In last December's issue of Practical Accountant, we reported that inInformation Letter 2001-0214, the IRS Chief Counsel states that income should be reported when someone goes on a personal trip using the frequent flyer mileage from employer-paid business travel. The letter went on to say "When a taxpayer does not receive a 1099 or other documentation, the tax system relies on voluntary compliance" and continues: "[I]income tax regs generally provide for an employee to include in gross income the fair market value of an employer-provided fringe benefit."

That was the first time I can remember the IRS addressing this issue in such a broad manner. I was a little surprised that such a pronouncement would come out in the form of an information letter from the Chief Counsel. I shouldn't have been, because the letter was simply a trial balloon launched by the IRS. The Service does that every once and awhile.

Well, that trial balloon has burst and has quickly plummeted to the ground now that the IRS issued Announcement 2002-18. The announcement directly contradicts the Chief Counsel's letter. Be assured the announcement is a direct result of the reactions to that letter with its logical and rather simplistic reasoning.

The announcement, in a real understatement, acknowledges that there are numerous technical and administrative issues relating to frequent flyer miles on which no official guidance has been provided and that it has not pursued a tax enforcement program for frequent flyer miles. The IRS then states it "will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits related to business travel."

The Service does add a caveat: Don't be a pig. It indicates this relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes. It concludes that future guidance on the taxability of these benefits will be applied prospectively.

What does this all mean? It appears that IRS is saying business frequent flyer mileage applied to personal use should be taxed, but we waited too long and couldn't figure out administratively how to handle it. So maybe this latest pronouncement, as with the earlier letter, is really something else.

Maybe it is an engraved invitation to Congress to enact tax legislation on frequent flyer mileage. The saga continues?

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