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Charley v. Comm'r IRS - 91 F.3d 72 (9th Cir. 1996)


I.R.C.§ 61 provides that gross income means all income from whatever source derived. Gross income has been defined as an undeniable accession to wealth, clearly realized, and over which the taxpayer has complete dominion.


Dr. Philip Charley was authorized first class travel for his employer. Several times in 1988, Charley had a travel agent book a coach ticket but charge for first class. Charley would then use frequent flyer miles that he'd earned at no cost to upgrade coach tickets to first class, and have the agent transfer the amount of the price difference into his personal travel account. Appellee Commissioner of Internal Revenue determined that appellants, Charley and his wife, had a gain of $3,149.93 for the credits, the market value of the property minus the adjusted basis of zero, which was taxable. The tax court found that Charley and his wife had a tax deficiency of $882 and an addition to tax of $44 pursuant to I.R.C. § 6653 for negligent disregard of the tax rules.


Do travel credits converted to cash in a personal travel account established by an employer constitute gross income to the employee for federal income tax purposes?




The court affirmed the deficiency because the funds credited to the account were taxable, whether as a gain from the disposition of property or as additional compensation, where Charley and his wife did not prove that the funds were excluded. The court reversed the § 6653 penalty, however, because a reasonable person would not conclude from the record that the conversion would constitute taxable income.

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