crowell Mining Law Monitor moring Vol Issue Winter Mining by robertbell

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Mining Law Monitor

moring

Vol. 20

Issue 1

Winter 2003

Mining Law Monitor
Thomas C. Means & J. Michael Klise, Editors Volume 20 - Issue One - Winter 2003

Surface Mining

Environmental

Health & Safety

Leasing

Labor

Inside this issue...
FMSHRC in 2002: The Year in Review............................ 1 Changing Campaign Law May Mean Changes for Your Corporate PAC.................... 5 The Data Quality Act: Toward Greater Accountability in Regulation.......................... 7 The Use of Business Aircraft: It’s All in the Details......... 11

FMSHRC IN 2002: THE YEAR IN REVIEW
byTim Biddle

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is our annual review and comment on notable decisions issued by

the Federal Mine Safety and Health Review Commission during the previous year. We also address an important decision from the United States Court of Appeals for the Seventh Circuit, on review from the

Commission. But before we get to the judicial decisions, we need to set the stage by telling you about several developments that affected the Commission last year. The most important development was that the Commission lost a quorum: it could not issue any decisions for the last six months of 2002 because it did not have the minimum three Commissioners required to decide cases. The Commission began 2002 with three Commissioners: Chairman Ted Verheggen, Commissioner Robert Beatty, and Commissioner Mary Lu Jordan. But in June 2002, Chairman Verheggen resigned to become Director of Legislative Affairs in Washington for Dow Chemical Corp. After he left, the Commission could not issue decisions because only
NOTICE This newsletter is a periodic publication of Crowell & Moring LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your own situations and any specific legal questions you may have. For further information about these contents, please contact the Editors or Authors.

Commissioners Beatty and Jordan were left. And it got worse. Commissioner Jordan’s six-year appointment expired in August 2002. She was not renominated and she was not given a recess appointment. That left Commissioner Beatty and four empty Commissioner chairs. From August 2002 until January 2003, the Commission could not even grant review of ALJ decisions because it takes two Commissioners to take that action. (Cases had to go directly to the courts of appeals for review.) But help was on the way. In October 2002, President Bush nominated Michael F. Duffy for Commissioner, and, in January 2003, he was confirmed by the Senate. When Duffy was nominated, he was the Deputy General Counsel for the National Mining Association. Duffy is

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But there were four decisions issued by the Commission during 2002 that are worth bringing to your attention. We summarize them below. Jurisdiction

no stranger to the Commission. He was Counsel to Ford B. Ford when Ford was Chairman at the Commission from 1987 to 1993; many years before that, Duffy had also been an Attorney Advisor at the Commission for two years. He also was Senior Counsel at the American Mining Congress for eight years beginning in 1979, specializing in mine safety and health. In early February, the President appointed Commissioner Duffy to be Chairman of the Commission. Now the Commission can at least grant review of ALJ decisions, even though it still has to await appointment of a third Commissioner before it can issue any decisions. Also affecting the Commission in 2002 was its move in September from 1730 K Street in Washington to 601 New Jersey Avenue, a block from the Capitol, where it was joined by its Administrative Law Judges (“ALJs”). The ALJs also moved from Falls Church, Virginia, to quarters on another floor in the same building on New Jersey Avenue. Thus, for the first time in 26 years, the Commissioners and the Commission’s ALJs (at least those not based in Denver) are under the same roof. According to Tom Stock, the Commission’s Acting General Counsel (many of you know Tom because he practiced with us at Crowell & Moring before he became ex-Chairman Verheggen’s Attorney Advisor), the move went smoothly – aided, no doubt, by the fact that the Commission had only the move to occupy its time. During the first six months of 2002, when the Commission had enough Commissioners to issue decisions, it issued 53 of them. Although that sounds prolific, most of those “decisions” were brief orders allowing (or not allowing) civil penalty cases to be reopened because operators failed – for a variety of predictable reasons – to contest civil penalty assessments within the 30 days required by the Mine Safety Act. In a few other cases, the Commission reviewed ALJ decisions that applied standards to mine-specific conditions, but those decisions are of little interest to those who were not involved.

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of the best ways to beat an MSHA citation is to prove

that MSHA had no jurisdiction even to inspect a facility,

much less charge the facility with a violation of a Mine Safety Act mandatory standard. The Commission over the years has decided many cases where the question was whether MSHA had jurisdiction – usually holding that it does – but there is always a new argument. A construction contractor at a cement plant near Boulder, Colorado was cited by MSHA for several violations of Part 56 after a worker was seriously injured in an accident. The contractor contested the citations and thought it had a winner when it argued that the cement plant operations were subject to the Occupational Safety and Health Act, and were not “milling,” which is covered by the Mine Safety Act. The contractor argued that in an appendix to MSHA’s interagency agreement with OSHA dividing jurisdiction between them, MSHA had defined “milling,” in part, to mean a process that separated waste from valuable material. The contractor’s “gotcha” argument was that the cement company’s Boulder plant did not separate waste from valuable material and therefore could not be engaged in milling as defined by MSHA. But MSHA pointed out that the interagency agreement itself expressly gave MSHA jurisdiction over cement plants and it argued that other parts of its milling definition cover the plant’s activities (crushing, grinding, pulverizing, sizing, etc.) and that, since all cement plants are mills, they all are under MSHA’s jurisdiction. ALJ Manning agreed with MSHA, so the contractor asked for Commission review. Like the ALJ, the Commission ruled

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against the contractor. All three Commissioners agreed that Congress gave MSHA the authority to define “milling” and held that MSHA had defined that term to cover all cement plants, regardless of whether they separate waste from valuable material. The Commission said it does not have the authority to second-guess MSHA over its definition of milling since Congress gave that responsibility to MSHA. Watkins Engineers & Constructors, 24 FMSHRC 669 (July 2002). Civil Penalty Deadlines

for it. In the Cactus Canyon case, that interval was almost a year (364 days). As the Commission put it, ALJs “must consider all of [MSHA’s] delays in proposing and assessing a penalty when reaching a determination of prejudice.” We’re not sure what the difference is between “proposing” and “assessing” a penalty, but we’re happy that the Commission seems to be tiring of long delays between the time a citation is issued and the time a contested citation gets to an ALJ in a penalty case. This decision – which must be followed by all ALJs – should give operators a better chance of showing prejudice and getting a penalty case dismissed when MSHA dilly-dallies for many months before proposing a penalty and then fails to file a Petition for Assessment at the Commission within the 45 days allowed by the Commission’s procedural rules. Civil penalties assessed by MSHA become final and payable unless the company-assessee notifies MSHA in writing within 30 calendar days that it will not pay the penalty assessed and requests a hearing (the form for this notification is the socalled “green card” that comes with the assessment papers). The purpose of the hearing is to give the company an opportunity to force MSHA to prove that the violation charged occurred and, if it did, for MSHA and the company to offer evidence on each of the six statutory factors that must be considered by the ALJ when he decides how much of a penalty to assess. If a company doesn’t send in the green card within 30 days, MSHA eventually sends it a letter saying that the assessed penalty has become a final, unappealable order of the Commission and must be paid. That usually gets the company’s attention. Many companies plead with the Commission to let them off the hook because they intended to contest assessed penalties but missed the deadline because . . . (some of the excuses are pretty colorful). If the ALJ doesn’t buy the excuse and allows a penalty case to begin, the operator sometimes petitions for review by the Commission.

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cases decided by the Commission in 2002 involved

civil penalty case procedures. In Cactus Canyon

Quarries of Texas, Inc., 24 FMSHRC 262 (March 2002), the question was whether MSHA’s failure to file a petition for assessment of civil penalties at the Commission against Cactus Canyon within 45 days after the company refused to pay the penalties assessed should result in dismissal of MSHA’s petition. MSHA had filed its petition against Cactus Canyon two weeks beyond the 45-day deadline specified in Commission Rule 28(a) (29 C.F.R. § 2700.28(a)). When Cactus Canyon moved to dismiss the penalty petition, Chief ALJ Barbour evaluated the reasonableness of MSHA’s excuse and considered whether the operator was prejudiced by MSHA’s delay in filing the petition. Finding that MSHA’s “clerical mishap” excuse was good enough and that Cactus Canyon was not prejudiced by the two-week delay, Judge Barbour allowed MSHA’s case against Cactus Canyon to go forward. Cactus Canyon petitioned the Commission for interlocutory review of that ruling, and the Commission granted the petition and reviewed the ALJ decision. The Commission sent the case back to Judge Barbour, telling him that, in evaluating the prejudice-against-the-operator factor, he also needed to consider the time that passed between the date the citation was issued and the date when MSHA proposed a civil penalty

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Illinois Steel Supply Co. v. Secretary of Labor (MSHA), 294 F.3d 844 (7th Cir. 2002), the court of appeals held that a steel supplier for a limestone quarry which brought steel products (beams, pipes, tubing, etc.) to the mine by truck about twice a week and whose driver sometimes helped unload them was not an independent contractor subject to Mine Safety Act jurisdiction. Why? Because, although the Act defines a mine “operator” to include independent contractors performing construction and services at a mine and the steel company was providing a “service” to a “mine” (a quarry is a mine that is subject to the Mine Safety Act), the court used a common-sense analysis to decide that the connection between the supplier and the quarry was too tenuous to classify the supplier as an “operator,” and thus subject to the full panoply of Mine Safety Act requirements. The court equated the supplier’s contact with the quarry with the kind of minimal contact that occurs when a vending machine company resupplies a pop machine at a mine or when a UPS driver delivers a package at a mine – thus answering a question that has been rattling around for years. Although the Commission Unwarrantable Failure had held that the steel supplier was “clearly” subject to MSHA jurisdiction, the court of appeals said it clearly was not.

Many of the Commission’s decisions in 2002 involved these kinds of cases. We report one, Phelps Dodge Sierrita, Inc., 24 FMSHRC 661 (July 2002), because it is a good example of the standard the Commission applies in deciding whether a company should be allowed to contest a citation or order or the penalty assessment if it didn’t meet the 30-day deadline for such contests. The same standard applies when a company pays an assessed penalty by mistake. The standard is whether the company is able to show inadvertence or mistake – the same standard that applies in the federal courts to allow parties to escape defaults or other dire consequences of failure to act as required to protect one’s rights. Applying that standard, the Commission said Phelps Dodge provided a reasonable and well-supported (by affidavit) explanation of why it failed to contest the assessed penalty for a citation (“confusion”) and allowed it to contest the assessed penalty. But some of these kinds of cases don’t end up well for the company because the Commission (and its ALJs) only have so much patience for carelessness.

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Virginia Slate Co., 24 FMSHRC 507 (June 2002), the Whether MSHA will continue to enforce its standards against companies with minimal contacts on mine property remains to be seen. There certainly has been no change to MSHA’s Program Policy Manual to reflect the Seventh Circuit decision, nor are we aware of any directive by MSHA Administrators calling off inspections of such persons or entities. In fact, MSHA can point to decisions in other Circuits such at the Tenth Circuit (Colorado, Utah, New Mexico, Wyoming, Independent Contractors Kansas, and Oklahoma) and the D.C. Circuit (nationwide), which are arguably inconsistent with the existence of a de minimis exception. MSHA surely knows (or should know) that it cannot enforce against companies which have only minimal contacts with mines in the three states in the Seventh Circuit. But beware: MSHA surely will enforce against

Commission distilled several earlier decisions that

discussed the factors that an inspector must consider in deciding whether to charge an operator with unwarrantable failure when he charges a violation. For those readers who want the latest in “tests” for unwarrantable failure, we commend this case. Unfortunately, Virginia Slate did not pass enough of the tests to win.

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dessert, we turn to an important decision in 2002 from

the United States Court of Appeals for the Seventh Circuit

(which covers Illinois, Indiana, and Wisconsin) which reversed a Commission decision from 2000. In Northern

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mining companies that fail to provide hazard training to employees of minimal-contact companies if they will be exposed to mine hazards while at a mine.

currently pending before a special three-judge panel of the U.S. District Court for the District of Columbia. When that decision comes down, McConnell v. FEC moves on to the United States Supreme Court, which BCRA obligates to take the case. So, on November 6, everything

CHANGING CAMPAIGN LAW MAY MEAN CHANGES FOR YOUR CORPORATE PAC
by Beth Nolan and F. Ryan Keith

changed – but soon, some things could change back, since some BCRA provisions may not survive this suit. In the meantime, BCRA is fully operational. The FEC is actively promulgating new regulations developing a number of its provisions – for example, changing the definition of “coordinated expenditures,” prohibiting political gifts from minors and foreign nationals, and revising how campaign funds may otherwise be used. At the same time, the IRS has reduced federal reporting requirements for certain political parties and PACs, including non-federal corporate PACs. The U.S. Sentencing Commission is revising sentencing guidelines

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is an important time for Political Action committees

(“PACs”) – indeed, for nearly everyone involved in

federal politics – to pay close attention to the state of the law. On November 6, 2002, the day after the mid-term elections, the Bipartisan Campaign Reform Act (“BCRA”) went into effect, codified at 2 U.S.C. § 431. BCRA, the culmination of several well-publicized years of effort by Senators John McCain (R-AZ) and Russell Feingold (D-WI), and Congressmen Christopher Shays (R-CT) and Marty Meehan (D-MA), effects the most comprehensive set of changes to election law since the 1974 passage of the original Federal Election Campaign Act, and the attendant birth of the Federal Election Commission (“FEC”). Some of BCRA’s changes aim to decrease the overall influence of business, which may not make “soft money” contributions anymore. As a result, establishing or maintaining a PAC may be crucial for a business wishing to exert political influence in the BCRA world. Currently, BCRA might be described as a moving target. The statute’s constitutionality – whether it unduly restricts First Amendment rights – was challenged immediately. (Indeed, the statute specifically set forth a procedure for that challenge.) The consolidated litigation takes the name of its lead plaintiff, Senator Mitch McConnell (R-KY), and is

for criminal election law violations, which now have stricter penalties and a longer statute of limitations. This article highlights some of the most important facets of these changes for businesses involved in the federal political arena. Other changes important to candidates and national and state parties are not addressed here in detail, but we are happy to answer questions about those as well. Soft Money and Contributions to Political Parties. One of the most significant of BCRA’s changes is the prohibition imposed on national political parties on soliciting, receiving, and spending corporate and union “soft money” – money that is not subject to the federal election laws. Given the overwhelming importance soft money has played in the federal election process – and given that last year saw unprecedented amounts of soft money raised and spent – this change will no doubt put new pressures for money and spending on other, lawful

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sources, including PAC hard money contributions. A corporation may continue to make political contributions to state and local party committees, subject to state law limits, although certain activities – voter registration during pre-election periods, efforts to get out the vote, and issue advertising – may be funded only with the newly-conceived “Levin funds,” contributions of which are limited to $10,000 per year from a corporation. That limit may be decreased by state law. Contribution Limits. Effective January 1, 2003, BCRA increased the permitted contributions for individuals and other non-corporate entities. An individual may give $2,000 per candidate per election (up from $1,000); $25,000 to each national party committee per year (up from $20,000); $10,000 to each state or local party committee per year (up from $5,000); and, in general, an aggregate of $95,000 in total federal contributions each two-year election cycle (up from $25,000 per year), though only $37,500 of that may go to candidates, and only $37,500 to PACs. These limits are subject to indexing for inflation. In addition, BCRA’s “Millionaires’ Amendment” increases these limits for opponents of very wealthy individuals funding their own campaigns. BCRA makes no changes, however, to the limit on individual contributions to PACs (remaining $5,000 per PAC per year), or to the limits on the contributions that PACs may make to candidates ($5,000 per candidate per year), to parties (for national parties, $15,000 per year; for state and local parties, $5,000 per year), or to other PACs ($5,000 per PAC per year). Moreover, PAC limits are not subject to indexing for inflation, but PACs may raise as much money as they like, subject to the contribution limits applicable to their donors. For corporate PACs, the organizing corporation

may commit its own funds to the PAC for its establishment, administration, and the solicitation of contributions only. New Disclaimer Rules. When PACs communicate a political viewpoint beyond their “restricted class,” they must begin identifying the PAC through a disclaimer. The BCRA disclaimer requirement is highly specific (requiring the information to be in a separate text box, for example), and applies to a range of communications, including communications by means of broadcast, newspapers, billboards, mass mailings, telephone banks, unsolicited mass e-mails, and electioneering communications. A PAC’s restricted class is generally limited to individuals who are involved with the operations of the company behind the PAC in an especially close way, and will usually exclude most of a business’s rank and file. Throughout the federal election laws, the concept of the restricted class is significant, and PACs must be sure they understand its numerous implications. Electioneering Communications. Corporate PACs are exempt from another key BCRA provision: its restrictions on the funding of “electioneering communications” in an election’s closing weeks. These are broadcast, cable, or satellite communications that refer to a clearly identified federal candidate, are targeted to that candidate’s electorate, and are made within sixty days of a general election or thirty days of a primary election. Corporations, trade associations, and unions may not buy these ads. Their PACs, in contrast, are free to buy them with hard money, subject to disclosure and disclaimer restrictions. IRS Reporting. A final noteworthy development for PACs comes from the IRS, which, upon congressional authorization, has greatly reduced the federal filing burden of PACs established in Section 527 of the Internal Revenue Code. In particular, a PAC unregistered with the FEC no longer need

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make periodic reports of its contributions and expenditures to the IRS, if it (a) focuses all of its political activity on state and/or local offices, and (b) has a state law obligation to report information similar to – but not necessarily the same as – that otherwise required by the IRS rules. If a federal candidate or officeholder has a significant role in the PAC, including soliciting contributions or influencing disbursements, the standard filing duties continue to apply. Certain filing requirements for federal PACs registered with the FEC have also changed.

2000, it drew very little attention in either the public or private sector. Yet it has already begun to enhance dramatically the ability of regulated entities to participate meaningfully in administrative rulemaking. Only rarely does a piece of legislation with such potentially far-reaching implications slip by so unnoticed. We believe the DQA may become an important new tool for regulated entities to use to ensure that only “good science” is employed in the formulation of complex federal rules. The DQA was inconspicuously enacted as part of the FY 2001

* * * * *

Consolidated Appropriations Act. It amends the Paperwork Reduction Act (“PRA”) and directs the Office of Management and Budget (“OMB”) to develop government-wide standards which “provide policy and procedural guidance to Federal agencies for ensuring and maximizing the quality, objectivity, utility, and integrity of information (including statistical information) disseminated by Federal agencies.” The goal is to ensure that information used and disseminated by federal agencies is of consistently high quality. The DQA was not intended to imply that all government information was lacking in quality. There was sufficient awareness, however, that the statistical, scientific, and other types of information which frequently provide the basis for important administrative decisionmaking may not always be of a quality to justify new administrative burdens on the regulated community.

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sum, BCRA has changed the rules of the game for political

campaign financing. In the process, the role of the PAC as

a vehicle for the participation of the business community has been enhanced. But, with court challenges pending and FEC rulemakings underway, PAC sponsors should stay tuned. [Crowell & Moring Senior Counsel Beth Nolan formerly served in the White House as Counsel to the President, and currently advises clients on federal election law, federal ethics law, and other matters involving combined legal, political, and public relations challenges. Associate F. Ryan Keith assists her in this practice.]

THE DATA QUALITY ACT: TOWARD GREATER ACCOUNTABILITY IN REGULATION
by Ed Green and Richard Mannix

The Statute’s Requirements Are Simple

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thrust of the DQA is to direct OMB, through

government-wide guidelines, to require that each federal

agency, in turn, issue its own data quality guidelines ensuring and maximizing the quality, objectivity, utility, and integrity of the agency’s information. If this were all the Act said, it would have little impact, for the response of a number of agencies has been that they already disseminate high-quality

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is safe to say that, when the Data Quality Act (“DQA”)

was signed into law by President Clinton in December

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information. But the DQA provides more. It gives the public the ability to force a prompt examination of whether the agency has, indeed, adhered to high data quality standards in specific situations. Under the Act, OMB must require each federal agency to establish administrative mechanisms that allow affected persons “to seek and obtain correction of information maintained and disseminated by the agency that does not comply with [its] guidelines.” Thus, the public can challenge the validity, reliability, and soundness of the information and data used by the agency to advance particular initiatives. The Act promotes transparency and public accountability. Finally, federal agencies are required to report periodically on the number and nature of complaints received by the agency regarding the accuracy of its information and how such complaints were handled by the agency. Where did this sweeping enactment originate? It seems to have been a logical outgrowth of the information age, a response to our ever-increasing recourse to the Internet. It was reported, after the fact, that the DQA was the brainchild of certain corporate interests who sought a mechanism for controlling indiscriminate dumps of corporate data into federal Internet sites. Indeed, its congressional sponsor, Representative Jo Ann Emerson (R-MO), explained that her goal was to ensure that information on federal agency websites was accurate, objective, and useful. Some also noted that the effort may have had its origins in the frustrations experienced by industry opponents to EPA’s 1997 revisions to the ozone and particulate matter clean air standards when those interests were denied access to certain raw medical data on which the standards were based. Whatever its source, the DQA will undoubtedly change the way federal regulators and the regulated community conduct their business.

The OMB Guidelines

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to its charge, OMB issued its guidelines in final form

on February 22, 2002. The guidelines are sensitive to

the variety of circumstances in which they will apply and to the need for a “common-sense and workable” approach that fits a particular agency’s existing information resources management and administrative practices. At the same time, “the essence of the guidelines [must] apply.” The agency must set “performance goals” by which others, including the public and OMB, can measure improvements in information quality. Agencies must “make their methods transparent by providing documentation, ensure quality by reviewing the underlying methods used in developing the data and consulting (as appropriate) with experts and users, and keep users informed about corrections and revisions.” “Quality” Defined

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MB defines the term “quality” as encompassing “utility,” “objectivity,” and “integrity.” “Utility” refers

to the usefulness of the information to its intended users, including the public. The agency needs to consider the uses of the information, not only from the agency’s own perspective, but also from the perspective of the public. “Objectivity” focuses on whether the information is being presented in an accurate, clear, complete, and unbiased manner and whether it is presented in the proper context. Also, as a matter of substance, the information must be accurate, reliable, and unbiased. The agency needs to identify the sources of its information (consistent with confidentiality protections) and, “in a scientific, financial, or statistical context, [it needs to identify] the supporting data and models, so that the public can assess for itself whether there may be some reason to question the objectivity of the sources.” “Integrity” refers to security – “the protection of information

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from unauthorized access or revision to ensure that the information is not compromised through corruption or falsification.” The “Dissemination” of “Information”

for the nature and multiplicity of issues it addresses. However, “influential” scientific, financial, or statistical information means that “the agency can reasonably determine that dissemination of the information will have or does have a clear and substantial impact on important public policies or important private sector decisions.” An agency that is responsible for disseminating “influential scientific, financial, or statistical information” shall provide in its guidelines for “a high degree of transparency about the data and methods to facilitate the reproducibility of such information by qualified third parties.” “Reproducibility” means that the data is “capable of being substantially reproduced,” subject to an acceptable degree of imprecision. The purpose of the “capable of being substantially reproduced” standard is not to require that the agency actually reproduce analytical results prior to dissemination, but to encourage a commitment to such transparency about data and methods that an independent reanalysis could be undertaken by a member of the general public. In situations in which trade secrets, privacy, or confidentiality compete with the right of public access to data and methods, the agency will be expected to “apply especially rigorous robustness checks to analytical results and document what checks were undertaken.”

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OMB’s definition, “information” means any

communication or representation of knowledge such as

facts or data, in any medium for form, including textual, numerical, graphic, cartographic, narrative, or audiovisual. It does not include opinions, “where the agency’s presentation makes it clear that what is being offered is someone’s opinion rather than fact or the agency’s views.” “Dissemination” means “agency initiated or sponsored distribution of information to the public,” such as a risk assessment prepared by the agency to inform its formulation of possible regulatory or other action, or where the agency requests a third party to conduct research and then directs the person to disseminate the results or has authority to review and approve third-party information prior to release. There are limited exceptions. For example, “dissemination” does not include “distribution limited to correspondence with individuals, . . . press releases, archival records, public filings, subpoenas, or adjudicative processes.” Subsets of Information to Which Even Higher Standards Apply

Assessments of Health, Safety, and Environmental Risks. The DQA requires agencies that perform analyses of risks to human health, safety and the environment to employ, in the scientific context, the basic standard of quality for the use of science in agency decisionmaking that Congress adopted in the 1996 amendments to the Safe Drinking Water Act (“SDWA”). Under the SDWA standard, to the degree that an agency action is based on science, the agency must use the best available, peer-reviewed science and data collected by acceptable methods or best-available methods. It must ensure

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the regulations, there are certain types of

information are subject to higher standards –

“influential” information, and assessments of health, safety, and environmental risks. “Influential” Information. Stricter standards apply if the information is considered “influential.” Each agency is authorized to define “influential” in ways that are appropriate

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that the presentation of risk information is comprehensive, informative, and understandable, that it clearly specifies each population at risk, together with the realistically expected risk or central estimate of risk (not just the worst case) for specific populations. The agency must specify each significant uncertainty identified in the assessment process and the studies that may assist in resolving the uncertainties, and it must identify known studies that either support or fail to support the estimate of risk and the method by which those studies were reconciled. The “Correction” Process

guidelines by October 1, 2002 ensuring the “quality, objectivity, utility, and integrity” of the information they disseminate. Links to final agency guidelines are provided at the OMB website, (http://www.whitehouse.gov/omb/inforeg/ agency_info_quality_links.html. The correction mechanisms provided in individual agency guidelines have rather quickly become the basis for some targeted challenges. For example, using Environmental Protection Agency (“EPA”) guidance that was made available on October 15, 2002, the Center for Regulatory Effectiveness (“CRE”) filed a petition in November 2002 on behalf of the Kansas Corn Growers Association and the Triazine Network challenging “EPA disseminations of information relating to the purported endocrine effects of the herbicide atrazine” on grounds that there are no validated test methods for assessing such effects. Similarly, a producer of barium chemicals petitioned EPA in October 2002 for correction of the reference dose for chronic oral exposure to barium and compounds which is reflected in EPA’s Integrated Risk Information System on grounds that it is neither objective nor reproducible. EPA has used the reference dose to set a stringent hazardous waste standard which the company alleges has harmed its business. CRE has also used the DQA to challenge the National Highway Transportation Safety Administration’s proposed collection and reporting of information on potential vehicle defects. Environmental and other activist groups have expressed some concern over the ability industry now has to demand correction of health and safety-related information. Final Agency Actions?

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noted above, the DQA requires agencies to provide

administrative mechanisms that allow affected persons

to seek and obtain timely correction of information that does not comply with agency guidelines. The goal is to provide broad public access to a structured complaint process. Agencies must specify appropriate time periods within which they will decide whether and how to correct the information. Rapid turnaround is the goal. If the person seeking correction does not agree with the agency’s decision, that person may file for reconsideration within the agency. The agency must provide an objective administrative appeals process which ensures that the office which originally disseminates the information does not have responsibility for both the initial response and the resolution of the disagreement. Though some would strongly disagree, “OMB does not envision administrative mechanisms that would burden agencies with frivolous claims.” The goal is clearly to enhance agency decisionmaking and the responsiveness of the traditional notice and comment rulemaking process where there is a likelihood that delay in the review of foundational information could result in actual harm. The federal agencies were required to issue their own

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burning question yet to be conclusively resolved is

whether agency DQA decisions will be reviewable in

court as final agency actions. The likelihood is that they will be. Neither OMB nor the individual federal agencies have

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the option of declining to write guidelines, nor is any agency free to disregard its own guidelines once issued. The Act was clearly intended to impose binding government-wide requirements that can have a direct and significant impact on affected persons and companies. When a petition for correction is denied, then reconsidered and denied again (when administrative remedies have been exhausted) – perhaps even before then, depending on whether the agency action is final under Darby v. Cisneros – the presumption will likely be in favor of judicial review. It can be expected that this question will soon be presented to the courts. In any event, business interests now have a new tool for selfdefense and a new opportunity to protect against irresponsible over-regulation and ill-conceived regulatory constraints. The DQA is a welcome addition to the regulatory landscape. It may have been a sleeper when enacted, but the DQA is poised to make a major wake-up call to the federal bureaucracy.

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increasing use of airplanes and helicopters by

mine operators and other natural resource owners has

helped minimize travel time, maximize efficiency, and increase flexibility. Although the aircraft themselves provide significant benefits, they come at a price. First, these aircraft can cost millions of dollars. In addition, owning and operating aircraft brings the potential for significant liability. To address the financial concern, companies may share the use and cost of the aircraft with other entities, whether affiliated or not. On the liability side, aircraft are frequently placed in affiliates or subsidiaries that are formed for the specific purpose of operating them in an effort to limit liability and insulate the company with the assets. By placing the aircraft in that entity, the liability and assets of the company will be insulated from liability. Or will they? Although these attempts to minimize cost and liability make good sense in the business world, they are often at odds with the applicable legal requirements. That does not necessarily mean that the business objectives cannot be met; it just means

THE USE OF BUSINESS AIRCRAFT: IT’S ALL IN THE DETAILS
by Eileen M. Gleimer [Editors’ Note: The availability of corporate aircraft can greatly facilitate the management of far-flung mining operations and other natural resources properties. But, in this age of federal regulation, you may not be surprised to learn that, to take advantage of the benefits of corporate aircraft and helicopters, there are regulatory and tax shoals that must be carefully navigated. The following article by Crowell & Moring Aviation Group Partner Eileen Gleimer is a primer on some of the pitfalls to watch out for if your company is going that route.]

that meeting them may be a bit more complicated. The complications stem from the fact that aircraft operations are subject to a multitude of confusing and often conflicting regulations issued by the Federal Aviation Administration (“FAA”), Department of Transportation (“DOT”) and Internal Revenue Service (“IRS”). As a result, an understanding of these rules should be the starting point for a company to determine whether the aircraft it intends to acquire can be used as intended and whether existing aircraft operations are in compliance with law. FAA Issues

M

ANY

corporate aircraft are operated under Part 91 of

the Federal Aviation Regulations (“FARs”), the

general operating rules for U.S.-registered aircraft. Because

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Part 91 contemplates, in most instances, the operation of an aircraft by an owner (or lessee) for itself, it is less restrictive and generally does not require that the company have an operating certificate or license from the FAA. This is to be contrasted with the far more extensive and restrictive regulations applicable to air taxi operators (i.e., aircraft charter companies), which are in the business of providing air transportation for hire. Among other things, Part 91, unlike the regulations governing air taxi operators/charter companies, does not specify minimum rest periods or maximum hours of operation by crewmembers, and, for example, permits the use of shorter runways and airports without FAA-approved weather reporting services and the operation of aircraft with lower levels of visibility. These factors and others provide greater flexibility for the business operator than is available for air taxi operators/charter companies.

– mining, for example). Even if the carriage is incidental to another business, there are still strict limits on when compensation may be received and the amount of such compensation. For example, if the aircraft is operated “within the scope” of the operator’s business (other than transportation by air), the operator may carry its officials, guests, and property as well as those of its parent, subsidiaries, or subsidiaries of its parent and may be reimbursed for the fully allocated cost of such operation(s). If the carriage is not within the scope of the business, other options may be available for more limited reimbursements which, in most cases, will not result in a fully allocated cost reimbursement. Determining what is and what is not “within the scope” is not always easy and requires an examination of the reason for each passenger’s presence on the aircraft and the party benefited by such presence. As opposed to the narrow interpretation placed on situations

The Problem of Compensation. The tradeoff for not being licensed, however, is a general prohibition against operating for compensation or hire. Only in very narrow circumstances may a company operating under FAR Part 91 receive compensation for operating the aircraft. These exceptions to the “no compensation” rule, however, are available only for large aircraft (i.e., more than 12,500 pounds maximum certificated takeoff weight) or multi-engine turbojet aircraft. For the operator of a helicopter or other aircraft that does not meet the eligibility requirement to avail itself of these costsharing mechanisms, it would need an exemption from the FAA. Assuming the aircraft meets the eligibility requirements (by definition or exemption), compensation will only be permitted if the operation of the aircraft is incidental to the primary business of the company (in other words, the company must engage primarily in a business other than operating the aircraft

where compensation may be received by an unlicensed operator, the FAA broadly interprets the meaning of “compensation.” Most significantly, compensation may be found to exist even though dollars do not change hands. For example, inter-company chargebacks or bookkeeping entries, quid pro quos, the expectation of future business, or the transfer to the operating party of anything of value would constitute compensation in the FAA’s eyes. The most common pitfall in the operation of corporate aircraft is the creation of a separate entity that serves no purpose other than operating as the flight department for the corporate family or its owners. Although this is typically done to limit liability, the receipt by that entity of compensation for the carriage of persons or property (in the form of chargebacks, reimbursement of expenses, and quite possibly capital contributions) requires it to hold an air taxi certificate. The fact that the company carries only its parent, affiliates, or

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owners does not change the end result. In the absence of an air taxi certificate, the company is operating in violation of the FARs. A significant concern for such a company is the impact such operations may have on the entity’s liability. Specifically, if the owner is operating unlawfully, the insurer may seek to deny coverage if a claim is made – a position that has been upheld by courts in certain cases. Similarly, grounds may exist to pierce the corporate veil since the company was formed for an illegal purpose. In addition to the liability concerns, the pilots could be subject to FAA enforcement action (which could result in the loss of their licenses), or the company could be subject to substantial civil penalties. From an IRS perspective, the federal transportation excise tax (described in more detail below) would be due. Using a Management Company. Some aircraft owners hire a management company in lieu of having their own in-house flight department. This typically involves, among other things, the management company employing and providing crews, coordinating the operation of the aircraft, arranging or providing maintenance, and preparing and maintaining all necessary documentation relating to the aircraft. While most management companies are licensed air taxi operators, the owner ’s flights are usually operated under the less stringent requirements of Part 91. Under such circumstances, the management company is not the “operator” in the FAA’s eyes despite the fact that it provides the crew and most, if not all, of the services required to operate the aircraft. Instead, the owner is the “operator” and therefore has the potential civil and regulatory liability for any violation of the FARs or any injury, death, or property damage arising while the owner is “operating” the aircraft. Although the owner may have a breach of contract claim against the management company, in the case of FAA violations, the FAA will look to the owner. Fractional Ownership. Interests in aircraft are frequently

acquired through fractional ownership programs that provide all of the support for the aircraft as well as alternate aircraft. Despite the broad role played by the program manager, the purchaser of the fractional interest is the operator of its aircraft and any other aircraft it uses in the program. Thus, the same rules and restrictions apply to these owners as apply to owners or lessees of whole aircraft. In other words, a single-purpose entity may not be the fractional owner, and any compensation received by the fractional owner must fit within one of the narrow exceptions to the certification requirements. Is the Owner a U.S. Citizen? In addition to the restrictions on types of operations for which limited compensation may be received, an examination must be conducted to determine whether the owner of the aircraft is a “citizen of the United States” as defined by the federal aviation statute. For a corporation, citizenship requires that the corporation be organized under the laws of one of the states in the U.S., that the president and two-thirds of the other managing officers be citizens of the United States, and that at least 75% of the voting stock be owned or controlled by U.S. citizens. For a partnership, all of the partners must be individuals who are U.S. citizens. If any of the partners is other than an individual, the partnership is not a U.S. citizen for FAA registration purposes. Determining citizenship requires an examination of all entities in the chain of ownership. If at any point in the chain, the citizenship test is not met, all entities below that point will fail the citizenship test. For aircraft registration purposes, this means that the aircraft may only be registered at the FAA if it is owned by a company formed in the United States and is “based and primarily used” in the United States (i.e., 60% of its flights are between two points in the U.S.), through the use of an owner trust or, in some cases, a voting trust.

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Although the failure to meet the definition of U.S. citizen can easily be remedied for purposes of registering the aircraft at the FAA, it raises significant issues for purposes of the economic regulations administered by the DOT. If the operator of the aircraft is not a U.S. citizen (regardless of whether the aircraft is U.S.-registered), the DOT will view the aircraft as a “foreign civil aircraft,” which is defined as an aircraft “owned, operated or controlled” by a party that is not a U.S. citizen. If classified as such, the company will be required to obtain a foreign civil aircraft permit for flights between the U.S. and points abroad and will be prohibited from operating between two points in the U. S. whenever compensation is involved. As a result of the DOT regulations, the company may be unable to engage in the operations permitted by the FARs. At a minimum, it is likely that the operation will need to be restructured to enable the company to use the aircraft as desired. IRS Issues

amounts paid by affiliated companies to the owner/operator whether such amounts are paid in cash, through chargebacks or otherwise. If excise tax does apply, the 7.5% federal transportation excise tax and $3.00 fee per passenger per segment (i.e., the period from each takeoff to each landing) assessed by the IRS must be collected and remitted based on the amount paid for “taxable transportation” starting and ending within the U.S. or within 225 miles of the continental U.S. To the extent the excise tax is paid, a fuel tax credit or refund would be available. These issues arise regardless of whether the aircraft is managed by an outside company, or, if managed, regardless of whether the aircraft is chartered to outside parties by the management company (although certain issues relate only to aircraft that are chartered to outsiders). If the aircraft is with a management company, the applicability of the tax is primarily determined by an evaluation of whether “possession, command and control” of the aircraft is vested in the company or in the management company. If vested in the company, the tax does not apply. Identifying the party with “possession, command and control” requires an examination of the management structure and agreement and the manner in which they are implemented. In instances where an owner retains exclusive or substantial control over the aircraft, crew, and availability of the aircraft for the owner’s use, and the operating costs effectively flow through the management company to the owner, the IRS has determined that no tax applies to the amount paid to a management company since the management company is acting merely as the aircraft owner’s agent. The ability of the owner to use its aircraft whenever it desires and not be pre-empted by the management company’s use of the aircraft

I

N

addition to the FAA concerns, the operation of corporate

aircraft requires consideration of a variety of tax issues

including, among other things, excise tax and imputed income. Excise Taxes. Although the FAA may classify the operation of the aircraft as non-commercial, the IRS is not bound by such a determination. As a result, excise tax may apply to the cost-sharing mechanisms permitted by the FAA. The applicability of the excise tax also depends, in part, on the relationship between the operator of the aircraft and the passenger traveling. Specifically, if the company carries members of the affiliated group (as defined by § 1504 of the Internal Revenue Code), it is generally not required to collect the excise tax. However, if the aircraft on a particular flight is made available to persons outside of the affiliated group, the exemption is lost and the excise tax would apply to

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for another party is strong (but not controlling) evidence that “possession, command and control” of the aircraft remains with the owner. However, when the management company essentially controls the aircraft, its operations, and maintenance, and the owner does not have the right to pre-empt third party use of the aircraft (even if an alternate aircraft is provided for the owner), the service is essentially the same as a charter. Under such circumstances, the IRS has determined that the excise tax applies to amounts paid by the owner for the transportation service, including the value of owner-provided goods and services, because the owner has relinquished “possession, command and control” of the aircraft to the management company. Personal Use of Company Aircraft. In many cases, the company aircraft is made available to select executives for their personal use. If the executive is not required to pay for such use, income must be imputed to reflect the value of the fringe benefit. This value is based either on the fair market value of a charter flight in an equivalent aircraft or the results of the mathematical calculation in which the Standard Industry Fare Level (“SIFL”) in effect at the time of the flight is multiplied by the appropriate aircraft multiple. An applicable terminal charge is added to the product. The multiples are based on the maximum certified takeoff weight of the aircraft and vary for “control employees” and “non-control employees.” Under the fair market value option, the number of passengers on board the aircraft is irrelevant. The SIFL option, however, results in income being imputed to the relevant employee for each passenger on personal travel. The amount to be imputed depends on the number of people on the aircraft on each flight segment, the relationship of the passengers on personal travel to the employee, and the reason the employee is using the company aircraft for personal travel,

among other things. Not surprisingly, the IRS does not permit shifting between two options. When one is selected (most typically the SIFL formula) it must be applied consistently or the IRS will use the fair market value option for all personal flights on the company’s aircraft. Because of increasing public concern about executive compensation, some executives prefer to reimburse the company for such personal use rather than have it reflected in their salary. In some instances, the company will calculate the reimbursement based on the SIFL rate. SIFL, however, is intended to be used to calculate the amount of income that must be imputed to satisfy IRS requirements; it is not intended to be used to calculate the amount that may be paid to the company for personal travel. As noted above, the FAA will permit reimbursement only under certain limited circumstances. Since the aircraft is being used for personal travel, it is not “within the scope of the company’s business” and, therefore, a fully allocated cost reimbursement is not permitted. The only practical option is the use of a timesharing agreement where the executive will reimburse the company for twice the cost of fuel and some limited out-ofpocket expenses related to the specific flight. Although the amount calculated using the SIFL formula may be less than the maximum amount that may be collected under a timesharing arrangement, additional steps would be required to comply with the FARs. Because a time-sharing arrangement is, by definition, a lease for FAA purposes, the executive would be required to have a written agreement with the company, the agreement would need to be filed with the FAA, the local FAA office would need to be notified in advance of the first flight under the agreement, and a copy of the agreement would need to be carried on the aircraft. Furthermore, the company would be required to collect and remit the federal transportation excise tax for the amounts paid under the time-sharing agreement.

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In addition to excise taxes and imputed income, aircraft owners and operators are faced with a variety of other tax issues. For example, are all of the aircraft-related expenses deductible, what documentation is required to substantiate deductions, and how does personal use affect the deductible amount? These issues are only the tip of the iceberg. Almost every decision relating to the acquisition and operation of aircraft has tax implications. Conclusion

T

HERE

is little question that a company’s aircraft is a

valuable business tool. Maximizing that value while

avoiding the perils and pitfalls relating to its ownership and operation requires a thorough understanding the applicable legal framework. While many pitfalls can be avoided through careful structuring, certain restrictions are unavoidable. A thorough cost-benefit analysis following an examination of the FAA and IRS restrictions is the best way to ensure that utilization of aircraft can be maximized in compliance with the applicable law.

Mining Law Monitor

Vol. 20

Issue 1

Winter 2003

Mining Law Monitor

Vol. 20

Issue 1

Winter 2003

Crowell & Moring LLP 1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2595 p. 202-624-2500 f. 202-628-5116

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