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Disclaimer Statement: The answers provided to the questions in this website are not legal interpretations. Only the FAA's Office of Chief Counsel and Regional Chief Counsel provide legal interpretations. The FAA's Office of Chief Counsel does not review this website nor does it disseminate legal interpretations through it. However, there are some answers provided in this website where the FAA Office of Chief Counsel's legal interpretations have been reprinted.
I don't mean to be a pest, but that interpretation letter is only valid for determining what type of medical certificate is required to instruct. It falls short of defining “commercial flying” and whether or not instructing counts.
AC560,You have to hold a commercial certificate to gain or use the privileges of an instructor certificate. It is not considered commercial flying by the FAA which is why it does not require a 2nd class medical.
"The FAA has determined that the compensation a certificated flight instructor receives for flight instruction is not compensation for piloting the aircraft but is rather compensation for the instruction. A certificated flight instructor who is acting as pilot in command or as a required flight crewmember and receiving compensation for his or her flight instruction is exercising only the privileges of a private pilot. A certificated flight instructor who is acting as pilot in command or as a required flight crewmember and receiving compensation for his or her flight instruction is not carrying passengers or property for compensation or hire, nor is he or she, for compensation or hire, acting as pilot in command of an aircraft. Therefore, since a certificated flight instructor who is acting as pilot in command or as a required flight crewmember and receiving compensation for his or her flight instruction is exercising the privileges of a private pilot, he or she only needs to hold a third class medical certificate"
Source
Wrong!As long as you don't get paid, it's not commercial flying.
Official source please?"Other commercial flying" means any nonmilitary flying as a required crewmember, other than in air transportation, for which the crewmember is paid for his or her services). So, for example, when an individual is paid (e.g., with money) for flying corporate officers on a corporate jet in Part 91 service or when an airman provides flighttraining for compensation to another, such Part 91 flying is "other commercial flying" for the corporate jet pilot and for the flight instructor.
"The other commercial flying done by the flight crewmember does count against the daily 8hour limitation if it is done before the Part 135 flying, and also counts against the pilot's quarterly and yearly flight time limitations. For example, 2 hours of `free lance' flight instruction by the pilot during his rest period limits him to only 6 hours of Part 135 flying time during that 24 consecutive hour period.
The FAA construes "compensation or hire" very broadly. It does not require a profit, a profit motive or the actual payment of funds. Instead, compensation under the FAA's view, is the receipt of anything of value. Thus, compensation for the flights as proposed would exist in two forms. First, the expenses associated with the flight would be paid by donors to the charity, not the individual pilot; and second, the pilots would acquire flight hours at the charity's expense -- flight hours that could be used to demonstrate aeronautical experience eligibility for an airman certificate.3 These forms of compensation are sufficient to require the operator to have a part 119 certificate.
If you fly for an airline and instruct on the side, whether instructing is really interpreted as commercial flying or not isn't the point. The restriction is usually in your airline's FOM, not the FARs.