Mihalik v. Comm’r, T.C. Memo. 2022-36 (2022)
The U.S. Tax Courtroom has upheld an IRS dedication that airline tickets issued to sure grownup kinfolk of a retired airline pilot had been revenue to the pilot, and weren’t excludable fringe advantages beneath Code § 132. The tickets had been issued beneath a journey move program that supplied free standby tickets for the airline’s retired pilots and their household and mates. Program information listed the tickets for 2 grownup kinfolk as taxable, and the airline issued a Type 1099-MISC to the pilot for the worth of these tickets, however the pilot didn’t embody the worth as gross revenue on his federal tax return. The IRS didn’t problem the exclusion of tickets supplied to the pilot, the pilot’s partner, and the pilot’s daughter, however it decided that the worth of the tickets for the opposite grownup kinfolk was revenue and issued a discover of deficiency. The pilot petitioned the Tax Courtroom for a redetermination, claiming the tickets had been “de minimis” and excludable as a Code § 132(b) no-additional-cost fringe profit.
Addressing the no-additional-cost fringe exclusion, the Tax Courtroom famous that the pilot didn’t dispute that the tickets had been obtained or that the airline accurately decided their worth. Thus, the exclusion may solely apply if the kinfolk who obtained the tickets had been the pilot’s dependent kids. The airline’s undisputed information, nonetheless, indicated that each kinfolk had been over 30, so neither could possibly be dependent kids throughout the which means of the exclusion. This meant that their use couldn’t be handled as “use by the worker” for functions of the exclusion, and the worth of their tickets couldn’t be excluded from revenue. Turning to the pilot’s declare that the profit was de minimis, the court docket noticed that the airline’s information confirmed that it continuously issued tickets beneath this system, and that the worth of the tickets was a lot larger than the low worth objects thought of excludable by the relevant rules. As well as, the truth that the airline saved substantial information demonstrated that it was clearly neither unreasonable nor administratively impracticable for the airline to account for the tickets. Consequently, any declare to the de minimis fringe profit exclusion would “manifestly fail on its deserves.”
EBIA Remark: Airline tickets are the traditional instance of a no-additional-cost fringe profit, however the exclusion can be utilized by employers in different industries that promote providers to the general public and have unused capability, similar to accommodations, phone corporations, and occasion sponsors (see our Checkpoint Query of the Week). This case focuses on the exclusion’s beneficiant—however not boundless—extension to sure kinfolk of the worker. Different situations for the exclusion can elevate tougher line-drawing points. For instance, the Code makes the exclusion out there provided that the employer incurs no substantial further value (together with forgone income) by providing the service to staff. IRS rules elaborate on this requirement, explaining that in-flight meals and flight attendant providers aren’t deemed substantial, however the exclusion will be misplaced if airline staff are given reserved seats. Equally, lodge employers could typically disregard maid service as “incidental.” Past these examples, nonetheless, employers should train some judgment to find out whether or not a proposed no-additional-cost fringe profit truly qualifies for the exclusion. For extra data, see EBIA’s Fringe Advantages handbook at Part XXIV.B (“No-Further-Value Companies”).
Contributing Editors: EBIA Workers.
