## Facts

- Dr. Philip J. Charley was president of Truesdail Laboratories, a testing business; he and his wife owned slightly more than 50% of the company’s shares.
- Truesdail had an unwritten policy treating frequent-flyer miles earned on business travel as the employee’s personal property.
- In 1988, for four business trips, Charley arranged for Truesdail to be charged for round-trip first-class airfare while instructing the travel agent to purchase coach tickets.
- Charley used frequent-flyer miles (earned largely from business travel) to upgrade the coach tickets to first class.
- Charley instructed the travel agent to transfer to his personal travel account the difference between the first-class fare billed to Truesdail and the coach fare actually purchased.
- The procedure resulted in $3,149.93 credited to Charley’s personal travel account.
- The parties stipulated that the Charleys did not know the travel credits were taxable and did not intend to conceal the process.

## Issues

1. Whether travel credits placed into an employee’s personal travel account through conversion of frequent-flyer miles constitute gross income under I.R.C. § 61.
2. Whether the failure to report those travel credits warranted an addition to tax for negligence under I.R.C. § 6653.

## Decision

- The Ninth Circuit affirmed the Tax Court’s determination that the $3,149.93 in travel credits was includible in gross income under I.R.C. § 61.
- The court treated the arrangement as a monetization (a “sale”) of frequent-flyer miles producing a cash-equivalent benefit.
- The court reversed the I.R.C. § 6653 negligence penalty, relying on the stipulated good faith and the unsettled tax treatment of this specific monetization method.

## Legal Principles

- Gross income under I.R.C. § 61 broadly includes all accessions to wealth that are clearly realized and over which the taxpayer has complete dominion.
- A benefit is taxable when an employee structures transactions to convert an employer-funded price differential into a personal cash or cash-equivalent credit under the employee’s control.
- Administrative non-enforcement regarding ordinary accrual or personal use of frequent-flyer miles does not control when the employee converts miles into a monetized personal gain.
- A negligence addition to tax may be inappropriate when taxpayers act in good faith without concealment and the reporting obligation is not clearly established for the transaction at issue.

## Conclusion

The court held that travel credits created by diverting the employer-paid first-class/coach price difference into an employee’s personal travel account are taxable gross income, but it set aside the negligence penalty because the taxpayers did not conceal the conduct and the tax treatment of this monetization technique was not clearly settled.


Charley v. Commissioner, 91 F.3d 72 (9th Cir. 1996)