Philip J. Charley Katherine T. Charley v. Commissioner Internal Revenue Service

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?

I

Dr. Philip Charley and his wife Katherine Charley appeal the tax court’s determination of an income tax deficiency for tax year 1988 in the amount of $882 and an addition to tax of $44 pursuant to Internal Revenue Code (“IRC”) § 6653. We affirm on the merits and reverse the penalty.

During 1988, Truesdail Laboratories (“Truesdail”) engaged in the testing business, including testing urine for horse racing activities and investigating the causes of industrial accidents. Philip was the President of Truesdail and, together with Katherine, owned 50.255% of its shares. Philip performed various services for Truesdail including inspecting mechanical devices suspected of failure.

Philip, in his capacity as an employee of Truesdail, traveled to various accident sites to inspect machinery. Truesdail had an “unwritten policy” that the frequent flyer miles that were earned during an employee’s travel for Truesdail became the sole property of the employee.

During the year at issue, the following procedures were followed by…