Paul L. Caron

Monday, July 7, 2008

The Tax Treatment of Frequent Flyer Miles: An Update

The tax treatment of frequent flyer miles is a staple in the basic income tax course.  Beginning over twenty years ago, commentators began discussing the issue:

  • M. Bernard Aidinoff, Frequent Flyer Bonuses: A Tax Compliance Dilemma, 31 Tax Notes 1345 (1986)
  • Joseph M. Dodge, How to Tax Frequent Flyer Bonuses, 48 Tax Notes 1301 (1990)
  • Jonathan Barry Forman, Income Tax Consequences of Frequent Flyer Programs, 26 Tax Notes 742 (1985)
  • Lee Garsson, Frequent Flyer Bonus Programs: To Tax or Not to Tax - Is This the Only Question?, 52 J.Air L. & Com. 973 (1987)
  • George Guttman, IRS Moves Slowly on Frequent Flyer Issue, 38 Tax Notes 1309, 1309 (1988)
  • Lee A. Sheppard, Collecting the Tax on Frequent Flyer Benefits, 59 Tax Notes 1140 (1993)

In Charley v. Commissioner, T.C. Memo. 1993-558, the Tax Court held that an employee was taxable on frequent flyer miles sold back to the employer.  (The case was exensively discussed in Adam Rosenzweig, Note, Employee-Owner of Company Taxable on Frequent Flier Miles "Sold" Back to Company: Charley v. Commissioner, 50 Tax Law. 677, 681 (1997).)

The IRS then initially suggested, in Tech. Adv. Mem. 9547001 (7/11/95), that frequent flyer awards earned on business trips should be treated as taxable income.  Critical commentary followed, and the IRS announced a few months later that it was reconsidering its position.  There followed a number of articles on the subject, including:

  • Dominic L. Daher, The Proposed Federal Taxation of Frequent Flyer Miles Received From Employers: Good Tax Policy But Bad Politics, 16 Akron Tax J. 1 (2001)
  • Kathy Krawczyk & Lorraine Wright, How Should Frequent Flyer Miles Be Taxed?, 79 Tax Notes 1029 (1998)
  • Gene Steuerle, Frequent Flier Miles: Cheating Employers Is The Issue, 69 Tax Notes 1539 (1995)

In Announcement 2002-18, the IRS caved:

The IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.

However, the IRS noted that "[t]his relief does not apply to travel or other promotional benefits that are converted to cash,"  The New York Times reports that a number of markets have emerged to make it easy for frequent flyers to convert their miles into case:  Playing Markets That Trade Miles, by Michelle Higgins:

Any traveler who has tried to redeem frequent flier miles for an award seat, only to be thwarted by blackout dates or limited availability, knows that attractive alternatives are hard to come by. ...  Now imagine a virtual stock market for the eBay generation where the miles and points are currency, and the free market — rather than the airlines — determines the exchange rates.

That’s the general idea behind some new online services that have quietly begun testing ways for travelers to leverage unused miles. Such mileage matchmaking services have popped up as airlines, including American, Continental, Delta and United, have been announcing significant capacity cutbacks — reductions that are expected to make frequent flier awards even harder to use when the cuts begin to take effect this fall.

One of the sites,, has introduced a service called Global Points Exchange that allows travelers to barter miles with one another and set their own exchange ratios. ...

Another site that is letting travelers set their own trading terms is, which started in February ... [and lets] travelers convert those unused points and miles into merchandise that they can then sell online for cash or swap for other items, services and activities. ...

Frequent flyers who barter away their miles using these sites are not protected by Announcement 2002-18 and may suffer adverse tax consequences.  (Hat Tip:  Donald Tobin.)

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If I have been "gifted" or received a gift of two round trip friends' frequent flyer tickets for use in 2009, will I need to list those as gratuity income?
Thank you.

Posted by: johnschleicher | Feb 7, 2009 10:59:05 AM