FLYING FOR THE IRS

Let's see. Airlines started offering frequent-flier deals in 1981. The idea was to promote sales by allowing ticket purchasers to accumulate enough free miles for a no-cost ticket. This was particularly appealing to businesses whose employees travel a lot. In some cases, companies used the frequent-flier tickets to stretch expense dollars. In other cases, companies allowed employees to use the free miles they accumulated for personal trips unrelated to business.

Three years later, the Internal Revenue Service suggested in a mild way that the tax-collecting agency might consider the frequent-flier miles to be income for employees who convert free miles earned from business trips into personal trips at no cost.

The issue turned complicated not so much because there was disagreement about the potential tax liability but because the IRS was from the outset -- and still is -- wishy-washy about collecting on its threat. Over the years, only a handful of employees who took advantage of this indecision have been pressed by the IRS to pay taxes on the value of free airline miles.

Ah, there is one of the ingredients that make this a Jell-O issue: What is a free mile worth? If the cost is zero, some true-blue accountants suggest, would the tax also be zero?

That has changed this year. Airlines are no longer content to give away free miles with purchased tickets. They have discovered a lucrative market for selling free miles. Are you keeping up? That's right. Free miles now are for sale. Companies buy them to use as customer or employee perks. In the process, the airlines have established a market value for frequent-flier miles.

Aha, said the IRS. Now the time is ripe to get down to brass tacks on taxes. After all, it has only been almost 15 years since the need to confront this vast pool of revenue first arose.

But wait a minute. Are taxes on frequent-flier miles all that lucrative? Cooler heads at the IRS pondered this twist, for about a day, and decided the cost of paperwork and manhours to keep tabs on frequent-flier miles probably would far exceed the amount of collected taxes. Besides, the president of the United States, a frequent flier himself, knows how nasty the voters can get in an election year when the IRS is making headlines.

So the IRS has decided, although not with any finality, that it isn't likely to start dunning employees who have used their company's frequent-flier miles.

Who says the IRS doesn't have a heart?