February 5, 2012
WSJ: The Tax Treatment of Frequent Flier Miles
Following up on my prior posts (links below): Wall Street Journal Tax Report, Frequent-Flier Tax Traps, by Laura Saunders:
The tax treatment of frequent-flier miles is at center stage following the disclosure that thousands of Citibank customers received notices in January that miles they received for opening new accounts last year produced taxable income.
Citi sent the affected customers "1099-Misc" forms, which tell taxpayers that income is being reported to the IRS. Recipients should include that income on their 2011 tax returns—or risk getting a letter from the IRS. Some customers are furious. ...
This flap makes it a good time to review the tax treatment of frequent-flier miles. Put simply, most miles earned by most taxpayers most of the time are probably tax-free. Now for the confusing details. There are least six categories of frequent-flier miles, and several different ways of taxing them. ...
- Miles awarded by the airlines in return for flying with them [nontaxable rebates]
- Miles awarded in connection with credit-card use [nontaxable rebates]
- Miles awarded in connection with business travel [nontaxable according to Announcement 2002-18]
- Miles awarded as a promotion for opening an account [taxable, according to IRS]
- Miles awarded as a promotion for putting money in a mutual fund [taxable, according to Priv. Ltr. Rul. 9746048 (Aug. 14, 1997)]
- Miles awarded as prizes [taxable under § 74]
Prior TaxProf Blog coverage:
- Why Does Citibank, But Not the IRS, Treat Frequent Flier Miles as Income? (Jan. 24, 2012)
- IRS Clarifies Tax Treatment of Frequent Flier Miles (Jan. 31, 2012)
- Maule: The Frequent Flier Tax Flap (Feb. 3, 2012)
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I think your summary of Ltr. Rul 9746048 as "taxable" is an oversimplification. The ruling required the recipient reduce his cost basis in the mutual fund, rather than treating the miles as immediate taxable income like the Citi 1099-MISC would require. The later sale of mutual fund shares might generate taxable income in a future year. The letter ruling treated the miles as a rebate. If the same logic applies to the opening of the Citi account, is there the possibility of allocating the rebate to the many nondeductible fees that the customer will pay to Citi in future years, thereby reducing the basis in the nondeductible fees rather than generating taxable income? If so, should Citi have issued a 1099-MISC at all, or should the determination of appropriate taxable income be on the recipient of the rebate?
Posted by: Anonymous | Feb 5, 2012 12:47:24 PM