*except if you sell awards for cash or if miles are used in lieu of cash compensation as a tax dodge.

The IRS is now on record that if they decide the change this rule, you will not be held liable for past use of awards.

Here is the article from cchgroup.com:

Personal Use of Business Frequent Flyer Miles, Other In-Kind Promotional Benefits Not Taxable, IRS Says (Ann. 2002-18)

The IRS has announced that, consistent with prior practice, the Service will not assert that any taxpayer has understated his or her federal tax liability by reason of the receipt or personal use of airline 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. This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax-avoidance purposes.

I will post the full text of the Announcement when I get my hands on it.

Here it is...

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Announcement 2002-18; 2002-10 IRB 1

FREQUENT FLYER MILES ATTRIBUTABLE TO BUSINESS OR OFFICIAL TRAVEL

Release Date: FEBRUARY 20, 2002

Part IV

Items of General Interest

Most major airlines offer frequent flyer programs under which passengers accumulate miles for each flight. Individuals may also earn frequent flyer miles or other promotional benefits, for example, through rental cars or hotels. These promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services, or other services or benefits.

Questions have been raised concerning the taxability of frequent flyer miles or other promotional items that are received as the result of business travel and used for personal purposes. There are numerous technical and administrative issues relating to these benefits on which no official guidance has been provided, including issues relating to the timing and valuation of income inclusions and the basis for identifying personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures. Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.

Consistent with prior practice, 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.

This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.

For information regarding this announcement, call (202) 622-4606 (not a toll-free number). Alternatively, taxpayers may transmit comments electronically via the following e-mail address: [email protected]. Please include "Announcement 2002-18" in the subject line of any electronic communications.

[This message has been edited by Lucky5 (edited 02-21-2002).]

Ok, now that they're officially thinking about it, that pretty much means they're going to tax us for it in the not so far future. They're probably coming up with their stupid twisted tax laws on FF miles now.

I'm going to be really pissed if I have to pay tax on FF miles gained on business travel. To me, this seems to be a complete crock and another way for the IRS to gouge us.

You're probably not going to like this answer (and no, I don't work for the IRS), but here goes...

In all fairness, the personal use of frequent flyer miles obtained while traveling on business for your employer arguably _should_ be treated as income.

However, the practicalities of treating the benefits as income (e.g., valuation and reporting) are daunting and may be more trouble than they're worth to the fisc. Not to mention the fact that the IRS realizes that there's no definitive guidance out there.

Finally, if you should be upset with anyone about "gouging us," it ain't the IRS. In reality, it's Congress that writes the tax laws. The IRS, in simple terms, essentially just administers the rules provided by Congress.

I think this is a particularly good point, and one that is often overlooked. Each year, there's a "Message from the Commissioner" at the beginning of the Form 1040 instruction booklet. A few years ago, among other things, he pointed out that "The IRS tries to make the forms and rules as simple as they can possibly be and still be in compliance with the laws that Congress passes." How true!

And how does the IRS track that? Since I'm self-employed and have to watch my travel expenses more closely than your average corporate traveler, I frequently use Saturday stayovers to keep costs down. This certainly would make it more difficult for the green eyeshade types at the IRS to consider it "business travel" and tax the miles.

Luckily, most of my miles are on CO. CO keeps devaluing the OnePass program, so if the IRS does decide to tax miles, I might actually be able to claim a loss, because they sure don't have the value now that they did when I earned them!



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Bad Gordon!

No Freddie for you!

It's quite simple to figure out if miles are taxable, if you don't pay for the travel, then the miles would be taxable, regardless of whether you tried to reduce the cost through Saturday night stay or such.

The only practical way to track those miles if such rules were enforced would be for the airlines to set up two accounts for each person, one for business and one for leisure, and hopefully combine the two for elite qualification.

And they should tax the value of the heat your company provides to your office, too. When will we stop allowing employees to receive these tax-free fringe benefits?

Only time will tell, but why not just accept the ruling at face value? Everything is not a government plot or conspiracy.

duxfan,

Obviously this is all speculation, but as the business owner, and therefore the party paying for the ticket, and therefore paying for the miles, my guess is that you wouldn't be subject to any tax.

As an employee, I don't actually pay for my miles, my employer does. This means that my personal use of those miles could constitute a benefit provided to me by my employer. As you are not an employee, this wouldn't apply.

Again, obviously speculation.

There is a very good reason why the IRS has issued this finding. And it actually IS a bit of a plot.

After years of debate, the Federal government has decided that its employees can use their FF miles for personal travel. Many of these official travelers have huge FF account balances, because until now they were only allowed to spend the points on upgrading official trips.

As part of this policy change, it was important for the IRS to state explicitly that they would not tax these employees (themselves included!).

No, it has to do with the dollars used. If the dollars used to pay for the tickets were deducted as an expense, such as they most likely would be by the owner, then the miles are taxable, even if the owner and traveler are the same person.

Personal miles are not taxable because they were paid for with taxed dollars.

for those of you who have been around FT for awhile, don't you find it interesting that we are all speculating that the government is trying to find some way to tax and track our miles, when just recently they admitted that tracking miles was too complicated, and allowed government employees to keep their miles earned?

shows what faith most of us have in washington, thats for sure....

I've been around quite a while and I'm NOT speculating any such thing. Of course, I must be in on the conspiracy based upon my address just outside of DC

Yes, if you're taking that heat home and using it to heat your house. Then it's part of your compensation. I have no doubt that if the IRS could find a practical way to figure out which awards were obtained from miles an individual did not pay for, they'd tax them. However, as that is not practical (particularly for the small amount of $ it would bring in), it just isn't going to happen any time soon. tls