The Tax Court in Brief – April 11th- April 15th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of April 11th, 2022, through April 15th, 2022

Mihalik v. Comm’r | April 13, 2022 | Gustafson, D. | Dkt. No. 7881-19


Short Summary: Douglas Mihalik is a retired airline pilot and a participant in United Airline’s Retiree Pass Travel Program (RPTP). In 2016, United, through the RPTP, provided free airline tickets to Douglas Mihalik, his wife, daughter, and two adult relatives. The Mihaliks did not include the value of the free tickets in income on their 2016 tax return. The IRS later determined that the value of the tickets provided to the two adult relatives was required to be included and issued a notice of deficiency containing an adjustment for the omitted income. Total tax due was $2,862.00. The Mihaliks timely petitioned. They maintained that the value of the relatives’ tickets was non-taxable; that the tickets’ value represented the value of “de minimis travel provided to retired pilots,” allegedly a fringe benefit excluded from income under the tax code’s fringe benefit provisions. The IRS moved for summary judgment, arguing that the adult relatives were not among the individuals eligible for non-taxable fringe benefit treatment under the Code. In their response to the motion, the Mihaliks failed to allege any facts or legal argument to counter this contention. Finding that no genuine dispute of material fact existed, the Court ruled in favor of the IRS as a matter of law. In deciding the case, the Court read the pro se taxpayers’ petition to raise two issues for adjudication, whether provision of the relatives’ tickets was excludable from income, either as a “no-cost additional service” or a “de minimis fringe” benefit under I.R.C. §§ 132(a)(1) and (a)(4), respectively.

Primary Holdings:

  • The Mihaliks were required to include in gross income the value of airline tickets provided to their adult relatives because the ticket value does not qualify for exclusion under I.R.C. § 132.
  • The value of the relatives’ tickets is not excludable under I.R.C. § 132(a)(l), which excludes from income fringe benefits qualifying as “no-additional-cost service[s],” because the adult relatives were not the Mihaliks’ dependent children in 2016; and
  • The value of the tickets is not excludable under I.R.C. § 132(a)(4) as a “de minimis fringe” because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable.

Key Points of Law:

  • Gross income means all income from whatever source derived, unless specifically excluded by law. I.R.C. § 61(a); Treas. Reg. § 1.61-l(a).
  • R.C. § 132 excludes from gross income the value of certain “fringe benefit[s]” provided by an employer to an employee. An employee must include in gross income the value of any fringe benefit provided to the employee, or to a third party on the employee’s behalf, that does not meet the criteria for exclusion under Section 132. I.R.C. § 61(a)(l); see also Treas. Reg. § 1.61-21(a)(4).
  • Section 132(a)(l) excludes from gross income the value of any fringe benefit that qualifies as a “no-additional-cost service.”
  • A “no-additional-cost service” is any service that is (1) provided by an employer to an employee; (2) at no substantial additional cost to the employer (including forgone revenue); (3) for use by the employee; and (4) offered for sale to customers in the ordinary course of business of the employer. I.R.C. § 132(b); Treas. Reg. § 1.132-2(a)(l).
  • Excess capacity services, such as stand-by flights provided by commercial airlines to their employees, are generally considered no-additional-cost services and are non-taxable to the recipients. Treas. Reg. § 1.132-2(a)(l), (2).
  • Individuals treated as “employees” for purposes of Section 132(a)(1) include a retiree of the employer and the spouse and dependent children of a retiree. I.R.C. § 132(h); Treas. Reg. § 1.132-l(b)(l).
  • A “dependent child” under Section 132(h) is any son, stepson, daughter, or stepdaughter who is a dependent of the employee, or both of whose parents are deceased and who has not attained age 25. Treas. Reg.§ l.132-l(b)(5).
  • Section 132(a)(4) excludes from gross income the value of any fringe benefit that qualifies as “de minimis fringe.”
  • The term “de minimis fringe” is defined in Section 132(e)(l) to mean “any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.”

Insights:  This case makes two points worth noting. First, the Tax Court reads pro se petitions broadly. Although the taxpayers seemed to be relying on the “no-additional-cost services” fringe benefit exception, the Court seized on the words “de minimis” to examine whether another Section 132 exception applied. Second, the case demonstrates that the IRS will try a case of little monetary or precedential value if there are no factual disputes and the applicable law is clear and supports the government’s case, as here. Clearly, the recovery of $2,862.00 tax was not worth the government’s time and resources. However, the taxpayers, who did not contest the IRS’s factual allegations or interpretation of applicable law, gave the IRS no basis for settlement.

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