By Richard R. Hammar, J.D., LL.M., CPA
© Copyright 2001 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m69 c0103
Tax treatment of frequent flyer miles no longer up in the air. Ever since the major airlines launched their "frequent flyer programs" several years ago there has been uncertainty concerning the tax treatment of frequent flyer miles--especially when those miles are earned by employees while engaged in business travel for their employer. Are employers required to report the "value" of these mileage awards as taxable income to employees? Or, is this a tax-free fringe benefit? The IRS recently provided official guidance. It announced, "Consistent with prior practice, the IRS 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 attributable to the taxpayer's business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively." The IRS cautioned that "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." A "promotional benefit" is a program that allows travelers to accumulate frequent flyer miles through rental car companies or hotels. These promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services, or other services or benefits. The recent IRS announcement does not address the tax status of such benefits. This means that the IRS could pursue a "tax enforcement program" against these benefits, but most experts view this as unlikely. For information regarding this announcement, call the IRS at (202) 622-4606. IRS Announcement 2002-18.