You met today with your client, Sam Spader, who described the following situation and asked for your advice. Sam is the vice-president of Eyewitness Inc., a private investigation firm. He also owns 45 percent of its voting stock. The other 55 percent of the stock is owned by Phillip Marloan, the firms president and principal investigator. Recently, it has come to Sams attention that Phillip has been using business frequent flyer miles to pay for nonbusiness services. Phillip is the principal investigator and frequently travels in order to gather information relevant to a case. Eyewitness bills clients for all direct expenses, including first-class air travel, plus a fixed hourly amount. Eyewitness has an unwritten policy that frequent flyer miles earned during an employees business travel are the sole property of the employee. In connection with his employment, Phillip earns a significant number of frequent flyer miles. Instead of using these frequent flyer miles for personal travel, however, Phillip transfers them to acquaintances in exchange for nonbusiness services. For example, Phillip recently transferred 20,000 miles to a friend for repairing Phillips car. Sam believes that this arrangement may produce taxable income for Phillip, and asks you whether this is true.