Tax Research Memo

Date: | September 5, 2013 | Preparer: | Veronica Simmons | Reviewer: | Professor Watson | Subject: | Including frequent flyer benefits in Gross Income | Facts: | Over a period of time Latrell accumulated enough frequent flyer miles to purchase a free roundtrip ticket to Milan, actually valued at $1200. The frequent flyer miles he used were generated through business travel expenses paid for entirely by Latrell’s employer. | Issue: | Does Latrell have to recognize income from this purchase? | Authorities | IRC sec. 61 IRC sec 162Reg §1.274-5TCharley, (CA9, 7/24/96) 78 AFTR 2d ¶ 96-5171 | Conclusion: | Because there is a lack of substantial authority surrounding the specific treatment of frequent flyer miles, Latrell is not required to recognize any part of the $1200 ticket to Milan as income. | Analysis: | IRC sec. 61 gives a broad definition of gross income, and what should be included/excluded. IRC sec. 61 states that “all income from whatever source derived”, followed by a list of items included in gross income, but not limited to those items. IRC sec. 61 (a)(1) specifically states that “compensation for services, including fees, commissions, fringe benefits, and similar items” are included in gross income. The frequent flyer miles do not constitute any of the stated situations in the Internal Revenue Code. Because of the ambiguity surrounding what exactly a “frequent flyer benefit” is, there is no specific ruling that deems it necessary to include in gross income. In addition, nowhere in the Internal Revenue Code does it explicitly state that frequent flyer miles constitute compensation from the employer. The lack of substantial authority on the treatment of this benefit gives the client the ability to exclude this from his gross income without risk of understating his overall tax liability. The only ruling with specific relation to frequent flyer miles was Charley, (CA9, 7/24/96) 78 AFTR 2d ¶ 96-5171. In this case, Dr. Charley would instruct