Tax Memo

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Facts

Latrell accumulated frequent flyer miles from his business travel as a CPA in which his employer paid for the business trips, and he was not taxed on the travel reimbursement. He recently used his Delta Skymiles to purchase a free roundtrip airline ticket worth $1,200 to Milan, Italy.

Issues

Is an employee’s personal use of frequent flyer miles earned as a result of business travel taxable?

Authorities

IRC Sec. 62(a)
IRS Announcement 2002-18

Conclusion

No, an employee’s personal use of frequent flyer miles earned as a result of business travel is not taxable. Because Latrell’s used his frequent flyer miles to purchase an airline ticket instead of redeeming his frequent flyer miles for cash, he does not need to include the value of the airline ticket in gross income.

Analysis

IRC Sec. 62(a) provides the deductions from gross income that are allowed for computing “adjusted gross income.” IRC Sec. 62(a)(1) states that gross income includes fringe benefits such as frequent flyer miles accumulated from business travel. IRC Sec. 62(a)(2)(A) states that the reimbursed expenses of an employee related to his or her performance of services under a reimbursement or other expenses allowance arrangement with the employer are allowable deductions in addition to those allowed by IRC Sec. 161 through IRC Sec. 196. Since under IRC Sec. 62(a) frequent flyer miles are categorized as deductions to gross income, they are not taxable. IRS Announcement 2002-18 also states that frequent flyer miles or other in-kind promotional benefits, such as a free airline ticket, earned by the taxpayer’s business travel will not represent taxable income. However, this ruling applies only to in-kind benefits and not to benefits that have been liquidated or converted to cash. Therefore, since Latrell used his frequent flyer miles to purchase an airline ticket instead of redeeming his frequent flyer miles for cash, he does not need to include the value of the...
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