Academic journal article Journal of Accountancy

Are Frequent Flyer Miles Taxable?

Academic journal article Journal of Accountancy

Are Frequent Flyer Miles Taxable?

Article excerpt

Earlier this year, Citibank surprised many of its customers by issuing Forms 1099-MISC, Miscellaneous Income, to report the value of frequent flyer miles the customers had received in exchange for opening new accounts as part of an ongoing promotion. Understandably, the customers were upset because, the value of the miles notwithstanding, many of them ended up paying dearly (through potentially as much as several hundred dollars in taxes) merely for opening an account.

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Two customers have filed a federal lawsuit seeking class action certification (Hirsch v. Citibank, N.A., No. 1:12-cv-01124 (S.D.N.Y., filed 2/14/12)), and Sen. Sherrod Brown, D-Ohio, wrote Citibank to reprimand it and ask it to discontinue the practice.

This seemingly should be a cut-and-dried matter, bur the Code and the regulations do not address the taxability of frequent flyer miles. Announcement 2002-18 specifically addresses frequent flyer miles, but it does not provide much guidance. Instead, it merely indicates the IRS does not plan to pursue enforcement: "[T]he 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." In addition, the announcement deals only with frequent flyer miles a taxpayer earns from business or official travel, not with frequent flyer miles given to a taxpayer as part of a product promotion. The IRS has seemed willing at times to give taxpayers a pass on certain items that are relatively modest in amount, revolve subjective estimates of value, and are difficult to enforce. …

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