Charley owned (and worked for)
a company that required him to travel a lot. When he traveled he would
get frequent flyer miles, which he kept for himself. Then on later trips
he would bill clients for the price of a first-class ticket, but buy a
coach ticket, use the points to upgrade to first-class, and pocket the difference.
Charley made $3,149 this
The IRS stepped in and claimed
that the $3,149 was from his 'sale' of the frequent flyer miles, and
needed to pay taxes on that gross income.
The Tax Court found for the
IRS. Charley appealed.
The Tax Court found that the
travel credits constituted gross income.
The Appellate Court affirmed.
The Appellate Court looked
to 26 U.S.C. §61, which says that
gross income included "all income from whatever source
The Court noted that you
could either consider this to be a "rip-off" by Charley of his
employer, or a "sale" of his frequent flyer miles, but in
either case, Charley made money, and that money was gross income.