Tax Day is right here! And what higher option to observe the day than a lesson on §132, a lesson that evokes the ghost of Dan Rostenkowski, whose curmudgeonly visage seems to the suitable. For individuals who don’t know, Rostenkowski was the chairman of the Home Methods and Means Committee from 1981 till 1994 when, within the nice custom of Illinois politicians, he was indicted on varied counts of fraud, finally pleading responsible to mail fraud. Sure, political corruption in Illinois truly has its personal Wikipedia entry.
Throughout his time as head of the Home tax writing committee, Rostenkowski oversaw a number of main legislative adjustments. Maybe his crowning glory was his function within the 1986 Tax Reform Act, which has lengthy been considered as a triumph (nevertheless short-lived) of sound tax reform.
Immediately’s lesson has its genesis within the earlier Deficit Discount Act of 1984, PL 98-369, 98 Stat. 494. There, Congress wrote a brand new §132 to exclude from gross earnings a protracted listing of conventional worker fringe advantages. In Douglas Mihalik and Wendy J. Mihalik v. Commissioner, T.C. Memo. 2022-36 (Apr. 13, 2022) (Choose Gustafson), Mr. Mihalik acquired free airline tickets for himself and members of his household. He sought the exclusionary shelter of §132. Whereas §132 could be very broadly written to cowl varied members of the family of an worker, Choose Gustafson teaches us how some members of the family are excluded from the exclusion. Particulars under the fold.
Legislation: Tax Remedy of Airline Passes
One of many perks of working for an airline has lengthy been free or reduced-cost airline tickets. Professor Joel Newman provides an amazing historical past of that profit in his article Fly Me Fly My Mom, 35 Tax Notes 291 (1987). The tax therapy of the free airline ticket is the difficulty in at the moment’s case. Let’s run by it.
It at all times begins with gross earnings. Part 61 tells us that gross earnings is “all earnings from no matter supply derived.” That mysterious time period has lengthy been interpreted broadly to incorporate any “accessions to wealth, clearly realized, and over which the taxpayers have full dominion.” Commissioner v. Glenshaw Glass, 348 U.S. 426, 431 (1955). Equally, Treas. Reg. 1.61-2(d) says that gross earnings contains receipt of property or companies as compensation for companies, not simply money.
Thus, if I work for an airline and, due to my standing as an worker (offering companies), the airline provides me a free ticket to fly to Hawaii, that ticket is gross earnings to me within the quantity of its honest market worth. The ticket is an accession to wealth simply as if my employer gave me the money and I then used the money to purchase the ticket.
However the evaluation doesn’t finish there. Part 132 permits taxpayers to exclude from their gross earnings sure fringe advantages of their jobs. In my instance, §132(b) permits me to exclude that accession to wealth if the airline “incurs no substantial further price (together with forgone income)” in offering the ticket to me. Logically sufficient, these are referred to as no-additional price advantages, and sometimes apply to companies which will have extra capability, similar to accommodations, colleges, theaters, amusement parks, and airways.
Thus, I may exclude my ticket to Hawaii from gross earnings if there have been unsold seats on the airplane and I used to be merely utilizing that extra capability. But when my ticket both truly bumped a paying buyer or locked up a seat on the airplane, making it unavailable to a paying buyer, the exclusion wouldn’t apply. See Treas. Reg. 1.132-2(c).
That’s a reasonably beneficiant exclusion. However wait. It will get higher. Congress didn’t restrict this exclusion of no-additional-cost advantages to precise present workers. As initially enacted, what are actually §§132(h)(1) and (2) prolonged the exclusion profit to retired workers, disabled workers, spouses and surviving spouses of workers, and the dependents of workers. Wow.
Nonetheless, as beneficiant as it’s, the exclusion allowed by §132 shouldn’t be limitless. That’s what we study from at the moment’s case.
Information
The tax yr at concern is 2016. As a retired airline pilot for United Airways, Mr. Mihalik was entitled to make use of the airline’s Retiree Go Journey Program (“Program”). The Program permits “a retiree’s eligible cross riders with space-available cross journey privileges for leisure journey on flights operated by United and United Specific retired workers free standby airline tickets.” Eligible cross riders embrace the retiree, their partner, their home companion, their kids as much as age 26, grownup disabled kids of any age, and as much as two further individuals, denominated as “enrolled pals.” A few of these free tickets are excluded from earnings, however others should not. The Program provides this steering on how United Airways complies with tax regulation:
“Tax legal guidelines and rules govern whether or not or not an eligible cross rider’s journey is taxable or not. Beneath current tax rules, cross journey by home companions, enrolled pals and non-dependent kids ages 18 till they attain age 26, no matter cross kind, is taxable and needs to be reported to the IRS. If the journey worth exceeds $600 for the yr, a Kind 1099 will likely be mailed to you accordingly.”
In 2016 Mr. Mihalik made in depth use of the Program, acquiring free tickets for himself, his spouse, their daughter, and two different members of the family that he designated as “enrolled pals.” Choose Gustafson is cautious to offer us their full names: Sean Garth Mihalik and Jessica Marie Liening Mihalik. From that one would possibly assume that Sean was their son and Jessica was their daughter-in-law. For some purpose, the Mihaliks by no means informed the Court docket what the connection was.
Per the foundations of its Program, United Airways despatched Mr. Mihalik a 1099 for $5,478 for the tickets it had given Sean and Jessica. It didn’t ship Mr. Mihalik a 1099 for the worth of the tickets it had given him, his spouse, or their daughter.
The Mihaliks didn’t report the $5,478 as earnings, nor did they report both Sean or Jessica as dependents. The IRS picked up on this omission, chosen the return for audit, and despatched the Mihaliks an NOD proposing a $2,862 deficiency (apparently there have been another smaller points). The Mihaliks petitioned the Tax Court docket and the IRS moved for Abstract Judgment.
Lesson: The §132 Exclusion Does Not Embrace ALL Your Household
Mr. Mihalik is the airline worker whose companies created the entitlement to free tickets below the Program. Subsequently, the scope of the §132 exclusion keys off of his relationship to the individuals who obtain free tickets. Whereas these tickets have been an plain accession to wealth to Sean and Jessica, the tickets nonetheless signify compensation to Mr. Mihalik for his prior companies. The tickets have been thus issued to him and he gave them to Sean and Jessica, who thereby are in a position to exclude their worth below part. Mr. Mihalik, nevertheless, should look elsewhere to seek out some purpose why these tickets should not gross earnings to him. His greatest shot was §132.
Whereas §132 could be very beneficiant, it isn’t as beneficiant as Mr. Mihalik wanted. It permits a taxpayer to exclude free airline tickets given to some household, not all household. That household have to be both the taxpayer’s partner or dependent baby. Certain, the actual airline’s advantages may be extra beneficiant. The United Airline Program, for instance, offered free tickets to non-dependent kids (as much as age 26), to home companions who weren’t spouses, and to 2 further designated “enrolled pals.”
The IRS didn’t contest the appliance of §132 to the tickets given to Mr. Mihalik, Ms. Mihalik, or their unnamed daughter, however insisted that the tickets given to Sean and Jessica weren’t topic to the §132 exclusion.
Choose Gustafson agreed. He explains how the Mihaliks, who have been continuing professional se, just about did not comply with Tax Court docket guidelines and so didn’t give the Court docket the knowledge it wanted to rule of their favor:
“As a result of Sean and Jessica have the identical surname because the Mihaliks, we assume that additionally they share some familial relation. However the Mihaliks don’t provide any info to make clear that relation and subsequently, for the needs of the Commissioner’s movement, we assume that Sean and Jessica are merely family members (to an unknown diploma) of the Mihaliks. Though some dates are redacted, the information listing the beginning years for Sean and Jessica as 1983 and 1984, which means Sean and Jessica have been each over the age of 30 in 2016.” Op. at 3-4
Primarily based on that info, there was merely no manner that both Sean or Jessica got here inside the scope of the §132 exclusion.
It could be that Mr. Mihalik had acquired free tickets for Sean and Jessica up to now and that the failure to report that earnings in 2016 was only a continuation of a previous sample. And it’s definitely true, that quantities reported on a 1099 are essentially gross earnings. After studying this opinion, nevertheless, we should always all study the lesson that free tickets to an airline worker to be used by somebody apart from their partner, dependent baby, or mother or father (in case you are an airline worker), are gross earnings and should not excluded by §132.
Remark 1: What In regards to the Daughter? Choose Gustafson notes that the Mihaliks “didn’t declare dependents on their return” for 2016. Which means they didn’t declare their daughter as a dependent. However §132(h) extends the exclusion solely to dependent kids. And it’s definitely true, {that a} taxpayer can have gross earnings even when that earnings shouldn’t be reported to the IRS by some third social gathering. So maybe the Mihaliks will be grateful that the IRS didn’t choose up on what seems to me to be one other merchandise of underreported earnings.
Remark 2: It is Not A Freebie However It is Nonetheless A Nice Low cost. The Mihaliks nonetheless acquired a big profit from the Program, even when these advantages have been taxable. They didn’t must pay the complete worth of the tickets they acquired for Sean and Jessica. As an alternative they solely needed to pay the tax, which is like paying a giant low cost. I admit that may be a troublesome idea for some individuals to wrap their minds round. For instance, Texas Tech presents some college students a housing stipend along with a full trip on tuition. One yr, one such pupil stormed into my workplace demanding to know why her housing stipend was taxable earnings. She complained that she had been promised free housing however now she must pay tax on the worth of the housing. Her stipend was about $600 and her marginal fee was about 10%. I steered to her that she consider the housing stipend as a reduction. That’s, she could be fairly comfortable if she needed to pay solely $60 in lease for a $600 condominium. She would suppose that was fairly a cut price. She stormed out, unconvinced.
Remark 3: Rostenkowski‘s Ghost. To carry it again to the intro, the unique §132 didn’t have a particular provision for airline workers. All workers of all industries have been handled the identical and obtained the identical familial profit. A few years after Congress enacted §132, airline labor unions succeeded in getting Congress to offer a extra beneficiant §132 to airline workers by extending the exclusion to their dad and mom. Free tickets for folks! No tax! The Consolidated Omnibus Funds Reconciliation Act of 1985 (COBRA), 100 Stat. 82, 319, added what’s now §132(h)(3), titled “Particular rule for folks within the case of air transportation.” Once more, whereas all workers get the exclusion profit for freebies given to their spouses and dependents, airline workers get a particular deal! They get to exclude the free tickets given to their dad and mom.
I really like making my college students scratch their heads over what potential deep and abiding tax coverage purpose Congress had for creating this particular tax profit for the dad and mom of this one specific trade. After which I inform them this truth: when this laws was in gestation, Dan Rostenkowski had two daughters who have been flight attendants. They instantly bounce to the conclusion that any of us would bounce to.
However Professor Newman’s article, supra, does a lot to dispel that conclusion. He rigorously traces the in depth lobbying efforts of flight attendant unions for parental passes to be a part of the §132 exclusion, a lobbying effort that was based mostly partially on conventional perks airways had given workers. These efforts failed within the preliminary enactment of §132. They succeeded two years later. And when one appears to be like on the different particular provisions Congress created for airways in COBRA, one sees how the particular provisions for airways mirror extra conventional lobbying somewhat than any sly insertion by an Illinois Congressman who simply needed to fly backwards and forwards to Chicago tax-free. Nonetheless, one can think about Rosty smiling.
Bryan Camp is the George H. Mahon Professor of Legislation at Texas Tech College of Legislation. He invitations readers to return every week to TaxProf Weblog for one more Lesson From The Tax Court docket.
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