"Sale" of frequent-flyer miles results in taxable income.

• Author: Tievsky, Seth
• Position: Brief Article

The tax treatment of frequent-flyer miles has been a controversial issue for both taxpayers and the IRS. The Service has ruled in Letter Ruling (TAM) 9547001 that frequent-flyer miles are included in gross income, however, in response to objections raised by the private sector, the IRS appears to have backed away from this position. A recent decision by the Ninth Circuit in Charley, 7/24/96, addresses the treatment of frequent-flyer credits obtained in connection with business-related travel and converted into cash.

In Charley, die employers policy was that frequent-flyer miles earned during business travel became the sole property of the employee. An employee-shareholder who purchased tickets for business flights devised a method for converting frequent-flyer miles into cash. The client would be billed for first-class tickets, but the employee would instruct the travel agency to purchase coach-class tickets. The employee would use his accrued frequent-flyer miles to upgrade the coach-class ticket to first class. The difference between the first-class ticket and the coach-class ticket would be credited to...