gq_dq

Not really, because credit card miles don't attract 1099s (thus far!).

EsquireFlyer

I'd be willing to take this bet. I highly doubt that this is the case.

dhuey

Perhaps someone will correct me if I'm wrong, but IIRC early last year the Citi fine print only indicated that the account holder would be responsible for all taxes, if any. Later in the year, Citi got much more specific, expressly mentioning that a 1099 would issue re the miles.

Andy2

Chasbondy:

Citi reported the amounts in Box 3 of 1099-MISC. Every tax prep. program will properly NOT calculate Social Security and Medicare Tax if the source amount is from Box 3. The Social Security and Medicare tax is applied to amounts from Box 7 of Form 1099-MISC. If it is input wrong, the computer will produce incorrect results.

redtop43

One thing that has really confused me is that Citi has done nothing more than shot itself in the foot.

Their cost is whatever they paid, 1 cent. The more the 1099 shows, the higher their profit on the resale of the miles and the higher their cost of buying the business. It all cancels out for both P&L and tax purposes.

I think there are interesting questions here of what the IRS calls "constructive receipt." The T&C of all the FF programs state that the miles are the property of the airline. Let's say your boss says on December 28 "I am going to give you a bonus next week." That bonus is not taxable until you have actually received it. What they call "constructive receipt" is usually when you have an irrevocable right to it. You don't have to deposit the check in the bank to have "received" it, but you have to have actually gotten the check. Here, you don't own the miles, all you own is a promise that they will give you something equal in value to the miles. But they can break that promise. You don't have an irrevocable right to it. If you exchange the miles for a ticket, you now have an irrevocable right to that ticket. (If the airline goes bankrupt and doesn't honor the ticket, there are other issues, generally if it's a business ticket you can write it off, if it's a personal ticket it's just a personal loss and not deductible. If you sold the ticket against airline policy, you won't get any sympathy from AA or the IRS.) But until you actually redeem the miles, I don't think they are irrevocably yours.

If I were one of the unlucky Citi customers, I would put ads on Craistlist offerning to sell the miles, starting at $625 for 25,000, and moving downward as I got no responses. When I reached the point where people would buy them, I would report that to the IRS as the taxable amount. I feel very confident that if my position was well documented, that they would allow me to use the market-clearing price. (Meaning, I would put the ads in large cities and refresh them a few times, putting one ad in Cheyenne, Wyoming, wouldn't really cut it.)

What would be nice is if the IRS would address this. It affects many thousands of people, and it I could get a certain valuation, everyone should be able to.

nsx

Yes, Citibank cost itself future business for no benefit. You are incorrect that the 1099 amounts are reported anywhere on Citibank's books. Citibank only deducts its actual cost of the purchased miles.

Too clever by half.

You may not find the market-clearing price this way. Instead you may find the account-clearing price, which is when AA notices your ads and confiscates your miles. Then you can claim that this makes your point about constructive receipt. It doesn't, any more than leaving the keys in an unlocked car I just bought and having it vanish means that I never really received the car from the dealer.

jonny1

i am still little bit confused cos some are saying 1099 on miles and points, do I get 1099 from CITI if I received 171k Advantage miles from them?

what about amex? i received 150k points from them.

do I get 1099 if i sell points/miles on paypal?
thanks

Andy2

You make some very good points. One glaring problem with your Craigslist suggestion is that the sell of frequent flier miles is against the rules of the program and the penalty is the forfeiture of all miles in the account with no compensation. So if one of your interested buyers is a representative of American Airlines - which really does happen - your miles won't have any value if your AA account is closed.

This is one of the strong arguments that the miles have little or no value. They simply can't be converted to cash in the year of receipt by most recipients. Pretty much the only "authorized" way to obtain cash for the miles is to take a business flight and have your employer "reimburse" you for a reasonable amount. This is clearly a taxable event, but it is between the IRS, the flyer, and the employer, not Citi.

Citi's valuation is based on the retail price of miles purchased from AA by AAdvantage members in small quantities to top off accounts in order to book flights. It is nuts. Remember that IBM Consulting commercial where the heavyset guy with a bathrobe on in the hotel room struggles against his fate and finally gives in and eats the $10 jar of mixed nuts from the minibar? The commercial is directed at achieving "premium pricing". Citi would seem to value that jar or mixed nuts at $10, in spite of the fact that it costs $2 at the grocery store.

Andy2

If you will read some earlier posts, the rebate rule is explained. This rule protects the receipt of miles in most situations from credit card companies like AMEX.

The Citibank 1099 situation is caused by the opening of bank accounts, which may not be protected by the rebate rule.

Whether paypal issues a Form 1099 is a function of the number and dollar value of transactions; it is completely unrelated to whether the transactions involve miles.

srdshelly

Things that have value belong to the owner, not an airline. Things that have value don't expire in 18 months. Things that have value cannot be canceled if an airline decides to eliminate its frequent flyer program (which they all claim they can). The miles have no value to the customer until they are actually used to obtain a ticket. And in that case the value varies widely. I think Cite will be loser in lawsuit before all is said and done, if it doesn't back off first.

ss

You can sell AA miles back to AA. To do so you go through their partner points.com (the same partner you'd go through if you wanted to buy AA miles from AA). They won't offer you cash for the miles, but they will make a deposit to your PayPal account from which you can withdraw the cash, so it amounts to the same thing. AA charges about 2.7 cents to buy a mile, and pays about 0.4 cents for each mile you sell.

EsquireFlyer

@:-) Then maybe the FMV of a mile should be 0.4 cents.

(And, if you can actually trade for cash at 0.4 cpm, the FMV is definitely not 0 cpm.)

Andy2

Maybe that is the value of an AA mile. In addition to your good logic and your example that satisfies the tax reasoning that courts have used in taxing people who directly exchanged their miles for cash (there are some examples of this in the very old article I linked in an earlier post), the amount of 0.4 cents per mile is very close to the 0.5 cents per mile that can be arrived at when the Citi branch gave one customer the choice of receiving a $125 cash bonus or 25,000 miles in exchange for the qualifying deposit.

Most of the miles we receive are protected by the rebate rule or the 2002 IRS announcement, so the FMV is irrelevant in those situations. For AA miles that are not so protected, the 0.4 cents per mile would result in $100 of taxable income for each 25,000 miles received, which isn't that much tax, really. $100 times a typical tax rate is $20 - $40, and most of us would jump at getting 25,000 miles for that.

I based my "no value" analysis on the seeming math proof that Fidelity, TD Ameritrade and Bank Direct appear to value AA miles at $0.00 per mile by not issuing Forms 1099-INT. But I recognize that there are flaws in that logic.

I nominate SS as the winner of the "What is the FMV of an AA Mile" contest. I will quit arguing that an AA mile is worth $0.00 per mile. Maybe all of the posters that are arguing that a mile is worth 1.0 - 1.5 cents per mile will too, and we can soon retire this thread unless Citi or the IRS provide more information.

Even if a person argues that the recipient is more likely to use the 25,000 miles on a flight that would have cost $250 - $375 instead of one costing $100, I think that discounting has to come into play. Citi is asserting that the taxation should occur in the year the miles are received rather than in the year they are used. Many posters wisely point out that the possibility exists that the miles will go unused. The normal way to value something today that may be completely valueless in the relatively near future is to provide a discount to value. A discount from 1 cent per mile to 0.4 cents per mile would be a 60% discount, if my math is correct, which doesn't seem unreasonable given all of the worries regarding airline bankrupties and future mileage devaluations.

I doubt that Citi is going to correct the 1099 MISCs, unfortunately. So the recipients who received the 1099s will have to decide whether to make adjustments on their income tax returns to get to the taxable income they believe to be correct. I think this thread provided a lot of good information. I know I definitely know a lot more about the subject than I did previously.

EsquireFlyer

With respect to those banks, I really don't think your conclusion follows from your proof.

nsx

The miles may or may not be mixed nuts. However, we are.