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In a brand new case, Mihalik, C Memo 2022-36.4/13/22, a retired pilot took benefit of a particular program of his former employer that offered free airline tickets on a stand-by foundation. Though the worth of such advantages could qualify for a tax-free statutory fringe profit, the Tax Courtroom refused to offer clearance on this occasion.
Usually, the price of de minimis fringe advantages is exempt from federal earnings tax. This happens when it’s impractical or unreasonable for an employer to maintain observe of comparatively small advantages. It might vary from use of the corporate fax machine or copier for private causes to free espresso, tender drinks or donuts within the workplace. Additionally, the worth of no-additional price providers could also be exempt from tax. A “no-additional price service” is (1) offered by an employer to an worker; (2) at no substantial further price to the employer; (3) to be used by the worker; and (4) is obtainable on the market to prospects or purchasers within the regular course of enterprise.
For instance, extra capability providers, equivalent to stand-by flights offered by industrial airways to their workers, are sometimes handled as no-additional price providers and aren’t taxable to the recipients. To qualify for this exemption, nonetheless, the profit should be offered to an energetic or retired worker, their partner or their dependent little one.
On this case, the taxpayer, a resident of Florida, is a retired United Airways pilot. The airline gives retired pilots (and their relations and mates) with free stand-by tickets beneath its Retiree Move Journey Program (RPTP). The taxpayer, his partner and their grownup daughter traveled extensively beneath the RPTP in 2016. Different family members additionally benefitted from this system.
United Airways stored detailed information of all these journey actions. It reported taxable earnings of $5,478 for 2016, based mostly primarily on the journey of the taxpayer’s family members. The IRS issued a discover of deficiency for $2,862, together with an quantity attributable to the journey of the taxpayer’s grownup daughter. Because of this, the taxpayer took the IRS to Tax Courtroom, regardless of the comparatively small quantity of tax at stake.
At trial, the taxpayer claimed that the worth of the advantages represent a de minimis fringe profit. Alternatively, it argued that this was a no-additional price profit. Nonetheless, the Tax Courtroom disagreed. It disputed the tax exemptions for each sorts of advantages.
- The worth of the tickets can’t be excluded from tax a de minimis fringe as a result of the tickets had a price excessive sufficient that accounting for his or her provision was not unreasonable or administratively impracticable.
- The worth of the family members’ tickets can’t be excluded from tax as a “no-additional price service” as a result of the grownup family members weren’t the taxpayer’s dependent kids in 2016.
This case demonstrates that taxpayers should persist with the strict letter of the legislation when tax-free fringe advantages are being claimed. Test your tax standing on the gate.
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