Commercial cargo jets, like the ones flown by FedEx, don't have windows on the sides. The packages don't need to see the view. But the aircraft do come equipped with a few "jumpseats" -- two in the cockpit and a few more in the cargo hold, often just behind the cockpit door. These seats are reserved for unusual customers who have to accompany their freight to its destination -- when livestock is being transported, for example -- and they're also used by government aviation inspectors, maintenance personnel, and reportedly even Secret Service agents from time to time.
When no one is using the seats on official business, the cargo carriers reportedly allow some of their employees to occupy them for personal travel, without charge. It's not glamorous, and the routing is usually quite inconvenient (Portland to Seattle via Memphis, anyone?), but in some situations, it beats paying full fare or staying home. When employees take advantage of this perk, can they exclude its value from their gross income under section 132 of the Code?
This very question was presented to the IRS in the mid-1980s. The agency audited a cargo carrier (believed to be FedEx), and the IRS agent conducting the audit asked the national office for a "technical advice memorandum," one of the nonprecedential types of IRS guidance I talked about the first night of class. (Actually, it was the company's employees who would have to pay the income tax, but the company needed to know whether the flight values were wage income for tax withholding and Social Security tax purposes.)
The technical advice memo (8741007) was issued on June 5, 1987. In it, the national office ruled that the fair market value of the employees' personal travel was gross income to them, because it did not fit into the definition of a "no-additional-cost service" as defined in section 132(b). As you will recall, that definition requires that the service be "offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services." The IRS reasoned that the employer did not offer customers the same "service" that the employees were enjoying when they were sitting in the jumpseats. "Because the jumpseats are not offered for sale to customers," the IRS reasoned, "their use by employees is not the result of unsold capacity."
To paraphrase the IRS ruling, FedEx was not in the business of passenger transportation, but rather in the business of freight transportation. FedEx had argued, in effect, that the "service" it provided in its business was air transportation, period. To the taxpayer, transportation of people and transportation of packages were the same thing -- transportation of matter, as it were. That argument fell on deaf ears.
Taxpayers of means often don't take defeat at the hands of the IRS lying down, however. Instead, they get on the phone with their lobbyists and friends in Congress. Sometimes, they get special legislation passed to make their tax issues go away. And so it was in this case. Take a look at Code section 132(j)(7), which took effect Jan. 1, 1988. Gong! Problem solved, at least prospectively.