Monday, April 29, 2013

Charley v. Commissioner case brief

Charley v. Commissioner case brief
91 F.3d 72,1996 U.S. App. 18248, 96-2 U.S. Tax Cas. (CCH) P50,399; 78 A.F.T.R.2d (RIA) 5694

CASE SYNOPSIS: Appellant taxpayers challenged a decision of the United States Tax Court, which determined an income tax deficiency for tax year 1988 in the amount of $ 882 and an addition to tax of $ 44 pursuant to I.R.C. § 6653, holding that travel credits constituted taxable income and upholding the imposition of the addition to tax by appellee Commissioner of Internal Revenue.

FACTS: Appellant taxpayer was authorized first class travel for his employer. Several times in 1988, appellant had a travel agent book a coach ticket but charge for first class. Appellant 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, taxpayer 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 appellants 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.

On appeal, 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 appellants 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.

CONCLUSION: The determination of tax deficiency owed by appellant taxpayers was affirmed on the merits, but the penalty was reversed because the tax court was correct in concluding that the travel credits constituted taxable income under the facts of the case, but erred in assessing the penalty where the record did not show that appellants negligently ignored the tax rules with respect to frequent flyer miles.
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