Thursday, September 15, 2011

In the back with the boxes, a tax issue

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and the IRS agent conducting the audit asked the national office for a "technical advice memorandum," one of the nonprecedential types of IRS guidance I talked about the first night of class.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.

1 comment:

  1. Just a few additional comments regarding free flights as it relates only to order to utilize the 'benefit' of flying to exotic locations via Memphis (I was thinking Bora Bora, not Seattle) on the jumpseat, an employee must pass a written safety examination which focuses on what to do in the event of an emergency (Tom Hanks must have passed in 'The Castaway' because he and Wilson survived) and how to behave in the presence of such an esteemed flight crew (FedEx only hires Captains and requires 20 years of flying experience at a minimum). Once an employee demonstrates sufficient knowledge (these exams are not at the same level of complexity as a law school exam!), said employee enjoys a lengthy flight on a very uncomfortable seat--think stadium bleachers. And, unless the employee lucks into the jumpseat behind the pilots and is instead relegated to the cargo area, the flight is noisy and cold. Then, depending upon the final destination, the employee will have up to a four-hour layover in Memphis. The employee has to sit in a lounge equipped with more comfortable seating, but vending machines full of spendy treats. The employees (unless pilots) will never be allowed in the Pilot's Lounge. Here, the pilots are treated to gourmet catered food including chocolate covered strawberries in and out of season, lobster, cool cheeses, etc. Because the pilots have to turn around and fly right back to the city from whence they just departed, they, too, will have the layover, just in a cushy lounge with comfy sleeping cots. Once the plane has been reloaded for its final destination, the employee, by now running on little or no sleep, boards the plane to embark on a vacation. And yes, while the flight comes at the unbelievably low price of 'on the house,'some things are worth paying for.

    The other alternative flight benefit extended to FedEx employees is the 'stand-by' option mentioned in class yesterday. By no means is this a free flight, rather it is a flight at a significantly reduced cost but with many strings attached. The flight must be prearranged through FedEx with 'partner' airlines. Standby literally means you hang out in the terminal until there is no one left to board and there is one empty seat. I was always lucky and got on my desired flight but flights are fuller today than they were several years ago [and, I might add that when I utilized the standby flight benefit, two adults and one child could fly from LAX to Seattle on a nice carrier like Alaska Airlines for $30 roundtrip]. Now, an employee might have to wait a day to fly standby. Time being money, many employees ditch this option as well, especially when travelling with children (oh, the standby benefit is extended to immediate family members, but only employees can jumpseat) because who wants to hang around an airport with screaming toddlers? Annoying! Most FedEx employees utilize the flight benefits to visit family on the spur of the moment when they have a long weekend. Some do take full advantage by jumpseating for international travel. It is an excellent perk. But, one more caveat...FedEx has several divisions such as FedEx (air), FedEx Ground (cheapy UPS-like package handling) and FedEx Kinkos. The flight benefits are only offered to those employees working under the air transportation umbrella.