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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
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
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
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
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
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
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
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
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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