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IRS 7/95 Technical Advice Memorandum Taxation Of Frequent Flyer Miles And Accountable Plans
IRS COVER PAGE COMMENTARY
The IRS is concerned that there may be some misunderstanding about a recently released technical advice memorandum involving the taxation of frequent flyer miles and accountable plans. This technical advice memorandum was issued to help resolve a specific case, involving a specific employer. I does not establish precedent for any other case involving any other employer. The IRS has no special enforcement program for frequent flyer miles.
The IRS does not want other employers to be misled by applying the analysis of this technical advice memorandum to their plans. The IRS is reconsidering the analysis in this technical advice memorandum, in part because the technical advice memorandum does not address the full range of regulations potentially applicable to employee reimbursement plans involving frequent flyer miles.
JUL 11 1995
Index No. 62-02-02 Control No.: CC:EBEO:Br2-TR-32-34-95 9547001
INTERNAL REVENUE SERVICE NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM
"This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal Revenue Code."
Non-Supervisors Automobile Expense Allowance Arrangement: Supervisors Automobile Expense Allowance Arrangement: Air Travel Allowance and Reimbursement Arrangement:
This memorandum is in response in response to your request for technical advice concerning the Taxpayer's travel expense reimbursement and expense allowance arrangements.
Whether the Taxpayer's business expense allowance and reimbursement arrangements described below are "accountable plans" within the meaning of section 62(c) of the Internal Revenue Code and the regulations thereunder?
The Taxpayer maintains several arrangements through which it reimburses its employees for official business expenses. We have been asked to determine whether three of those arrangements, the Non-Supervisors Automobile Expense Allowance Arrangement ("Non-Supervisors' Auto Arrangement"), the Supervisors Automobile Expense Allowance arrangement ("Supervisors Auto Arrangement"), and the Air Travel Allowance and Reimbursement Arrangement ("Air Travel Arrangement"), are accountable plans within the meaning of section 62(c) of the Code.
Each Auto Arrangement provides that under certain circumstances, employees may be eligible for reimbursement of expenses incurred in using privately-owned vehicles for official purposes. Eligibility for reimbursements under each arrangement is determined by an "approving official," who must determine that the use of a privately-owned vehicle will be beneficial to the Taxpayer. Employees will be reimbursed for all mileage incurred for official business.
Under the Non-Supervisors Auto Arrangement, employees are required to supply odometer readings for purposes of calculating reimbursable mileage. Employees are reimbursed under this arrangement at the applicable "cents-per-mile rate" prescribed by the service.
The Supervisors Auto Arrangement provides that supervisors:
will be reimbursed at the rate of [$x] per day or [the applicable cents- per-mile-rate,] whichever is greater, whenever a privately-owned vehicle is used for business purposes. Odometer readings are not required on the respective claims forms; the integrity of the claim is the responsibility of the traveler. However, should the approving official have reason to question the claim, the claimant must provide evidence that supports the claim of distance traveled.
The Air Travel Arrangement sets forth the conditions under which the Taxpayer pays the cost of employee air travel for official business. It requires employees to use the method of transportation that is most advantageous to the Taxpayer. Employees must consider per diem, overtime, and lost work time costs in addition to transportation costs.
The Air Travel Arrangement instructs all employees who are denied seating on an overbooked flight to demand penalty payments. Employees are to request that the airline make the check payable to the Taxpayer. If the check is nonetheless made payable to the employee, the employee must endorse the check for payment to the Taxpayer.
Until recently, the Air Travel Arrangement required employees to return certain airline incentives, including discount coupons for future air travel, to an appropriate official of the Taxpayer. The Air Travel Arrangement has been amended to provide that "[a]ccumulated mileage/points obtained via participation in Frequent Flyer or Frequent Traveler programs sponsored by commercial airlines...may be retained and used by you for personal travel. However, official travel arrangements must be made using the most economical accommodations available, commensurate with the needs of the business."
Section 62 (a) of the Code lists the deductions from gross income allowed in computing "adjusted gross income." Section 62 (a) (2) (A) includes among those deductions those allowed by part VI (section 161 through section 196), which consists of expenses paid or incurred by the taxpayer, in connection with his or her performance of services as an employee, under a reimbursement or other expenses allowance arrangement with his or her employer.
Section 62 (c) of the Code provides that arrangements will not be treated as "reimbursement or other expense allowance arrangements" for purposes of section 62 (a) (2) (A) unless (1) the arrangement requires the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement and (2) the arrangement requires the employee to return any amount in excess of the substantiated expenses covered under the arrangement.
In enacting section 62 (c) of the Code, Congress noted the sharp distinction it had drawn in the Tax Reform Act of 1986 between unreimbursed and reimbursed employee business expenses by subjecting unreimbursed employee expenses and other miscellaneous itemized deductions to the two-percent floor under section 67. The rationale for the limitation is that, under a true reimbursement arrangement, the employer has an incentive to require sufficient substantiation to ensure that the employee's allowance be limited to actual business expenditures. In the case of nonaccountable plans, however, there is no reason to allow the employee an above-the-line deduction. Such amounts more nearly resemble salary payments: the amount received by the employee is not necessarily determined by the actual amount of business expenses incurred by the employee, and the employee may retain amounts that are not spent for business purposes. The Conference Committee stated:
If an above-the-line deduction is allowed for expenses incurred pursuant to a nonaccountable plan, the two-percent floor enacted in the 1986 Act could be circumvented solely by restructuring the form of the employee's compensation so that the salary amount is decreased, but the employee receives an equivalent nonaccountable expense allowance.
See H.R. Conf. Rep. 998, 100th Cong., 2d Sess. 203 (1988).
Under section 1.62-2(c) (1) of the Income Tax Regulations, a reimbursement or other expense allowance arrangement satisfies the requirements of section 62 (c) of the Code if it meets the three requirements of business connection, substantiation, and returning amounts in excess of expenses. These requirements are set fourth in paragraphs (d), (e), and (f), respectively, of section 1.62-2 ("the three requirements").
An arrangement meets the business connection requirement of section 1.62-2(d) of the regulations if it provides advances, allowances (including per diem allowances, only for meals and incidental expenses, and mileage allowances), or reimbursements only for business expenses that are allowable as deductions under sections 161 through 196 of the Code, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer.
An arrangement meets the substantiation requirement of section 1.62-2(e) of the regulations if it requires each business expense to be substantiated to the payor (the employer, its agent or a third party) within a reasonable period of time. An arrangement that reimburses business expenses governed by section 274(d) of the Code meets this requirement if the information submitted to the payor sufficiently substantiates the requisite elements of each expenditure or use.
For example, section 1.274-5T(b) (6) of the regulations provides that the elements to be proved with respect to listed property, including passenger automobiles, are amount, time, and business purpose. The amount of business and total use of a passenger automobile must be substantiated based on mileage. Section 1.274-5T(b) (6) (i) (B). To meet the "adequate records" requirements of section 274 (d), a taxpayer must maintain an account book, diary, log, statement of expense, trip sheets, or similar record. Section 1.274-5T(c) (1).
An arrangement meets the requirements of section 1.62-2(f) of the regulations if it requires the employee to return to the payor within a reasonable period of time any amount paid under the arrangement in excess of the expenses substantiated ("return of excess requirement"). The determination of whether an arrangement requires an employee to return amounts in excess of substantiated expenses will depend on the facts and circumstances. An arrangement under which money is advanced to an employee to defray expenses will satisfy this requirement only if the amount advanced is reasonably calculated not to exceed the amount of anticipated expenses.
Under section 1.62-2(f) (2) of the regulations, mileage allowances calculated at the applicable cents-per-mile rate are deemed substantiated. Thus, it is not necessary for an arrangement to require the employee to return any unused portion of the allowance calculated under this method.
Section 1.62-2(k) provides that, if a payor's reimbursement or other expense allowance arrangement evidences a pattern of abuse, all payments made under the arrangement will be treated as made under a nonaccountable plan.
Automobile Mileage Reimbursements
The Non-Supervisors Auto Arrangement provides that employees of the Taxpayer who occupy non-supervisory positions are reimbursed for official use /FN1 of their privately-owned vehicles at the applicable cents-per-mile rate. The Non-Supervisors Auto Arrangement requires substantiation of the business use of privately-owned vehicles with mileage records and, thus, satisfies the substantiation requirement of section 1.62-2(e) of the regulations. Because non-supervisory employees are reimbursed at the applicable cents-per-mile rate, the return of excess requirement is deemed to be satisfied. Section 1.62-2(f)(2).
The Supervisors Auto Arrangement does not require supervisory employees to submit mileage records or return amounts in excess of substantiated expenses. This arrangement also establishes a different rate of reimbursement for supervisory employees. Reimbursements are calculated at the rate of $x per day or the applicable cents-per-mile rate, whichever is greater.
To meet the substantiation requirement of section 1.62-2(e)(2) of the regulations for passenger automobiles, an arrangement must require the submission of information sufficient to meet the requirements of sections 1.274-5T to the payor. The Supervisors Auto Arrangement does not require the submission of mileage records and, thus, does not meet the applicable substantiation requirements. In addition, the Automobiles Arrangement provides for reimbursements at the rate of the greater of $x per day or the applicable cents-per-mile rate without requiring the return of amounts in excess of actual or deemed substantiated expenses. Accordingly, the Supervisors Auto Arrangement does not meet the substantiation or return of excess requirements of paragraphs (e) and (f) of section 1.62-2 of the regulations. Therefore, the Supervisors Auto Arrangement is a nonaccountable plan. /2
Air Travel Allowances and Reimbursements
Under the Air Travel Arrangement, the Taxpayer pays for its employees official business travel. This arrangement requires all employees to return to the Taxpayer any compensation for involuntarily denied boarding on overbooked flights. By requiring the return of these excess amounts to the Taxpayer, the Air Travel Arrangement satisfies the return of excess requirement of section 1.62-2(f) of the regulations with respect to denied boarding compensation.
In contrast, the Air Travel Arrangement allows the Taxpayer's employees to retain mileage and awards accumulated on business travel. Mileage accrued toward awards constitutes a rebate in consideration of flying on a particular airline. Under generally accepted principles of tax law, a rebate is a purchase price adjustment, i.e., it reduces the purchaser's cost of the property acquired. /3 These purchase price adjustments constitute amounts in excess of the substantiated expenses covered under the Air Travel Arrangement. Accordingly, the Air Travel Arrangement's failure to require the return of such excess means that the Arrangement is a "nonaccountable plan" under section 1.62-2(c)(3)(i) of the regulations. /4
The Non-Supervisors Auto Arrangement meets the return of excess requirement of section 62 (c)(2) of the Code and 1.62-2(f) of the regulations. The Supervisors Auto Arrangement, however, requires neither substantiation of business mileage nor the return of amounts in excess of substantiated expenses. Accordingly, the Supervisors Auto Arrangement is a nonaccountable plan.
The Air Travel Arrangement requires the Taxpayer's employees to return denied boarding compensation to the Taxpayer and, thus, satisfies the return of excess requirement of section 1.62-2(f) of the regulations with respect to those payments. However, because the Air Travel Arrangement allows employees to retain the purchase price adjustments, the arrangement does not require the Taxpayer's employees to return amounts in excess of substantiated expenses and is, thus, a nonaccountable plan.
A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110 (j)(3) of the Code provides that it may not be used or cited as precedent.
/1 For purposes of this Technical Advice Memorandum, we assume that expenses for "official use" are equivalent to expenses that would be deductible under section 162 of the Code, and, thus, satisfy the business connection requirement of section 1.62-2(d) of the regulations.
/2 The Taxpayer has agreed that, prospectively, it will reimburse its supervisory employees only at the applicable cents-per-mile rate and require substantiation of business miles traveled.
/3 See, e.g., Rev. Rul. 91-36, 1991-2 C.B. 17; Rev. Rul. 76-96, 1976-1 C.B. 23; Pittsburgh Milk Co. v. Commissioner, 26 T.C. 477 (1977), acc., 1982-2 C.B. 2, aff'd, 630 F.2d 670 (9th Cir. 1980). An agent's receipt of rebates resulting from purchases on behalf of his principal constitutes an adjustment to the principal's purchase price. See, e.g., Ballentine Motor Co., Inc. v. Commissioner, 39 T.C. 348 (1962), and X-L Service, Inc. v. Commissioner, T.C. Memo 1973-148 (1973).
/4 The Service has suggested several acceptable alternatives for the Taxpayer to consider in rendering its plan "accountable." The Taxpayer has been initially amenable to ides that will assist it in complying with the requirements of section 62 (c).
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