This Note will begin with a brief history of frequent flyer programs and an explanation of how they operate, followed by a closer look at the traditional arguments for nontaxability of mileage earned on personal flights, taxability of mileage earned on business flights for an employer, and proposed theories for valuing the taxable mileage. Next, it will summarize failed attempts by both the courts and the legislature to resolve the issue. After establishing this background, the Note will explore the concept of gross income, particularly as reflected by section 61 of the Internal Revenue Code and interpreted by case law and Internal Revenue Service Revenue and Letter Rulings. Next, it will address the specific provisions of section 74 of the Internal Revenue Code, together with supporting case law decided both before and after the enactment of section 74. Finally, this Note will conclude with an analysis of the language of several frequent flyer programs. It will show how the structure and policy of these programs suggests that the earned miles are really taxable award or prize income as described in section 74, regardless of whether the mileage is earned in a business or personal context, and not taxable fringe benefits or tax-free purchase price adjustments.
Note, Are Frequent Flyer Benefits Really Benefits: An Analysis of the Frequent Flyer Tax Debate and a New Theory of Taxability for Frequent Flyer Benefts, 47 Clev. St. L. Rev. 281 (1999)