MilesBuzz! - Ask the lawyers: Miles and Mileage Programs

Currently, the International Bar Association`s annual conference takes place in Singapore. Among other things, we have panel on legal issues surrounding loyalty programs, with experts from the US, UK, Canada, and two EU countries. The session will be on Wednesday morning. If you have questions, please post them here, and I will try to have them answered - and post the answers, of course. Obviously, no legal advice is being offered for indivdual cases, and we must reserve all liability.

Currently, the International Bar Association`s annual conference takes place in Singapore. Among other things, we have panel on legal issues surrounding loyalty programs, with experts from the US, UK, Canada, and two EU countries. The session will be on Wednesday morning. If you have questions, please post them here, and I will try to have them answered - and post the answers, of course. Obviously, no legal advice is being offered for indivdual cases, and we must reserve all liability.
Wow, that should be of great interest to many of us. Will that session be transcribed? If not, I hope you will take copious notes and share them with us.

I imagine there are a huge number of questions people might want to ask. I would like to know if the FFPs (hotel and other "loyalty programs" too?) are the quintessential application of Murphy's Golden Rule, that is "he who holds the gold makes the rules"? They make up the rules in the beginning, then change them whenever they please, perhaps with just a brief pause to consider whether what they are doing is so outrageous (rarely, if ever, do they really "enhance" their programs) that it will produce massive disaffection, and we are told, probably correctly, that our choice is to like it or lump it. Is there any alternative to like it or lump it, or is it the case that they could role them up tomorrow if they chose to do so and we would be SOL, so to speak?

I suppose another question might relate to the non-transferrability of most miles/points, and attempts to quash and punish those who would try to get around the rules about such. Again, they can strip one of their miles/points without proving wrongdoing?

Currently, the International Bar Association`s annual conference takes place in Singapore. Among other things, we have panel on legal issues surrounding loyalty programs, with experts from the US, UK, Canada, and two EU countries. The session will be on Wednesday morning. If you have questions, please post them here, and I will try to have them answered - and post the answers, of course. Obviously, no legal advice is being offered for indivdual cases, and we must reserve all liability.

Can't think of any legal questions at the moment, but I do have to comment that myself and I am sure lots of other FTers would find the prospect of going to a conference of the International Bar Association to be very interesting. :D

The buying and selling of miles is a almost always a violation of program rules. Given that, does this market nonetheless provide a fair market value for miles?

The buying and selling of miles is a almost always a violation of program rules. Given that, does this market nonetheless provide a fair market value for miles?
The OP said the panel, not surprisingly, would concern itself with "legal issues surrounding loyalty programs." I don't see how your question relates to a "legal issue." Furthermore, what defines "fair market value" for what amounts to black market or gray market goods?

When a parking garage says on its tickets and on signs everywhere that they are not responsible for anything that might happen to your car, that does not mean that they can escape all legal liability for whatever might happen when the car is left with them. For example, a drunk employee of theirs smashes another car into yours, the garage is going to pay no matter that they sought to disclaim such responsibility. So another question - how legally effective are the loyalty programs various disclaimers, the ones that say they can do whatever they care to and you will have no legal recourse against them?

One question that always seems to be a bit hairy is the recourse of employees who travel for work, when the employer deems that miles earned from company travel are property of the company to use on company travel.

My employer does not do this (though if anyone found out how far my miles got me, I'm sure they'd give it some thought!), and although it does not seem to be the norm, it would not appear to be uncommon, either. The normal form seems to be that a company forces employees to submit their FF#'s and from that point on withdraws from the employee's account with or without consent. Furthermore, the employee is not allowed to withdraw from the account himself.

The question is, then, can your employer legitimately do this, and if so, what terms should apply? It seems that if the company has employees set up a separate account, this could hold up, but the idea that my double miles from a trip to Singapore that I paid for should fund company travel seems....offensive.

There are a lot more questions that I imagine come up: what happens to the account when an employee leaves? Is this even legitimate under the T&C of most programs, since the account is under the name of the individual with no reference to the company?

When DL switched from Frequent Flyer Program to Skymiles program they sent flyers and placed full page ads in several National (and I assume local) newspapers stating that OLD FREQUENT FLYER mile would never expire AS LONG AS DELTA HAS A FREQUENT FLYER PROGRAM and that, as long as flyer remained a Medallion Member, the Old Miles would be redeemed at the old Frequent Flyer rate.

Last year, when Frequent Flyer Miles were folded into, and mixed with, Skymiles, that all ended.

The old redemption schedule is gone and miles expire if no activity.

Randy Petersen has all documentation and, in fact, did an Inside Flyer article complaining about this action by DL.

Question, by sending mailers and placing ad stating that the miles would never expire and that they are redeemable at old rates, did DL make a legal contract with Members of the Frequent Flyer Program? And, is there any action that can be taken to reverse this move?

The OP said the panel, not surprisingly, would concern itself with "legal issues surrounding loyalty programs." I don't see how your question relates to a "legal issue." Furthermore, what defines "fair market value" for what amounts to black market or gray market goods?...

My question relates to tax law. The fair market value of miles is important in a variety of tax situations.

My question relates to tax law. The fair market value of miles is important in a variety of tax situations.
That's an interesting one, as have been the ones before it. Other than when one wins a huge number of miles and the airline imputes a value so great to the miles that the tax bill makes it not worth it to accept the prize, in what situations do taxes come up? I thought that frequent flyer miles rarely had any tax implications to them.

Other than when one wins a huge number of miles and the airline imputes a value so great to the miles that the tax bill makes it not worth it to accept the prize, in what situations do taxes come up? I thought that frequent flyer miles rarely had any tax implications to them.

When you have miles awarded as a result of travel for work, it could conceivably be seen as an extra form of compensation...IF the miles had any kind of market value associated with them.

It's been discussed here, but would be great to get the panels opinions on honoring these fares. Related are verbiage mistakes on websites: example on hotel offered 30% off lowest internet rate, but they really meant 30% off the regular rate. Is there any recourse for such errors?

I have wondered whether or not some type of class action could be taken against the airlines.

Most notably for me the QFF program.

We are induced to enter the program based on promises of not so free travel and those here in Australia pay a fee for the privilege. It is a contract. We choose credit cards that promise reward points and generally pay a fee for the privilege of accruing points to a particular ff program ie ANZ Qantas card and others and the interest rate is usually higher when the card has a reward program.

The law of contract deals with the aspect of harsh and unconcsionable conduct as well as the TPA secs 51AA and 51AC. These problems generally arise from one party having a superior bargaining position which the law trys to balance by protecting the little guy.

Now the rules that I find harsh are:

Limit of 100000 points transferable
If you die so do your points
Only one transfer per year
Only to a restricted class can you transfer

What about those poor infrequent fliers who never accrue enough to do anything reasonable and the points just languish until they extinguish.

I bet there is a big bonus for QF wher people die or points expire

These programs are very profitable to the airlines and QF in particular.

4,000,000 QFFers giving $1 certainly creates a handsome fighting fund.

I am interested in the contract to offer free flights in return for travelling on said airline. That there must be a fair amount of free awards seats offered.

a senarioo in question.. Emirates have a huge push to join their program with promise of award seats.
I am a top tier member and they could not find one first class seat on any flight out of Australia for the whole year of 2008 including seats to be released.
I would like to know what constitutes false advertising in these circumstances. I have been redeeming FF points on most carriers for 20 years and can always get a flight at some stage during the year -not with Emirates.

as they are based in a middle eastern country are they untouchable?
or

as they have an office in Australia is Australian office responsible
( as they keep referring to Dubai as the bad guy)
so if we join a FF program on the net where is the contract deemed as consumated?(cyberspace/head office or Australian office)

When you have miles awarded as a result of travel for work, it could conceivably be seen as an extra form of compensation...IF the miles had any kind of market value associated with them.
Well, I won't say it is inconceivable, but the odds are hugely against it, at least in the United States.

When you have miles awarded as a result of travel for work, it could conceivably be seen as an extra form of compensation...IF the miles had any kind of market value associated with them.

It's not only conceivable, it's been a reality in several countries and it may still be the case that tax officials have a legal right to levy taxes on the market value of non-cash compensation and perks including on frequent flyer miles and tickets acquired from work for personal use. The US is not the place I would worry about this, but there are places in Europe and Asia where this certainly was something to consider when domiciling the loyalty program accounts. ;)

I am interested in the contract to offer free flights in return for travelling on said airline. That there must be a fair amount of free awards seats offered.

a senarioo in question.. Emirates have a huge push to join their program with promise of award seats.
I am a top tier member and they could not find one first class seat on any flight out of Australia for the whole year of 2008 including seats to be released.
I would like to know what constitutes false advertising in these circumstances. I have been redeeming FF points on most carriers for 20 years and can always get a flight at some stage during the year -not with Emirates.

as they are based in a middle eastern country are they untouchable?
or

as they have an office in Australia is Australian office responsible
( as they keep referring to Dubai as the bad guy)
so if we join a FF program on the net where is the contract deemed as consumated?(cyberspace/head office or Australian office)

If a carrier has a local nexus, it is usually the case that you can pursue them on the basis of local laws. Given both that EK operates in Australia and that it actively markets its programs in a way that may be deemed to constitute false advertising per (any) local laws applicable, pursuing EK locally may work; and if a judgment against them is handed down by the local courts then collecting locally may be possible although not necessarily easy. Just because a frequent flyer program's terms and conditions does not necessarily make that true or binding; for example, clauses that say disputes are to be resolved in a jurisdiction, or under the laws of a jurisdiction, of the program operator's choosing should not necessarily dissuade you from pursuing the matter locally.

Given both that EK operates in Australia and that it actively markets its programs in a way that may be deemed to constitute false advertising per (any) local laws applicable, pursuing EK locally may work; and if a judgment against them is handed down by the local courts then collecting locally may be possible although not necessarily easy.

I swear I heard a story on FlyerTalk about someone procuring an order for a sheriff to seize an aircraft, and when they showed it to a ticket agent, corporate ordered the ticket agent to pay the judgment out of her till.

Or maybe I was just having a really happy dream...

...Other than when one wins a huge number of miles and the airline imputes a value so great to the miles that the tax bill makes it not worth it to accept the prize, in what situations do taxes come up? I thought that frequent flyer miles rarely had any tax implications to them.

Last year, I used miles I earned via personal travel to buy an air ticket for a business trip. I am a sole proprietor. I deducted what I considered to be the FMV of the miles as a business travel expense (1.6 cents per mile, IIRC).

I looked up the price paid by mileage brokers as the best indication of the true value of the miles. FlyerTalkers are all over the map on what they think miles are worth, but the mileage brokers work in a much tighter range.

What I find curious about arriving at FMV this way is that the whole mileage broker industry is unlawful (not criminal, but contract breaching). I wonder if there is legal precedent for using an unlawful market in determining fair market value.

When you have miles awarded as a result of travel for work, it could conceivably be seen as an extra form of compensation...IF the miles had any kind of market value associated with them.

The IRS issued a position about this years ago: http://www.irs.gov/pub/irs-irbs/irb02-10.pdf They didn't question that the miles have value, but in light of the administrative difficulties surrounding the taxation of employee-earned miles, they decided that they would not consider such miles to be included in income.

Other than that position, the IRS has had precious little to say about miles.

Last year, I used miles I earned via personal travel to buy an air ticket for a business trip. I am a sole proprietor. I deducted what I considered to be the FMV of the miles as a business travel expense (1.6 cents per mile, IIRC).

I looked up the price paid by mileage brokers as the best indication of the true value of the miles. FlyerTalkers are all over the map on what they think miles are worth, but the mileage brokers work in a much tighter range.

What I find curious about arriving at FMV this way is that the whole mileage broker industry is unlawful (not criminal, but contract breaching). I wonder if there is legal precedent for using an unlawful market in determining fair market value.
When you "bought" those miles from yourself, then deducted that "cost" on your business return, how did you treat the resulting "income" on your personal return? Did you treat all of it ([1.6 cents] x [number of miles for the award]) as an ordinary gain, one with a basis of zero, since you had not purchased the miles from the airline or anyone else? What advantage was there to doing it the way you did, which I think should have been a wash.

I am neither a tax attorney or CPA, and I claim no expertise on the subject of taxes. I do question, though, the assumptions that seem implicit in the way you treated that anything but arms-length transaction between your sole proprietorship business and yourself. If I am mistaken in my take on it, please set me straight.

If I had pulled out my personal checkbook to buy that business airfare, it would be very simple: the personal dollars I spent on the fare is a business expense. Likewise, if United had accepted a personal coup of chickens in lieu of cash, the fair market value of the coup would be my business expense.

Here, the airline accepted miles from me that were a personal asset (earned via leisure travel). Personal assets used to pay for a business expense are deductible to the extent of the asset's fair market value. By analogy, if you take a personal car and convert it to business use, you can start deducting depreciation and other auto-related expenses in proportion to the car's business use.

I have no doubt on the legal soundness of my position generally, and I doubt very much the IRS would ever challenge me on this. Still, I wonder about the proper way of determining fair market value, for the reasons stated above.

Avoiding a deductible expense you otherwise could have had is not the same thing as having a deductible expense. The logic behind taking a deduction for an award ticket "purchased" with miles you didn't pay for is the same as that behind taking a $500/night deduction for a stay at the Ritzus Maximus when you stay at Motel 6 for $50, or deducting the cost of a steak dinner after eating a PB&J sandwich you brought from home in your room. You didn't pay for a $500 room, a steak dinner, or this plane ticket, though you could have. If you don't spend money, or use something for which you previously spent money and for which you therefore have a cost basis, there is no deduction. Period. How you impute a value to the award is irrelevant: you cannot deduct 5¢ for it. (Taxes and fees you may have paid in conjunction with it, such as the security screening fee, are deductible.)

You'll probably get away with it unless that part of your return is audited for some other reason, as it's probably not material enough to raise an audit flag by itself, but that doesn't make it legal.

If you had paid for the miles, as in some airlines' mileage purchase programs, that might establish a cost basis and thus justify a deduction, but I'm not 100 percent certain that it would.

(Having said all that, keep in mind that tax advice you get here is worth at most what you paid for it.)

Personal assets used to pay for a business expense are deductible to the extent of the asset's fair market value.

Actually, it's the lesser of fair market value or basis. The issue of basis for miles is not simple. I happen to agree with you in the hypothetical situation you posed, but many others contend that the basis in miles is always zero. It comes down to a question of whether you paid for travel or for travel+miles. If the latter, then you have to figure out how to allocate your fare outlay between the travel and the miles. Given that others paid the same fare and got no miles (because they were not FF program members), you have a serious hill to climb if you want to allocate part of your purchase price to the miles.

Incidentally, deductions for Employee Business Expenses are subject to significant restrictions, including complete denial when computing your Alternative Minimum Tax. Many unfortunate taxpayers who shell out for legitimate business expenses end up paying the whole thing with after-tax money.

If I had pulled out my personal checkbook to buy that business airfare, it would be very simple: the personal dollars I spent on the fare is a business expense. Likewise, if United had accepted a personal coup of chickens in lieu of cash, the fair market value of the coup would be my business expense.

Here, the airline accepted miles from me that were a personal asset (earned via leisure travel). Personal assets used to pay for a business expense are deductible to the extent of the asset's fair market value. By analogy, if you take a personal car and convert it to business use, you can start deducting depreciation and other auto-related expenses in proportion to the car's business use.

I have no doubt on the legal soundness of my position generally, and I doubt very much the IRS would ever challenge me on this. Still, I wonder about the proper way of determining fair market value, for the reasons stated above.
Efrem and I, neither of us with professional expertise as tax advisors, agree that your handling of the ticket "expense" would almost certainly not stand up if you were to be audited. Did an accountant or other suitably qualified professional tell you that it would?

Imagine that you see a floral arrangement in a florist's shop and think it would look lovely in your office's reception area. You don't care to pay what it costs though, and it so happens that you know where flowers just like those in the florist's shop grow wild. You hike a great distance and climb a mountain to pick flowers identical to the ones in the florist's arrangement. Back home, you arrange them just as they were in the shop, and very satisfied with the results and pleased not to have spent the money,though you did put a great deal of time and effort into it, you take them to your office the next day. Can you deduct the fair market value of those flowers, what they would have cost if you paid the florist for them from your business' return? Maybe, but only if you reported a corresponding amount on your personal return as income.

Other than that position, the IRS has had precious little to say about miles.

THANK GOD!

...Did an accountant or other suitably qualified professional tell you that it would?

Yes, me. And you don't have to be a lawyer to work through this. You just have to understand general principles of tax law and applicable statutes and regulations. I have researched this.

As for the audit idea, I'd welcome that. I think the IRS knows better than to do that, though, as I'd be willing to take this to the U.S. Court of Appeals. Given that I'm an appellate attorney, that's no idle threat.

...Maybe, but only if you reported a corresponding amount on your personal return as income.

That's where your analogy breaks down. You are adding a big complication not present in the personal miles for business expense fact pattern. Here, someone is using their personal labor to create an asset to be used in the business. That raises questions about whether there is a gain or income to be recognized when that asset is used in the business.

Much more analogous is a simple situation where you take a personal asset (e.g., desk, car, computer) and convert it to business use. See, e.g., Publication 587:

http://www.irs.gov/publications/p587/ar02.html#d0e2758

Personal Property Converted to Business Use
If you use property in your home office that was used previously for personal purposes, you cannot take a section 179 deduction for the property. You also cannot take a Liberty Zone or GO Zone depreciation allowance for the property. You can depreciate it, however. The method of depreciation you use depends on when you first used the property for personal purposes.

If you began using the property for personal purposes after 1986 and change it to business use in 2006, depreciate the property under MACRS.

The basis for depreciation of property changed from personal to business use is the lesser of the following.

The adjusted basis of the property on the date of change.

The fair market value of the property on the date of change.


If you began using the property for personal purposes after 1980 and before 1987 and change it to business use in 2006, you generally depreciate the property under the accelerated cost recovery system (ACRS). However, if the depreciation under ACRS is greater in the first year than the depreciation under MACRS, you must depreciate it under MACRS. For information on ACRS, see Publication 534, Depreciating Property Placed in Service Before 1987.

If you began using the property for personal purposes before 1981 and change it to business use in 2006, depreciate the property by the straight line or declining balance method based on salvage value and useful life.

Obviously the depreciation part is irrelevant in the case of using personal miles for business expenses, but the idea is the same. Your adjusted basis and the fair market value of the personal miles are probably the same. Although you might not realize it, you pay for miles when you travel -- it's not a gift from the airline. Part of your fare is attributable to the flight and part is attributable to the miles. You can see this quite clearly in many examples of discount airfares that do not include miles.

By the way, the flower hypo above isn't as complicated as I thought. If we consider the labor involved in gathering and arranging the flowers to be within the scope of the trade/business, then there is no conversion of any asset. If we consider that same labor to be personal in nature, then there would be a conversion of a personal asset, but the adjusted basis in that asset would be zero.

The key difference with the miles is that there is a substantial adjusted basis and fair market value in those miles.

two issues are clear:

1. Miles earned on business trips belong to the company, unless there is an agreement to the contrary, which may be contained in an implied regulation at the level of the enterprise, the individual employment contract, or - hard to think of - other places. In part, the fact that the miles can be used for third party trips was a reason for this understanding.

2. If the employee gets to use the miles, thatis taxable income. LH has an agreement with the Minstry of Finance to pay a lump sum to cover these. However, there may be situations where there is a taxation: a company requires all employees to hand over their miles, and the company as a bonus pays F class tickets for their best employees. This would have to be taxed. Income is the price of the ticket, as this is gained.

Although you might not realize it, you pay for miles when you travel -- it's not a gift from the airline. Part of your fare is attributable to the flight and part is attributable to the miles. You can see this quite clearly in many examples of discount airfares that do not include miles.

This is the crux of your argument. Again, I agree with it, but many others do not.

Try this example: Suppose you buy three $99 intra-California round trips on Southwest. Under this fall's promotion, you earn a round trip award plus some flight credits. Forgetting about the flight credits, what's your basis in the award? Is it the full market value of an award (on the order of $300)? No, that can't be right because you only spent $297 and you got three round trips in addition to the award ticket. Is your basis 25% of your outlay, since you got 4 trips for the price of 3? No, because the award trip can be used for an expensive long-haul flight and the paid trips were cheap short-haul flights. In my opinion your basis in the award is somewhere between $75 and and $297. Precisely where is a judgment call.

You can see in this example that the question of basis is messy and murky. Do you really want to drag an IRS auditor into this muck?

1. Miles earned on business trips belong to the company, unless there is an agreement to the contrary, which may be contained in an implied regulation at the level of the enterprise, the individual employment contract, or - hard to think of - other places. In part, the fact that the miles can be used for third party trips was a reason for this understanding.

2. If the employee gets to use the miles, thatis taxable income. LH has an agreement with the Minstry of Finance to pay a lump sum to cover these. However, there may be situations where there is a taxation: a company requires all employees to hand over their miles, and the company as a bonus pays F class tickets for their best employees. This would have to be taxed. Income is the price of the ticket, as this is gained.

:td::td::td: That is disgusting!!!!! Are other EU countries the same? What about Switzerland?

Is it possible for German frequent fliers to set up an account with a program based outside of Germany, and thereby avoid taxes on miles earned?

oops. dupe.

nsx, I think the pertinent question is whether the IRS General Counsel would want to wade into this muck. The status quo is very much in their favor as hardly anyone is deducting the FMV of miles in the way I do. If the IRS were to win, they'd get a few hundred dollars from me and a small number of people who take this approach stop expensing business use of personal miles.

If I were to win, all sorts of people would start doing what I do. The financial press, tax professors and tax software companies watch tax cases closely. The revenue loss of an IRS loss on this issue would be large. In short, little upside and huge downside for the IRS to challenge someone willing to fight on this issue.

As for your hypo, I would first try to determine the value of those three RTs without flight credits or the award (X). Then, put a value on the award (Y). Finally, put a value on the six RR credits (Z). Assuming this is personal travel, your adjusted basis in the RR credits would be [$297 / (X+Y+Z)] * Z.

:td::td::td: That is disgusting!!!!! Are other EU countries the same? What about Switzerland?

Is it possible for German frequent fliers to set up an account with a program based outside of Germany, and thereby avoid taxes on miles earned?

Domiciling the frequent flyer account elsewhere is what I was referring to before; but Germany was not the only European example I was thinking of therein.

To answer your first question, yes some other EU countries are much akin. To answer your last question, yes.

Well, I have posted versions of this same theme for many moons in many different threads across FT, and I find THIS to be one of the biggest issues of all when it comes to miles and points:

CAN THERE BE A WAY to make sure we get all our miles that we sign up for in a timely matter and in full, as promissed, when doing promos and other second and third party activity as marketed to us by the airlines and hotels?

My feeling is that what they SHOULD do is this:

If you signed up to get xxxx miles by doing xxx promo, then you should receive it right away and THEY should go chase their partners. They are selling you things that right now end up more like promissed rebate scams that never come through and they are telling you it's YOU who has to wait when one of their partners delays the process. And this is always their excuse... "the other partner is delaying the process, not us."

Waiting up to 12+ weeks is unreasonable in this day and age. It's bait and switch because we are sold the concept that something we do will reward us. Be it shopping in the airline malls (United being one of the worst for posting correctly and on time) or doing some car rental promo or any of a number of things found in this very part of FT. Sometimes it works, sometimes it doesnt. I find more and more that I must wait and keep thick printed files only to fax and mail things to airline marketing people and wait wait wait for them to post what I should have rightfully gotten weeks ago!

I could go on and on, but what I need to see is law working for me, and no more of this "sorry sir, policy does not allow us to override our own internal stupidy that we all somehow accept blindly for no one's benefit but the very higher ups"

(breathing now)

thank you.
:)MM

Originally Posted by itsme
...Did an accountant or other suitably qualified professional tell you that it would?

Yes, me. And you don't have to be a lawyer to work through this. You just have to understand general principles of tax law and applicable statutes and regulations. I have researched this...
You are an accountant (preferrably a CPA) and/or a tax attorney, that is someone admitted to practice before the US Tax Court, or otherwise specially qualified in tax law? If there is one area of law where "general principles" least avail one, I expect it is tax law. And appellate practice comes in all flavors in state and federal courts, so unless your appellate experience is in tax cases, I think it of little relevance.

You cite a lengthy passage from the IRS playbook on "Personal Property Converted to Business Use," but it is hardly on point here. So you then say,
"Obviously the depreciation part is irrelevant in the case of using personal miles for business expenses," but "the depreciation part" is essentially the entirety of it, and surely you wouldn't tell an appellate panel, "...but the idea is the same."

I don't pretend the knowledge to get deep into this, but I do know a tax partner in a large, prestigious NYC firm and one in a large, prestigious DC firm, and I can't imagine them agreeing with the position you are taking. Of course, that settles nothing, but I would bet a substantial sum against you getting an opinion letter from a competent tax attorney or CPA saying you were right as to the law.

Just my opinion, FWIW, and I freely admit that ain't much.

Let's move away from my resume and toward the matter at hand. The publication I cited above shows the deductability of personal property when converted to business use. That well-established concept is expressed in many publications; I just cited the first one that came up in a search on irs.gov. See also Publication 535, p. 4: "Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you." http://www.irs.gov/pub/irs-pdf/p535.pdf

The question then is what the miles cost you when they came from leisure trips you paid for personally. A particularly easy case would be if you bought the miles for personal use, but later decided to use them for a business expense. Can we agree that in this situation, the cost of the miles used is the amount of the deductible business expense? Good, let's move on.

What about personal travel in which you earn miles? In the typical situation, you pay an airfare and you get two separate things: travel and miles. Since you are getting two separate things, you need to allocate a basis to each. See Publication 551 ("Basis of Assets") at p. 4 ("Allocating the Basis"). http://www.irs.gov/pub/irs-pdf/p551.pdf

Some have claimed that the IRS has stated that miles have no value, so your basis in such miles is zero. That is wrong both factually and conceptually. Above I posted the link to the IRS's position re taxation of employee-earned miles. The IRS does not opine that miles have no value. Such a view would be ludicrous. If one of the major airlines stopped issuing miles for travel but kept the same fare structure in place, passengers would be leaving it in droves.

The miles do have a value, and I submit that what the mileage brokers are willing to pay for them provides the best indication of what that value is. What that value is becomes, in most cases, the portion of your airfare that should be allocated to the miles.

Now if you disagree with any of this, please say precisely what you disagree with and on what authority. Let's dispense with my credentials and what you believe your tax expert friend would probably say.

I agree completely.

If UA, AA, CO, DL, or NW offered the option of paying a greater price to fly a certain itinerary earning miles or paying a lesser price to fly that same itinerary earning no miles, then there might be a case for considering the price difference to be the cost of the miles. But to my knowledge they don't.

And if they did offer that option to earn or not earn miles, would the cost per mile, and hence the deduction he/she could take when using the miles for business travel, be less for the elite earning a 100% or more bonus than for the non-elite earning only the actual miles flown? It would be rather anomalous, wouldn't it, if the elite traveling on a 25K domestic saver award could take deduct only half as much for using 25K of his miles to travel on business with a domestic saver award. The miles would, however, be equally valuable in the hands of a broker, though, who would be indifferent to whether they came faster to an elite or slower to a non-elite.

"Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you." You couldn't buy that personal travel without the miles rolled into the price, whether you had an FFP account to drop them into or not. The airline doesn't split out a price for the miles you can earn, and if they are carried on the airlines books at some very low value, perhaps <$.001 (see story on AC FFP when it was spun off), then why shouldn't the IRS take that as the "official value" rather than what you think a ticket broker would pay for your miles. It would be a different story if you actually purchased miles from a ticket broker, giving the broker actual $s for the miles, and use the miles for business travel, but that isn't what you are doing. If "deduct only what the property costs you" has the more expansive meaning you would give it, one that "deduces" or "imputes" a value based on a purchase that never in fact takes place, then how about some decided cases supporting that interpretation?

If a CPA prepared your returns taking a deduction on the business one and recognizing no corresponding income on the personal one, signing his name to those returns, that would be something. But none did and you seem disinclined to ask one if that approach would fly if you should happen to be audited and the IRS picked up on it. And you aren't going to seek a letter ruling from the IRS on it either, are you? So, I don't think we can take this any farther. (Maybe a CPA or tax lawyer will come along and give us the "answer," along with the reasoning and citations to support it.)

...It would be rather anomalous, wouldn't it, if the elite traveling on a 25K domestic saver award could take deduct only half as much for using 25K of his miles to travel on business with a domestic saver award. The miles would, however, be equally valuable in the hands of a broker, though, who would be indifferent to whether they came faster to an elite or slower to a non-elite.

You are limited to deducting the lesser of i) adjusted basis (usually cost) and ii) fair market value. So, for that reason the elite might have a lower cost per mile than the non-elite.

... if they are carried on the airlines books at some very low value, perhaps <$.001 (see story on AC FFP when it was spun off), then why shouldn't the IRS take that as the "official value" rather than what you think a ticket broker would pay for your miles.

The IRS wouldn't take that view because they understand financial statements. The low value of miles carried on the books of airlines historically is their liability for the miles' redemption, which has nothing to do with fair market vaule. Essentially, airlines treated that liability as the trivial increase in cost of carrying an extra passenger.

Interestingly, United has departed from that accounting approach:

Frequent Flyer Accounting. In accordance with fresh-start reporting, the Company revalued its frequent flyer obligation to estimated fair value at the Effective Date, which resulted in a $2.4 billion increase to the frequent flyer obligation. The Successor Company also has elected to change its accounting policy for its Mileage Plus frequent flyer program to a deferred revenue model. The Company believes that accounting for frequent flyer miles using a deferred revenue model is preferable, as it establishes a consistent valuation methodology for both miles earned by frequent flyers and miles sold to non-airline business partners.

Before the Effective Date, the Predecessor Company had used the historical industry practice of accounting for frequent flyer miles earned on United flights on an incremental cost basis as an accrued liability and as advertising expense, while miles sold to non-airline business partners were accounted for on a deferred revenue basis. As of the Effective Date, the deferred revenue value of all frequent flyer miles are measured using equivalent ticket value as described below, and all associated adjustments are made to passenger revenues.

(United's most recent 10-K at p. 53, available at http://www.sec.gov/Archives/edgar/data/100517/000110465907019919/a06-25698_210k.htm )


...a purchase that never in fact takes place, then how about some decided cases supporting that interpretation?

The purchase did take place. For an airfare, I got travel and miles. I've already cited the IRS publication on allocating basis, so there no need for cases holding that you allocate basis to the components of a lump sum purchase.

...(Maybe a CPA or tax lawyer will come along and give us the "answer," along with the reasoning and citations to support it.)

If you think there's an "answer" to this question, you are ignoring the implications of how no case, statute, regulation or IRS publication addresses it directly. In such a situation, you have arguments, some better than others. You have no "answer".

You are limited to deducting the lesser of i) adjusted basis (usually cost) and ii) fair market value. So, for that reason the elite might have a lower cost per mile than the non-elite...
What tax advice would you offer this person who wants to take a deduction on his business return based on the value he imputes to miles and doesn't want to report the miles his sole proprietorship purchases from him as income on his personal return: ...the person joins an FFP and the first miles into his account are 25K for opening a credit card account, that the exact number of miles redeemable for a domestic saver award. Then he flies 25K miles on the airline, making him an elite and meaning he will earn a 25% RDM bonus subsequently. Now, he uses 25K out of his account for a ticket he uses for business. A broker is offering 1.5 cpm. How much can/should he treat as a deductible business expense on his return?

Would you advise him in the future, when he is getting 125% RDM, that he should then take less of a deduction because his "cost" of miles will be less, or will his "cost" for RDM stay the same and his "cost" for the flights themselves go down though he may pay the same ticket price then as now? How would you tell him to handle the RDM earned from any business travel he might do on a paid ticket, should he recognize those miles as taxable income?

Do you prepare your own tax returns?

When DL switched from Frequent Flyer Program to Skymiles program they sent flyers and placed full page ads in several National (and I assume local) newspapers stating that OLD FREQUENT FLYER mile would never expire AS LONG AS DELTA HAS A FREQUENT FLYER PROGRAM and that, as long as flyer remained a Medallion Member, the Old Miles would be redeemed at the old Frequent Flyer rate.

Last year, when Frequent Flyer Miles were folded into, and mixed with, Skymiles, that all ended.

The old redemption schedule is gone and miles expire if no activity.

Randy Petersen has all documentation and, in fact, did an Inside Flyer article complaining about this action by DL.

Question, by sending mailers and placing ad stating that the miles would never expire and that they are redeemable at old rates, did DL make a legal contract with Members of the Frequent Flyer Program? And, is there any action that can be taken to reverse this move?

As I understand it, no contract would have ever formed. In order to have a contract there must be an offer by one party and an acceptance by another. The old Frequent Flyer program seems more like a benefit that DL made available to customers for free. Since there was nothing of value given by the customer, the program carried no contractual obligations. Do DL is free to modify their behavior without any legal liability. Although they may have promised not to take away the extra benefits attached to the old FF miles, it is very difficult to enforce a promise. Generally a party would have to demonstrate that they relied on that promise to their detriment. I don't think this would be possibly be actionable (and probably still pretty tough) until someone actually had their miles expire. Even then DL would have a solid defense in the fact that they gave fair warning that FF miles were being converted to skymiles.

I would be interested to hear other thoughts on this and/or any info from the IBA conference.

1. Re: divorce - anyway to keep miles, lodging points out of a divorce case.. how about if they were all or mostly awarded for biz travel hence could you claim they belong to the company you work for? No I'm not getting a divorce but I've always wondered

2. Using miles for travel for medical service, For example, by voting in the AA road warrior contest I had to agree to the T&C's which stated the 25K award was worth like $625.. if I used 25K miles to go to a hospital where I have to fly too to do a medical procedure, could I deduct the same value aa places on them when they give them out.. in other words deduct 625.00 on taxes for airfare and use the t&c's where they state this is the value of 25,000 miles as my supporting documentation?

thanks

Using classical law text definition of contract - it is a contract. In exchange for the promise of upgrades, better seats, free flights, etc. the customer to his detriment forgoes flying other, often cheaper airlines, and directs his business to the specific airline who to airline's detriment suppose to deliver on the promises.
If it is a contract - than the usual: "we can change, close or do anything we desire" without consumer agreement is not a valid clause in the contract.
Result of broken contract at USAirways:
(1) Promised - "our miles never expire" - now they expire in 3 years.
(2) Promised - "Chairmen prefered get unlimited upgrades" - but becasue the number of 1st class seats was severly reduced - they are almost impossible to get;
(3) Promised - " Chairman's Pref. get once a year free Bus Class upgrade for 2" - now it is only if the fare paid is min. $1,200; same for mileage upgrades for the rest of frequent fliers;
(4) Promised - "miles can be used on Star Alliance" - but availability of Star Alliance to USAirways members is getting limited (in business or 1st) becasue USAirways is unable to reciprocate due to its cut in number of front cabin seats.
And many more.

1. Re: divorce - anyway to keep miles, lodging points out of a divorce case.. how about if they were all or mostly awarded for biz travel hence could you claim they belong to the company you work for? No I'm not getting a divorce but I've always wondered
If the miles/points in fact belong to the company you work for, then there would be nothing for you to part with. You can't be compelled to hand over to a soon-to-be ex-spouse or anyone else that which isn't yours. But if the claim that you don't own/control those miles/points, that a business you yourself do not own/control does, is a bogus one, forget it.

2. Using miles for travel for medical service, For example, by voting in the AA road warrior contest I had to agree to the T&C's which stated the 25K award was worth like $625.. if I used 25K miles to go to a hospital where I have to fly too to do a medical procedure, could I deduct the same value aa places on them when they give them out.. in other words deduct 625.00 on taxes for airfare and use the t&c's where they state this is the value of 25,000 miles as my supporting documentation?

thanks
see the back and forth below between dhuey and myself about this. I think definitely not, especially your 25K is worth $625 because that is the value UA assigns them, but dhuey differs with me, at least with regard to the deductability of the "expense."

$625 for 25K miles works out to 2.5 cpm, but you might have earned them for less. (In July, with the help of the wonderful "triple miles" bonus, I earned a goodly number of miles, as well as EQM, at a cost of 1.3 cpm, and they threw in the flights themselves for "free.") Even if this approach to income taxes was a legally sound one, why wouldn't the cost of the least expensive ticket for the itinerary you flew be the metric rather than the value stated by UA in the announcement of that contest? (No, not going to go into the miles that would be earned doing the business travel on a paid ticket, nor basing it on the "least expensive" ticket, etc.)

And TrojanHorse, I think it would be very imprudent for a self-employed high earner to try for such a deduction, even if your accountant was willing to sign your return. Self-employed high earners are among those most likely to be audited by the IRS.

Using classical law text definition of contract - it is a contract. In exchange for the promise of upgrades, better seats, free flights, etc. the customer to his detriment forgoes flying other, often cheaper airlines, and directs his business to the specific airline who to airline's detriment suppose to deliver on the promises.
If it is a contract - than the usual: "we can change, close or do anything we desire" without consumer agreement is not a valid clause in the contract.
Result of broken contract at USAirways:
(1) Promised - "our miles never expire" - now they expire in 3 years.
(2) Promised - "Chairmen prefered get unlimited upgrades" - but becasue the number of 1st class seats was severly reduced - they are almost impossible to get;
(3) Promised - " Chairman's Pref. get once a year free Bus Class upgrade for 2" - now it is only if the fare paid is min. $1,200; same for mileage upgrades for the rest of frequent fliers;
(4) Promised - "miles can be used on Star Alliance" - but availability of Star Alliance to USAirways members is getting limited (in business or 1st) becasue USAirways is unable to reciprocate due to its cut in number of front cabin seats.
And many more.
You want it to be a contract, but at the same time you say it can't be a contract as written, that is with "we can change, close or do anything we desire" in there. Why wouldn't a judge say it is in there, and it is not a contract because according to its own clear, unambiguous terms stated at the outset, there is no enforceable promise? Not likely to prove a winning legal argument.

One question that always seems to be a bit hairy is the recourse of employees who travel for work, when the employer deems that miles earned from company travel are property of the company to use on company travel.

My employer does not do this (though if anyone found out how far my miles got me, I'm sure they'd give it some thought!), and although it does not seem to be the norm, it would not appear to be uncommon, either. The normal form seems to be that a company forces employees to submit their FF#'s and from that point on withdraws from the employee's account with or without consent. Furthermore, the employee is not allowed to withdraw from the account himself.

The question is, then, can your employer legitimately do this, and if so, what terms should apply? It seems that if the company has employees set up a separate account, this could hold up, but the idea that my double miles from a trip to Singapore that I paid for should fund company travel seems....offensive.

There are a lot more questions that I imagine come up: what happens to the account when an employee leaves? Is this even legitimate under the T&C of most programs, since the account is under the name of the individual with no reference to the company?
Personally, I always tell my employer that I wish the would take my FF miles. Here is why.

The justification is, the miles were paid for the company, and it is part of employment. Fine, then, I will only travel during normal business hours and get paid for all travel time as well. No more working a 10 hour day, then driving to the airport for 3-6 hours of travel time. (or traveling on Sundays).

What tax advice would you offer this person who wants to take a deduction on his business return based on the value he imputes to miles and doesn't want to report the miles his sole proprietorship purchases from him as income on his personal return:

For starters, a sole proprietor cannot purchase anything from its owner since they are legally the same person. I think what you mean to say is use a personal asset to pay for a business expense.


...the person joins an FFP and the first miles into his account are 25K for opening a credit card account, that the exact number of miles redeemable for a domestic saver award. Then he flies 25K miles on the airline, making him an elite and meaning he will earn a 25% RDM bonus subsequently. Now, he uses 25K out of his account for a ticket he uses for business. A broker is offering 1.5 cpm. How much can/should he treat as a deductible business expense on his return?


By analogy to stock sales where one identifies which shares he is selling, a taxpayer could, and probably should, identify in his files the source of the 25K miles he is using to pay for the business fare. Here, it is in his interest to find the highest cost miles for the conversion (much like you want to find the highest cost shares in stock sales). That's probably the 25K butt-in-seat miles.

Unless the airfare is some below-market special like nsx identified above, I think it's fair to allocate the fares paid for that 25K of flying between travel and miles, with the 1.5 cpm being the value allocated to the miles.

Would you advise him in the future, when he is getting 125% RDM, that he should then take less of a deduction because his "cost" of miles will be less, or will his "cost" for RDM stay the same and his "cost" for the flights themselves go down though he may pay the same ticket price then as now?

That's a close call. Is an elite (25% bonus miles) getting a discount on miles or a discount on travel? I think one could fairly say that the travel is being discounted, so the allocation to the miles could be the same per mile, and the portion for travel becomes a bit smaller.

How would you tell him to handle the RDM earned from any business travel he might do on a paid ticket, should he recognize those miles as taxable income?

He can and should enjoy the miles earned on paid business tickets for leisure travel. This is precisely what the IRS has said it will not tax as income.

Do you prepare your own tax returns?

Yes, for 20 years and without any audits. This stuff isn't brain surgery.

Using classical law text definition of contract - it is a contract. In exchange for the promise of upgrades, better seats, free flights, etc. the customer to his detriment forgoes flying other, often cheaper airlines, and directs his business to the specific airline who to airline's detriment suppose to deliver on the promises.


I really don't think that choosing to fly with the airline would constitute consideration. The ticket in itself is a contract: I give you money in exchange for your agreement to fly me to my destination. When the airlines dangle a frequent flyer program out there, it is merely precatory, i.e., not a bargained-for component of a contract. I don't think there is any provisions about frequent flyer programs in the contract of carriage, so you would have a really hard time arguing to a judge that it was part of the ticket contract. Also, the airline has not required any consideration from you in exchange for being allowed to be in their frequent flyer program. It's not like you signed an exclusive contract - you are free to fly other airlines in the future.

There is no promise of upgrades, free seats, etc. just from joining a program. In order to be eligible for those benefits, you have to get the points/miles.

...By analogy to stock sales where one identifies which shares he is selling, a taxpayer could, and probably should, identify in his files the source of the 25K miles he is using to pay for the business fare. Here, it is in his interest to find the highest cost miles for the conversion (much like you want to find the highest cost shares in stock sales). That's probably the 25K butt-in-seat miles...
Stock purchases and stock sales are exactly that, purchases and sales with real money paid to acquire the stock and real money received when the stock is sold. There is no question how much money is involved, and thus how much is gained or lost in the end. That is far different from your imputation of value based on what you think went for the travel you did and what you think went for the miles you earned. Two people buying shares on the NYSE at the same time pay the same price for their shares and that price will be a matter of record. Two people flying in the same fare bucket on the same flight will pay the same for their tickets, but you imagine that they must be paying different amounts for the travel component if they are earning different amounts of miles. (BTW, 24,999 miles are worth far less than 25,000 miles, aren't they, though how much is a single mile by itself has negligible value. Just another of the many disconnects to undermine your analytic approach.)


Unless the airfare is some below-market special like nsx identified above, I think it's fair to allocate the fares paid for that 25K of flying between travel and miles, with the 1.5 cpm being the value allocated to the miles...
You may think you got a helluva deal on your ticket because it cost you substantially less than what a ticket on another carrier would have cost you. It makes no sense, however, to describe it as a "below-market special." It is an irrelevancy here what the other carriers are selling tickets for, and hence whether you got a super deal or a lousy one.

That's a close call. Is an elite (25% bonus miles) getting a discount on miles or a discount on travel? I think one could fairly say that the travel is being discounted, so the allocation to the miles could be the same per mile, and the portion for travel becomes a bit smaller.
What is with all the "fair" and "fairly" stuff. Maybe you think doing it your way would be the "fair" way to go about it, but what bearing does that have on what is permissible according to the tax code?


He can and should enjoy the miles earned on paid business tickets for leisure travel. This is precisely what the IRS has said it will not tax as income.
So he could "recycle" his miles and really make out by earning miles in the course of business travel, for which he is claiming a deduction, then turning around and "selling" ("using a personal asset to pay for a business expense" if you prefer) the miles back to his business, then turning around and "selling" the miles earned through that business travel back to his business, then turning around... Kind of a perpetual motion machine. Well, perpetual motion machines don't exist, and IRS doesn't allow the tax equivalent thereof.

Yes, for 20 years and without any audits. This stuff isn't brain surgery.
And when people tell themselves it "isn't brain surgery" and chose to represent themselves rather than engage an attorney to represent them, you think they are displaying good judgment?

You haven't convinced me, and I haven't convinced you. So unless a CPA or a tax attorney weighs in with an authoritative opinion, there is no real point in continuing with the back and forth. You will do it your way, if you so chose, and I will not do it that way.

Maybe you think doing it your way would be the "fair" way to go about it, but what bearing does that have on what is permissible according to the tax code? :D Point taken.

... Just another of the many disconnects to undermine your analytic approach.)

You misunderstood my analogy to stock share identification. That concept also applies to inventories (ever hear of FIFO, LIFO and other fun accounting acronyms?). I wasn't suggesting that this is just like stock sales, but rather that there is lots of precedent in the tax code for determining what part of a fungible pool you are selling or using.

What is with all the "fair" and "fairly" stuff. Maybe you think doing it your way would be the "fair" way to go about it, but what bearing does that have on what is permissible according to the tax code?

In that context, I used those terms to mean essentially "reasonable" -- an important concept in tax law, and law generally.

So he could "recycle" his miles and really make out by earning miles in the course of business travel, for which he is claiming a deduction, then turning around and "selling" ("using a personal asset to pay for a business expense" if you prefer) the miles back to his business, then turning around and "selling" the miles earned through that business travel back to his business, then turning around... Kind of a perpetual motion machine. Well, perpetual motion machines don't exist, and IRS doesn't allow the tax equivalent thereof.

I'm afraid you need a refresher. Remember this from above?

Publication 535, p. 4: "Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you." http://www.irs.gov/pub/irs-pdf/p535.pdf

If he buys the ticket for a business trip, he records its cost as a travel expense on Schedule C. He gets the miles for his personal account tax-free, but at no personal cost to him. His personal basis in those miles is thus zero, so if he were to use them for a business trip, he cannot deduct any cost with respect to those zero-cost miles.

And when people tell themselves it "isn't brain surgery" and chose to represent themselves rather than engage an attorney to represent them, you think they are displaying good judgment?

Sometimes, sometimes not. It depends (the most common answer to legal questions).

You haven't convinced me, and I haven't convinced you. So unless a CPA or a tax attorney weighs in with an authoritative opinion, there is no real point in continuing with the back and forth. You will do it your way, if you so chose, and I will not do it that way.

I've supported my position with multiple citations to IRS publications, positions and tax law doctrines. You've cited to absolutely nothing in support of your opinion that this deduction "would almost certainly not stand up if you were to be audited". Do you display "good judgment" by reaching that conclusion without any reference to tax law authorities?

OK everybody, we had the session, we had your questions as of Wednesday 12am Singapore time, and I just need a quiet moment to post some answers. I will try to do sa asap, but as I just got back from the bar (not Bar:p:p) portion of this day, I won´t be able to do it tonite. I will also post the presentations of my colleagues on the panel as soon as I can and post the link here. Now, guess waht: today going down in the lift of the Sheraton Towers, what did I see: Flyertalk luggage tags.:)^:) Who´s here right now?

OK everybody, we had the session, we had your questions as of Wednesday 12am Singapore time, and I just need a quiet moment to post some answers. I will try to do sa asap, but as I just got back from the bar (not Bar:p:p) portion of this day, I won´t be able to do it tonite. I will also post the presentations of my colleagues on the panel as soon as I can and post the link here. Now, guess waht: today going down in the lift of the Sheraton Towers, what did I see: Flyertalk luggage tags.:)^:) Who´s here right now?
So did you let him/her know you were a FTer too by flashing the secret sign?:D

...as I just got back from the bar...

After you're done with the bar and any resulting after effects, please consider the untenable implications for the IRS if they were to reject my view on the need to allocate basis to the flight and miles portion of a personal travel ticket where the miles end up being used for business travel.

Imagine that Virgin America, in a bid to make an early splash with its transcon service, offers $400 RT SFO-JFK flight coupons. Once purchased, anyone can use them -- just make a reservation, show up at the airport, hand over the coupon and you're good to go. As part of this promotion, the purchaser of the coupon gets the miles earned, regardless of who flies.

Let's say that I'm crazy about New York, so I buy a big stack of these coupons. What I don't use, I'll give as holiday gifts.

After some time, I realize I have more of these coupons than I need personally. It turns out that many vendors supplying my sole proprietorship are happy to accept these coupons as payment for business purchases. They take each as though it were $400, and they don't mind that I end up with the miles.

Question: As I use these coupons for business expenses, how much per ticket am I allowed to deduct? Is it the $400 I paid for the coupon? If so, I've got quite a scam going. I'm personally keeping $75 or so worth of miles, so the payment of each coupon is really only costing me $325, yet I'm able to deduct my full cost of $400.

The flaw in this approach is obvious. When I hand over the coupon but keep the miles, the coupon I handed over did not cost me $400. It cost me that amount minus the value of the miles I kept.

This illustrates why it is proper and necessary, when using personal miles for business travel, to reasonably allocate the airfare between travel and miles. Failure to do so results in an improperly high basis for the travel and low basis for the miles.

One question that always seems to be a bit hairy is the recourse of employees who travel for work, when the employer deems that miles earned from company travel are property of the company to use on company travel.

My employer does not do this (though if anyone found out how far my miles got me, I'm sure they'd give it some thought!), and although it does not seem to be the norm, it would not appear to be uncommon, either. The normal form seems to be that a company forces employees to submit their FF#'s and from that point on withdraws from the employee's account with or without consent. Furthermore, the employee is not allowed to withdraw from the account himself.

The question is, then, can your employer legitimately do this, and if so, what terms should apply? It seems that if the company has employees set up a separate account, this could hold up, but the idea that my double miles from a trip to Singapore that I paid for should fund company travel seems....offensive.

There are a lot more questions that I imagine come up: what happens to the account when an employee leaves? Is this even legitimate under the T&C of most programs, since the account is under the name of the individual with no reference to the company?

Miles are given to the traveler not to the paying party.

I mostly agree with dhuey, with some minor quibbles.

When allocating the cost of a ticket between travel and miles: First, if it's a mileage run, the entire cost is for the miles.

Second, I'd estimate some underlying value for the travel (close to the full price), and also for the miles (1.5 cents each, perhaps). Then I'd proportionally reduce those to match the actual total amount paid.

So when an elite passenger pays the same fare and gets more miles, I'd allocate more of the cost to the miles, but at a lower per-mile rate.

I'm not sure what I'd do with unexpected bonus miles: e.g. I get a bump (that's another issue), and the airline rebooks me on a connection, so I earn an extra 1000 miles for the trip.

I agree that allocation should be done per ticket; sometimes, the airline is selling miles cheaper (e.g. when there's a 300% bonus). When that makes the value of the miles more than the full cost of the ticket, no problem; proportional reduction handles that case fine, it just generates some very inexpensive miles.

However, based on that treatment, if you buy a ticket for a business trip, I do not believe you get the miles associated with it for a $0 basis and deduct the full cost; unless, that is, you later use those miles (and not more expensive ones) for business use.

As for valuing miles won as an award: if the airline says the miles are worth $625, and you pay income tax on $625 for winning them, then clearly your basis in those particular miles is $625. It's quite possible to have identical things with a different basis; someone could have bought 100 shares of Google at $85, and another 100 shares at $500.

I mostly agree with dhuey, with some minor quibbles.

When allocating the cost of a ticket between travel and miles: First, if it's a mileage run, the entire cost is for the miles....

That might be hard to justify. When you do a mileage run, you are receiving the travel. It might be worth nothing to you -- indeed, it has a negative value since you travel only because you must in order to get the EQMs. Still, cost is not usually determined based on how much something is worth to you.

Imagine that Virgin America, in a bid to make an early splash with its transcon service, offers $400 RT SFO-JFK flight coupons.

They should print on the coupon "Cash value 1/20 cent".

Problem solved.

They should print on the coupon "Cash value 1/20 cent".

Problem solved.

Not so easy. The "cash value" is the amount the company is willing to pay in cash for the coupon. The "market value" is its value in the marketplace.

Remember the "50% off" coupons United had some years ago? You could get one on a $20 flight, and they were selling for $50 (and in some cases, worth over ten times that). Printing "no cash value" on them would only mean that United wouldn't (commit to) buy(ing) them back.

The "cash value" is the amount the company is willing to pay in cash for the coupon. The "market value" is its value in the marketplace.

Interesting. That raises more questions in my mind about coupons, but they would be off topic.

Thanks in advance to NorthernAtlanticRacer !

perhaps this was posted here or elsewhere...

Some of you may get the JOE SENT ME emails and some may subscribe to them. He makes some valid points... I will just paste in this part, but here's one that bugs many of us who store and use miles a lot! I dont like how it's sort of becoming OK to squeaze the customers out of the very things all those marketing tools promise you can get and use! For example, I signed UP for that credit card and loan to GET miles so we could all someday fly to Maui. now you're telling me that's never going to really happen? And it's OK???????

***

BRANCATELLI FILE: THE END OF FREQUENT FLYER PLANS AS WE KNOW THEM
Without drawing any kind of moral equivalency, let's just say that December 1, 2007, is a date that will live in business-travel infamy. That's when one of the Big Six will complete a sneak attack that will destroy the frequent flyer programs as we have known them. If you've got big balances in your frequency plans, you need to know how those miles are going to be made worthless. For all the details, surf to http://joe.biztravelife.com/joe.html

MM, when Ponzi schemes like legacy FF programs collapse, people like us who got in early and have cashed in big time shouldn't complain. The real victims are the latecomers who have enabled the programs to stay alive long enough for us to redeem most of our miles.

MM, when Ponzi schemes like legacy FF programs collapse, people like us who got in early and have cashed in big time shouldn't complain. The real victims are the latecomers who have enabled the programs to stay alive long enough for us to redeem most of our miles.

Yes, for me these programs have been wonderful. I'm not about to pay for paid F/C, and I'm not elite with any carrier, so miles are my only way into the premium cabins. It's been a great ride even if it ends tomorrow.

MM, when Ponzi schemes like legacy FF programs collapse, people like us who got in early and have cashed in big time shouldn't complain. The real victims are the latecomers who have enabled the programs to stay alive long enough for us to redeem most of our miles.

FF programs aren't ponzi schemes. They're discounts on airfare. They'll work fine with no new participants or increase in volume.

http://joe.biztravelife.com/joe.html
Is this meant as a teaser? When I click on the link, I find a site that requires a paid subscription. Care to tell us what you saw there that you think we should know? Which of the big 6 is to do what on 12/1/07?

FF programs aren't ponzi schemes. They're discounts on airfare. They'll work fine with no new participants or increase in volume.

Arguably they work better (for the existing participants) with no new participants or increase in volume, since there's less competition for the existing award seats. That's the main different from a Ponzi scheme, to which "new blood" is the sine qua non of continued existence.

FF programs aren't ponzi schemes. ....

It's unfortunate that in common parlance, "Ponzi scheme" often means nothing more than a fraudulent scheme. That doesn't do justice to Charles Ponzi. http://en.wikipedia.org/wiki/Charles_Ponzi

As noted above, a Pozni scheme is a very specific kind of fraud.

When I click on the link, I find a site that requires a paid subscription. Care to tell us what you saw there that you think we should know? Which of the big 6 is to do what on 12/1/07?

Same thing happened to me at that link. But this seems to obviously be referring to the Delta decision to not have all seats available for Skychoice awards effective December 1, 2007, which has been discussed quite a bit in the Delta forum.

http://www.flyertalk.com/forum/showthread.php?t=741838

Oh, and thanks to another thread, it is in today's USA today
(http://www.flyertalk.com/forum/showthread.php?t=748950)

http://www.usatoday.com/travel/columnist/brancatelli/2007-10-22-frequent-flier-programs_N.htm

It's unfortunate that in common parlance, "Ponzi scheme" often means nothing more than a fraudulent scheme. That doesn't do justice to Charles Ponzi. http://en.wikipedia.org/wiki/Charles_Ponzi

As noted above, a Pozni scheme is a very specific kind of fraud.

Yes, Ponzi schemes are a very specific kind of fraud, but if a given airline stops taking in cash from new customers, it will fail to deliver on the miles it sold/credited to accounts that have not yet been cashed out. In that regard, calling it a Ponzi scheme wouldn't be completely inaccurate.

That's what I was getting at. A Ponzi scheme relies on inflow of new cash to pay off prior participants. Any type of advance sale of a service to be delivered in the future can collapse a la Ponzi if the money is not set aside to pay for that future service.

If the FF programs are spun off, the airlines will need to set aside that money and treat the redemption obligation as a true liability. That would be good news for customers. But I wouldn't be caught dead investing in a FF program if I didn't trust the airline not to find ways to devalue by stealth.

Yes, Ponzi schemes are a very specific kind of fraud, but if a given airline stops taking in cash from new customers, it will fail to deliver on the miles it sold/credited to accounts that have not yet been cashed out. In that regard, calling it a Ponzi scheme wouldn't be completely inaccurate.

An airline might be depending on continuing sales of miles, but a Ponzi scheme depends on very rapid increases of new money in order to sustain the large payouts to early investors. The most you could say of airlines is that some depend on modest increases in mileage sales.

Also, the early "investors" in mileage programs don't really do much better than the new ones. They might get their travel awards for lower mileage amounts, but here again, this is a very minor advantage when compared to the loot an early investor in a big Ponzi scheme can get.

FYI.
************************
Section 137 Frequent Flyer Mileage and Awards. (a) In General - If an individual receives a frequent flyer benefit as a result of the purchase in a trade or business of property or services.

1. no amount shall be includable in such individual's gross income by reason of receiving such benefit,

2. no deduction otherwise allowable for the purchase of such property or services shall be reduced by reason of such benefit, and

3. no deduction shall be allowed for the portion of any transportation purchased using such a benefit.
**************************

Bottom line- although you may think you have a basis for miles/points or even think that miles have value, ultimately to the IRS it is considered legally as a "rebate" from prior travel, thus having a cost basis of 0 and is not able to be deducted. Check the ruling back in 1987.

The only exception to the rule is when you PURCHASE miles from the airline. Your basis is then the actual cost of purchasing miles plus fees.

FYI.
************************
Section 137 Frequent Flyer Mileage and Awards. (a) In General ....

What is that? It looks to be part of 104 H.R. 3111, which never passed the House in 1996. See http://thomas.loc.gov/cgi-bin/bdquery/z?d104:HR03111:@@@X

The current 26 U.S.C., Section 137 has nothing to do with frequent flyer miles. See http://uscode.house.gov/search/criteria.shtml

...Bottom line- although you may think you have a basis for miles/points or even think that miles have value, ultimately to the IRS it is considered legally as a "rebate" from prior travel, thus having a cost basis of 0 and is not able to be deducted. Check the ruling back in 1987.

The only exception to the rule is when you PURCHASE miles from the airline. Your basis is then the actual cost of purchasing miles plus fees.

The reason an employee has a zero basis for miles earned on a business trip is that he/she paid nothing for them.

In 2002, the IRS decided to allow employees to receive such miles free of income tax. See Announcement 2002-18 (at p. 621) http://uscode.house.gov/search/criteria.shtml That's as far as the IRS has gone on this issue. The IRS never stated any requirement that earned miles have a zero basis; that's just the consequence of how the employee received them for free (and free of income tax).

As discussed above, personal travel in which a taxpayer uses personal miles to pay for business expenses presents an entirely different situation. There, it is necessary to allocate the basis of the airfare, which is really a lump sum, between travel and miles. Miles are not generally free in your leisure travel; you pay for them and they have a substantial basis.

It never matters what that basis is when you use these miles for more leisure travel. It does matter, though, when you use this personal asset to pay for a business expense.

The reason an employee has a zero basis for miles earned on a business trip is that he/she paid nothing for them.

As discussed above, personal travel in which a taxpayer uses personal miles to pay for business expenses presents an entirely different situation. There, it is necessary to allocate the basis of the airfare, which is really a lump sum, between travel and miles. Miles are not generally free in your leisure travel; you pay for them and they have a substantial basis.

It never matters what that basis is when you use these miles for more leisure travel. It does matter, though, when you use this personal asset to pay for a business expense.

Will you say that one airline mile on NW is the same as one mile on NW? Yes?

Lets go the opposite direction so to say.
There have been precedents where the employer asks you to use your miles for a business trip and they'll "purchase" miles from you. It doesn't matter weather you got the miles from personal or business, the IRS treats the mileage as a "rebate" with a 0 cost basis. You will be required to pay regular income tax on the amount of the "Sale" (i.e. FMV) and report that as income. You cannot deduct the cost of the miles as the basis is 0. You cannot argue that the basis is NOT 0 unless you purchased directly (i.e. via airline), as the policy is shown by the IRS charging income tax on the full amount on the sale. The company can then deduct the purchased amount as a business expense.

In your case, you are taking the miles with zero basis and deducting the FMV of the tickets without paying the income tax. You probably will get away with it, but if you do get audited and it actually goes to court, my bet is that it won't turn out too well for the taxpayer.

Cheers

What is that? It looks to be part of 104 H.R. 3111, which never passed the House in 1996. See http://thomas.loc.gov/cgi-bin/bdquery/z?d104:HR03111:@@@X

The current 26 U.S.C., Section 137 has nothing to do with frequent flyer miles. See http://uscode.house.gov/search/criteria.shtml

You're right. Didn't scroll down enough on accountant city.

Cheers.

...There have been precedents where the employer asks you to use your miles for a business trip and they'll "purchase" miles from you. It doesn't matter weather you got the miles from personal or business, the IRS treats the mileage as a "rebate" with a 0 cost basis. You will be required to pay regular income tax on the amount of the "Sale" (i.e. FMV) and report that as income. You cannot deduct the cost of the miles as the basis is 0. You cannot argue that the basis is NOT 0 unless you purchased directly (i.e. via airline), as the policy is shown by the IRS charging income tax on the full amount on the sale. The company can then deduct the purchased amount as a business expense....

In bold is where we disagree, and I don't think there are any precedents that support your view on the conversion to business use of personal miles, earned on tickets for personal travel. I agree with you on the zero basis for miles earned on business travel.

FYI.
************************
Section 137 Frequent Flyer Mileage and Awards. (a) In General - If an individual receives a frequent flyer benefit as a result of the purchase in a trade or business of property or services.

We're discussing deductibility when the benefit was the result of a personal, not trade or business, purchase.

Will you say that one airline mile on NW is the same as one mile on NW? Yes?
No. Identical things can have different bases.

Would you say that one share of Microsoft stock is the same as one share of Microsoft stock? But if I sell the first one, I owe $20 in income tax; if I sell the second one, I owe $0 in income tax.

No. Identical things can have different bases.
...

Indeed, they usually do. Even where a manufacturer establishes a uniform retail price, there are still differences in sales taxes and delivery charges. The fact that the basis can be different for identical miles has no relevance in this discussion.

When is the conference and when will we hear anything??

When is the conference and when will we hear anything??

now that WE have created all the topics here in this thread while thinking there really was to be one, they'll think about setting one up some time. :D

Maybe this was fly fishing by ATA's legal? :confused:

OK everybody, we had the session, we had your questions as of Wednesday 12am Singapore time, and I just need a quiet moment to post some answers. I will try to do sa asap

Still waiting... :confused:

Sorry, I had a slight timing problem...I will try to give an overview here and post a more detailed analysis later on today. Generally, we have noticed a difference of opinion (now, that´s no surprise, since lawyers were debating:rolleyes:) amongst the legal systems. At the extreme end was our panelist from Hong Kong, who felt that in HK, the airlines essentially could do whatever they pleased to do. At the other end, the European panelists felt that the terms and conditions would be subject to the European Unfair Terms and Conditions Directive, thus posing some "border". What remained an issue were "bought" miles: while all panelists agreed that the airline could devaluate miles, and even forfeit them ( I was the only one disagreeing, so you may not want to follow me on this one), they felt that if a customer had spent actual money for the miles, he had more rights.

One panelist reported of taking a British carrier - one that is not part of *alliance - to court for not making flights available. The carrier fought to have the matter removed from small claims, thus exposing our dear panelist to full cost risk - easily a high 4 to low 5 figure Pound amount - so he had to withdraw. BUT, this shows clearly, that carriers are well aware of the risks and do not want to risk a judgement.

As to the issue of ownership in employment relationships, all agreed that there is a primacy of the contract: if the contract stipulates that the miles are accrued for business usage, then this must be adhered to. Most also agreed that even in absence of such contractual rules, the economic benefit of the miles should rest with the person paying - if he can use them. Thus, if the T&C's stipulate that only the person holding the account may redeem miles, then the miles are his. However, he may be asked to use the miles for business related travel.

Now, I need to check in now and will be back in a few minutes.

Thanks for getting back to us!!!

Here's a related question I thought of recently: What protection does a corporate purchase of miles have? Amex bought billions of miles from Delta at the time of Delta's bankruptcy. Does Amex have a claim against Delta for devaluing those miles, for example by imposing capacity controls on its formerly unrestricted double mileage awards?

...If you have questions, please post them here, and I will try to have them answered - and post the answers, of course....

Did you have a chance to consider the use of personal miles for business expenses under USA tax law, or was that too narrow of a question for your international conference?

. . . while all panelists agreed that the airline could devaluate miles, and even forfeit them ( I was the only one disagreeing, so you may not want to follow me on this one), they felt that if a customer had spent actual money for the miles, he had more rights.


Hmmm. Might this be due (at least in part) to the difference in the way civil law and common law look at contracts? I refer, of course, to the differences between "causa" and what we common-law folks call "consideration"?

I would think in common law whether the consideration was in cash or in action (flying the particular carrier) would make little difference, except in computing the measure of damages for breach (presuming breach was found).