De minimis and working condition fringe benefits reexamined.

• Author: Butler, Kimberly A.

In American Airlines, Inc., 204 F3d 1103 (2000), aff'g and rev'g 40 Fed. Cl. 712 (1998), the Federal Circuit agreed with a Court of Federal Claims ruling on the tax treatment of gift vouchers and certain per-diem allowances that did not qualify as working condition fringe benefits. However, the appeals court did not agree with the lower court's grant of summary judgment for per diems given on overnight trips (i.e., travel requiring at least one overnight stay away from an employee's home base) and remanded the case for further findings of fact on whether American Airlines "reasonably expected" the amounts paid in per diems to its flight crew to be incurred.

Background

From 1985-1988, American Airlines provided a $36 per-diem allowance to its flight crew and flight attendants, for meals and incidental expenses while away on overnight and turnaround trips (i.e., travel involving departure and return to a home base on the same day). American Airlines considered several factors in determining the per-diem amount, including industry standards, the experience and judgment of its management, Federal per-diem rates ($14/day) and cost estimates prepared by a consulting firm. Per-diem amounts were separately identified on employees' paychecks. American Airlines did not require its employees receiving per diems to substantiate their actual travel expenses.

American Airlines also provided its flight crew (e.g., pilots and engineers), based in Dallas-Fort Worth (DFW), eight hours of this per-diem allowance for each day of training at the DFW facility. In addition, union contracts required the airline to provide onboard meals for pilots and flight engineers on certain flights.

In 1985, a major competitor's labor strike increased American's passenger loads, which resulted in an increase workload on its employees. As a gesture of appreciation, American Airlines gave each employee two $50 "Be My Guest" American Express restaurant vouchers. The employees' names were not included on the vouchers, and there were no restrictions on transferability. If the purchase was less than $50, no refund was given.

American Airlines' Position

American Airlines did not treat the benefits as wages and, therefore, did not withhold employment taxes, relying on the following arguments:

American Airlines' Benefit Position Per Diem-- Travel expense Overnight Trips exclusion provided under Regs. Secs. 31.3121(a)-1(h) and 31.3401(a)-1(b)(2) and/or "working condition fringe...