Tax Court: ‘Tax-free’ fringe benefit is taxable

Fringe benefits can be tricky when tax time comes around. Keeping complete records helps you avoid legal hassles.

Here’s a recent case where an employer’s excellent recordkeeping and reporting kept it out of trouble with the Service.

After United Airlines pilots retire, they’re entitled to a special perk from their former employer – free “standby” airline tickets. Certain family members can also fly free.

One former pilot took full advantage of the airline’s Retiree Pass Travel Program, frequently flying with his wife, daughter and two adult relatives.

He assumed that the value of the tickets didn’t have to be reported as gross income on his tax return. However, what he didn’t know was his former company was keeping detailed records on the program’s travel activities.

The employer ended up reporting $5,478 in taxable income to IRS, based on the value of the travel of the former employee’s relatives. Under existing tax law, nontaxable fringe benefits can only be used by the employee, their spouse and dependent children.

When the IRS sent the taxpayer a notice of deficiency for $2,862, he took the Service to court. A U.S. Tax Court ruled in favor of the IRS.

When a fringe benefit isn’t tax-exempt

The employer did its due diligence by tracking the potentially taxable value of its fringe benefits.

Fringe benefits always count as taxable income, unless they’re:

• De minimis, or too small for an employer to reasonably keep track of, or
• “no additional cost” services that are sold to customers or clients in the normal course of business and don’t involve substantial cost to the employer. (This doesn’t apply to plane tickets, the judge said, because they have a high value.)

Bottom line: It’s the employers’ responsibility to track fringe benefits. That especially includes keeping tabs on any normally tax-exempt benefits that could be taxable in some cases.

It’s also key for Payroll to watch out for unusual perks your company offers that might count as fringe benefits.