IRS Clears the Air on Frequent Fliers, ‘Golden Parachutes’
In a pair of developments aimed at businesses, the IRS issued new rules Wednesday regarding the personal use of frequent-flier miles earned by business travelers, and also said it is proposing new rules on how “golden parachute” payments to departing executives are taxed.
Seeking to clear up confusion, the Internal Revenue Service said frequent-flier miles earned on business or official travel will not be counted as taxable income when they are converted to personal use.
Some legal interpretations have held that these miles are just another form of compensation not exempted from taxation. But IRS officials say it would be difficult to place a value on the miles and to separate those a taxpayer got on personal trips or through credit cards from those obtained through business travel.
Because of these difficulties, the IRS has never pursued an enforcement program on frequent-flier miles or similar benefits from business trips. The announcement Wednesday is intended to put any lingering questions to rest.
The new rules the IRS is proposing on golden parachute payments to departing executives are designed to protect low- and mid-level workers whose stock options appreciate when their firm is acquired. Golden parachutes are employment agreements that typically provide top executives with lavish severance payments if their company is taken over and new management is brought in.
Current law imposes an excise tax of 20% on payments of more than three times an individual’s base compensation when a company is acquired or merged. The tax applies when an employee owns more than $1 million in stock or 1% of the fair-market value of outstanding shares.
The IRS now wants to eliminate the $1-million threshold to keep the law from applying to “individuals who do not possess significant influence over the corporation,” such as workers who see the value of their stock options increase as a result of a merger.
“Lots of people who weren’t intended to be were swept up into this thing” under rules issued in 1989, Peter Elinsky, partner in charge of compensation and benefits for KPMG, told Bloomberg News. “It’s a great change, because the law was intended for the guys who are really making out like bandits.”
The regulations still subject corporate officers and other highly compensated employees--defined as those making more than $90,000, up from $75,000--to the golden parachute rules.
The rules also deny a tax deduction to companies for making the payments. They apply when the acquiring firm gains more than 50% ownership.
Some tax experts say the IRS also should have eliminated the 1% ownership threshold because it sweeps in people who don’t influence corporate decisions.
The rules apply mostly to public companies that merge. The regulations also govern compensation arrangements in private firms, including those about to go public.
The IRS will take comments on the golden parachute proposal--REG-209114-90--until June 5; a public hearing will be held June 26.
