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Airline Tickets Given to Adult Relatives Must Be Included in Couple's Income

(Parker Tax Publishing May 2022)

The Tax Court held that a retired airline pilot and his wife were required to include in their income the value of airline tickets they received for free from the husband's former employer and provided to two adult relatives. The court concluded that the value of airline tickets provided to the couple's adult relatives (1) was not excludable under Code Sec. 132(a)(1) as providing no-additional-cost services because the relatives were not dependent children, and (2) was not excludable under Code Sec. 132(a)(4) as "de minimis fringe" benefits because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable. Mihalik v. Comm'r, T.C. Memo. 2022-36.


Douglas Mihalik is a retired United Airlines pilot. In 2016, United Airlines provided retired pilots (and their family members and friends) with free stand-by airline tickets under a retiree benefits program entitled the Retiree Pass Travel Program (RPTP). United Airlines kept records of tickets issued to the Mihaliks and their relatives in 2016. For each flight, the records list the flight date, each passenger's name, the value of each ticket issued, and whether the value of each ticket constituted reportable taxable income to Mr. Mihalik. The records also note each passenger's birth date and relationship to Mr. Mihalik. Because of their connection to Mr. Mihalik, Sean Mihalik and Jessica Liening Mihalik also received tickets from United Airlines under the RPTP in 2016. United Airlines' records list Sean's and Jessica's relationships to Mr. Mihalik as "Enrolled Friend", label each as a "taxable pass rider", and report a taxable "wage amount" for each ticket issued to Sean and Jessica under the RPTP.

The Mihaliks filed a joint federal income tax return for 2016 but did not include the value of the free airline tickets for Sean and Jessica in their gross income. In a notice of deficiency, the IRS determined that the Mihaliks were required to include the value of the airline tickets provided to Sean and Jessica in their 2016 gross income.

The Mihaliks contested the IRS's determination, arguing that the value of the tickets was excludable under Code Sec. 132 because the tickets were for de minimis travel provided to retired pilots. The IRS, citing Code Sec. 132(a)(1), Code Sec. 132(b), and Reg. Sec. 1.132-2(a)(1), countered that the entire value was not excludible from income because the tickets provided to the Mihaliks' adult relatives did not qualify for exclusion since Sean and Jessica were not the Mihaliks' dependent children. The Mihaliks' tax return did not list Sean and Jessica as dependents and they did not otherwise qualify as dependents of the Mihaliks. Despite a Tax Court order giving explicit instructions to the Mihaliks to address the IRS's factual assertions, the Mihaliks failed to do so.

Code Sec. 132(a)(1) excludes from gross income the value of any fringe benefit that qualifies as a "no-additional-cost service." Under Code Sec. 132(b) and Reg. Sec. 1.132-2(a)(1), 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. Generally, under Reg. Sec. 1.132-2(a)(2), excess capacity services, such as stand-by flights provided by commercial airlines to their employees, are considered no-additional-cost services and are non-taxable to the recipients. For purposes of Code Sec. 132, the term "employee" includes a retiree of the employer and the spouse and dependent children of a retiree. A "dependent child" is defined in Code Sec. 132(h)(2)(B) as 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. For purposes of Code Sec. 132, the term "dependent" is defined by Code Sec. 152(a)(1) as including a qualifying child, which is defined as an individual who, in addition to meeting other requirements, has not attained the age of 19 as of the close of the calendar year in which the tax year of the taxpayer begins, or is a student who has not attained the age of 24 as of the close of such calendar year.

Code Sec. 132(a)(4) excludes from gross income the value of any fringe benefit that qualifies as "de minimis fringe." A "de minimis fringe" is defined as 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.


The Tax Court held that the Mihaliks were required to include in their gross income for 2016 the value of the airline tickets provided to Sean and Jessica because the value did not qualify for exclusion under Code Sec. 132. The court agreed with the IRS that Sean and Jessica were not the Mihaliks' dependents nor could they be treated as employees under Code Sec. 132(b). Neither relative, the court noted, was under the age of 19 in 2016, and therefore, no matter what their relationship was to the Mihaliks, they did not qualify as dependents under Code Sec. 152(c), nor as dependent children under Code Sec. 132(h).

According to the court, the value of the tickets provided to Sean and Jessica under the RPTP did not qualify for exclusion as providing no-additional-cost services under Code Sec. 132(a)(1). Moreover, the court observed, any argument that the airline tickets constitute a de minimis fringe benefit would manifestly fail on its merits. United Airlines' records indicated, the court noted, that it issued airline tickets frequently under the RPTP and the value of the airline tickets issued to Sean and Jessica ($5,478) greatly exceeded the low-fair-market-value examples provided by Reg. Sec. 1.132-6(e). It was also clear to the court that it was neither unreasonable nor administratively impracticable for United Airlines to account for tickets issued under the RPTP. To the contrary, the court noted, United Airlines records documented substantial data about the RPTP tickets, including the tax implications to Mr. Mihalik of the tickets provided to non-family members. Therefore, the court concluded, the airline tickets provided to Sean and Jessica did not qualify as de minimis fringe benefits whose value was excludable under Code Sec. 132(a)(4).

For a discussion of the tax treatment of de minimis fringe benefits, see Parker Tax ¶123,135.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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