are, “within the scope of” and “incidental to” the business of the company. The FAA’s strict interpretation has excluded reimbursement for virtually all personal trips.
The FAA rejected the argument that the employee’s trip met the exception language because Schwab & Company needed to keep in contact with its CEO. The 1993 FAA letter stated, “In the case of Mr. Schwab, it may very well be that it is important that the company maintain prompt communication capability with him when he is on pleasure trips. That goal does not alter the fact that he is traveling for pleasure. The ability of the company to communicate with him is in no way dependent upon the company’s charging him for transportation on pleasure trips.”
Last-minute Changes in Travel Plans
The 2010 reinterpretation still takes a hard line on the argument. FAA Assistant Chief Counsel for Regulation, Rebecca B. MacPherson wrote, “The advances in communication technology weaken the argument that the use of company aircraft is necessary for personal travel for these reasons.” However, the FAA has relented on a second argument that Schwab raised in 1993; that the executive be able to make last-minute changes in travel plans to accommodate the demands of his or her employer.
Curiously, the letter mentions “the cost of cancelled commercial airfare,” not the convenience of private over commercial aviation, when it finds that “the company may determine that it is more efficient to provide the company aircraft for the entire trip, rather than reimburse the individual for the cost of cancelled commercial airfare.”
“Likewise,” the letter continues, “the company may accommodate the individual’s altered plans by providing the company aircraft when the compelling business concern has been resolved.”
Employer’s Ability to Disrupt Personal Travel
MacPherson wrote that the FAA agrees “that control over a high-level employee or official’s schedule and the employee’s ability to be recalled at anytime is a more compelling argument for allowing a company to be reimbursed for the personal travel by an individual whose position merits such a high level of interference into his or her travel plans.”
It is the ability of the company to disrupt an employee’s personal plans that renders a flight both “within the scope of, and incidental to,” the company’s business, under the reinterpretation.
“Even with the limitations, this is a big step by the FAA and allows for significantly greater accounting and reporting flexibility when executives use the corporate aircraft on personal trips,” aviation attorney David P. DeYoe said. (DeYoe serves on the editorial advisory board for the Guide.)
Preventing Abuse -- List of Potential Flyers
The Schwab Interpretation and the reinterpretation involve an overlap of the regulations on aviation safety, benefit taxes and corporate disclosure. The IRS and the Securities and Exchange Commission (SEC) incorporate the concept of “specified individuals” -- generally, officers, directors and individuals who own more than 10 percent of a company -- in their rules, triggering certain reporting requirements to the SEC and determining the tax treatment of fringe benefits these individuals receive.
But the FAA was clear that a blanket description will not work with the FARs. “The FAA does not believe that all officers and directors of a company are likely to be subject to the level of company control discussed above,” the letter states.
The FAA advises companies, instead, to keep a list of employees who might use the company airplane for personal use and who would also meet the two-pronged test, “in order to prevent abuse,” and to regularly update it. The letter also said that an employer should “keep records indicating that it has made a determination that the flight in question was of a routine personal nature.”
Other Reimbursement Guidance -- Weddings, Funerals
The FAA made clear that a company may make the company airplane available for “the entire trip” when executive duties call for disruption of his or her personal travel. Likewise, the letter stated, “the company may accommodate the individual’s altered plans by providing the company aircraft when the compelling business concern has been resolved.” However, the letter identified several examples of “personal travel plans that are unlikely to be altered or cancelled, even for compelling business reasons,” barring an emergency; for example, a significant event such as a wedding or funeral of a close family member. “It is also unlikely,” the letter states, “that an employee would be expected to cancel or reschedule necessary or urgent medical treatment.” The statement does not constitute an outright ban on reimbursement for these types of trips; rather, the letter stated, it is to be used as guidance.