Rev. Rul. 84-12

ISSUE

Does the tax imposed by section 4261(a) of the Internal Revenue Code on amounts paid for the taxable transportation of persons by air apply in the case of free bonus tickets issued by an airline company to its customers?

FACTS

X is an airline company engaged in the business of providing air transportation for persons within the United States. X has instituted a travel program for frequent travelers through which those travelers who amass sufficient mileage on the company's route system over a specified period of time become entitled to a free round-trip ticket on X's system. A traveler who enrolls prior to a certain date in X's program is entitled, without prior accrual of any mileage, to a "free" bonus round-trip ticket on X's route system. The traveler must then accumulate a requisite amount of mileage on X's system by a specified date. If the enrollee does not accrue the requisite mileage he or she is then billed by X for the bonus ticket. The amount billed will vary depending on the amount of mileage accrued.

LAW AND ANALYSIS

Section 4261(a) of the Code imposes upon the amount paid for taxable air transportation of any person a tax equal to 8 percent of the amount so paid.

Section 4262(a) of the Code defines "taxable transportation" as (1) transportation by air which begins in the United States or in the 225-mile zone (that portion of Canada and Mexico which is not more than 225 miles from the nearest point in the continental United States) and ends in the United States or in the 225-mile zone, and (2) in the case of transportation other than transportation described in (1), that portion of such transportation which is directly or indirectly from one port of station in the United States to another port or station in the United States, but only if such portion is not a part of uninterrupted international transportation.

Section 49.4261-2(a) of the Facilities and Services Excise Tax Regulations provides that the tax is measured by the total amount paid.

Revenue Ruling 54-332, 1954-2 C.B. 417, holds that where a telephone company furnishes telephone service to certain employees free of charge, no communications excise tax attaches. Where telephone service is furnished to employees at a reduced rate, the tax applies to the amount actually paid for such service.

Rev. Rul. 72-245, 1972-1 C.B. 347, holds that where an airline furnishes an employee the use of its international air travel facilities entirely free of charge, the $3 tax imposed by section 4261(c) of the Code does not apply, since there is no "amount paid" for transportation, within the meaning of 4261(c).

For purposes of section 4261(a) of the Code, the amount subject to tax is the actual amount paid for taxable air transportation. Where no amount is paid, the tax does not apply. Where payment is made at a reduced rate, to that extent it is an amount paid for air transportation that is subject to the section 4261(a) tax.

HOLDING

The tax imposed by section 4261(a) of the Code does not apply in the case of free bonus tickets issued by an airline company to customers who have already satisfied all requirements to qualify for the bonus. In the case of an advance bonus ticket issued to a customer this tax also will not apply at the time such bonus ticket is used. However, this tax will apply to any amount that a customer subsequently pays in respect of an advance bonus ticket because of traveling insufficient mileage to fully qualify for the free advance bonus ticket.