IRS clarifies frequent flier ruling.

The Internal Revenue Service has issued a technical advice memorandum ruling that an employer's travel expense reimbursement plan that allowed an employee to retain frequent flier miles was taxable. Although the IRS said it had no special enforcement program for frequent flyer miles, under similar circumstances, a CPA's clients could receive the same costly IRS ruling.

In TAM 9547001, the IRS ruled that the frequent flier plan did not qualify as an accountable plan, and if the plan was not changed to make it accountable, the employee would have to include the amount of reimbursements in gross income, rendering it subject to withholding and employment taxes. The employee would have to claim the offsetting expense as a miscellaneous itemized deduction, subject to a limitation of 2% of the adjusted gross income.

Subsequently, the IRS released a notice to quell fears that it was launching a compliance effort in this area, saying the TAM applied only to this employer, and that employers should not apply the analysis of the TAM to their own plans.

"The IRS is shying practitioners are reading too much into the technical advice memorandum, but if this issue came up in an audit in which the facts were similar to those in the TAM, the IRS would come to the same conclusion," said Cherie J. O'Neil, member of the American Institute of CPAs tax practice and procedures committee and professor at the University of South Florida in Tampa. "The IRS does not want to go on record saying all frequent flier miles are nontaxable for compliance reasons, but I do not think the IRS wants to continue considering the frequent flier benefits nonaccountable," said O'Neil.

Avoid a written statement

"What is unique here is that the company developed a written policy that explained when an employee could or could not retain for personal use the frequent flier miles earned from business travel," said O'Neil. "If a CPA's client is an employer with a written plan such as the one in the TAM, the IRS could apply the same ruling. This could have a significant payroll tax cost to the employer, and employees with significant expenses could lose 2% of their adjusted gross income," said O'Neil. "I would not advise my clients to have a written statement on the frequent flier benefit."

O'Neil said the benefits of frequent flier miles have never been clarified. Everyone agreed that coupons applied to personal use had value, she said, but no one knew what it was. "These coupons could be regarded as de minimis fringe benefits because they often are used by the airlines to fill excess seating," said O'Neil. "The only way the IRS can solve this problem is to issue a ruling that determines when frequent flier miles exceed the value of a de minimis fringe benefit."

A footnote in the TAM said the IRS suggested several acceptable alternatives the taxpayer could use to render the plan accountable. The TAM did not list them, but it said the taxpayer was initially amenable to ideas that would assist it in complying with the requirements of Internal Revenue Code section 62(c).