Andy2

How come? I can understand why Citi takes the position that 1099-MISC is the correct form for their non-interest bearing checking account since they require the recipient of miles to try out a service.

I can't find a reason that Fidelity, TD Ameritrade or Bank Direct would be allowed to use a 1099-MISC for reporting purposes instead of a Form 1099-INT, which has a miminum filing thrshhold of $10. These institutions award miles in increments as high as 50,000 at a time yet do not issue Forms 1099-INT. If they are properly compying with the tax laws, they must be valuing the miles at $0.00 per mile.

Even if somehow 1099-MISC was correct and the $600 filing threshhold applies, some people who are able to use the churning methods detailed in the Fidelity account opening bonus thread are receiving the account opening bonus for several different airlines. I may be wrong, since the most I have received from Fidelity is 50,000 miles in a year, but I believe the churners are receiving 100,000 a year or more from Fidelity. 1099-MISC reporting is by social security number, not based on each account opening bonus. None of the churners have reported receiving 1099-MISC from Fidelity, so the value placed on each mile by Fidelity must be quite low.

EsquireFlyer

First, I think the conclusion "If they are properly complying with the tax laws, they must be valuing the miles at $0.00 per mile" is internally self-contradictory. I don't think valuing miles at $0.00 per mile can constitute properly complying with tax laws. Even in the case of credit cards, whose frequent flier miles are not taxed, the IRS's position is not that the miles are valued at $0.00, but that the miles' value is considered a rebate on the purchase price (which would be a meaningless position if the value was $0.00).

If a big bank were to make a conscious policy decision on the proper valuation of a mile, they would probably first try to get an opinion from tax counsel so that they could rely on it in the event of an IRS audit. And I think it is highly unlikely that an experienced tax attorney would be willing to issue an opinion that the proper value of a mile is $0.00, especially in the case of miles like AA miles which can be sold back to the airline, within the program's rules (via their partner points.com), at a cash value of $0.004 per mile. And it's unlikely that a major financial institution would take such an aggressive tax position without receiving an opinion letter from tax counsel stating that it was at least "more likely than not" that the tax position would be accepted by the IRS.

On the other hand, there are many other possible explanations for why these other banks did not send out 1099s, which makes it not safe to assume that it must be because they value miles at $0.00. Some possibilities include:

1. They may value miles at above than $0.00, but lower than the amount necessary to trigger 1099 reporting.
2. Related to #1, they may, like Citibank apparently is, be confusing the 1099-INT with the 1099-MISC, and be applying the wrong threshold. The reason that some people have speculated for Citi's use of the 1099-MISC (have to try out a service) is not convincing to me as a legal justification. I think it was just a mistake.
3. They may be assuming, as Senator Brown did, that the IRS has stated that it will not seek to tax any miles, even though they have value, because of the administrative burden. (Whereas the IRS has only actually said that with respect to miles earned on business travel when the tickets are paid for by the employer but the miles are accrued by the employee.)
4. Or, and I think this is the most likely, the thought may have simply never crossed their minds, just like it apparently did not cross the minds of many of their clients, until Citi started making headlines with it (possibly pursuant to advice that Citi received privately from its tax advisors). This could just be an "oops" on the part of Fidelity, TD Ameritrade, or BankDirect; and if so, it's a really small "oops" in comparison to the other mistakes other big banks have made, leading up to the recent U.S. financial crisis. Perhaps the bank executives just had a lot of other things on their mind which took precedence over issuing 1099s for frequent filer miles.

I can't say for sure that any of the above is definitely the reason, but the fact that there are so many other possibilities makes it unsafe to assume that the fact that these banks did not issue 1099s for account-opening miles must have been because they consciously decided to value miles at $0.00.

This one is easier to explain. In designing the bonus program, Fidelity's target audience probably was not "the churners" (who actually cost Fidelity a lot more $$ than just the hassle of printing out a tax form), so even if they did make a tax decision regarding the reporting of miles, they probably did not anticipate the need to add up multiple mileage bonuses across accounts for the churners.

The tax approach Fidelity took could have been any of #1 to #4 above (or something else), rather than specifically deciding, "The maximum amount a churner could get from us each year is 120,000 miles, and we value miles at $0.00, so the total is worth 120,000 x $0.00 = $0, and so we do not need to issue a 1099."

I don't think it's clear that Fidelity has even considered the tax implications of the award-opening miles, but if they did, it is more likely that they considered the typical customer, and less likely that they specifically considered the tax implications with respect to the small subset of their customers that engages in "churning."

It's definitely possible that the banks have taken this, of course--I just don't think it's anywhere near certain. And so I don't think it's safe or accurate to say something like "Unlike Citi, these three other banks have decided to value miles at $0.00" without any proof that they consciously made such a decision. For the reasons I stated above, I don't think the failure to issue a 1099, without more, constitutes proof of that conscious decision.

Andy2

CollegeFlyer:

All of your points are logical and very well written.

I do believe that industry standards and industry comparisons matter if and when a person argues with the IRS, and that it is more reasonable than not to assume that Fidelity, TD Ameritrade and Bank Direct do, in fact, comply with the tax laws (at least when corresponding to the IRS). If compliance occurred, it is clear that each of these financial institution placed either no value per mile or an extremely low value per mile (much lower than did Citi) if 1099-MISC is the correct form. I do agree with you that 1099-MISC is probably not the correct Form in most of these situations.

The point of my earlier post was that this thread is dying out and that the primary benefit of the thread is to provide the recipients of Forms 1099-MISC with our various thoughts regarding a realistic value of an AA mile, guidance of how to make adjustments on a tax return if the recipient believes that 2.5 cents per mile is incorrect, and to share reasonable legal arguments in support of making this adjustment to the tax return if contacted by the IRS. Personally, I think industry standards help in making those legal arguments.

I think that the SS example valuing an AA mile at 0.4 cents per mile was very good. There is a lot of difference between Citi's valuation of $625 per $25,000 and a value of $100 per $25,000. Not that much difference between $100 and $0.00 per $25,000.

What amazes me the most is that not a single poster argued that 2.5 cents per mile is a correct valuation, and almost every poster has experience with using frequent flier miles. That would be embarrasing to me if I were in Citi's tax department.

airfly56

Has anyone gotten citi to issue a revised 1099 this year? Or tried to? Got to file soon and wondering if there is any hope.

opus2002

http://online.wsj.com/article/SB1000...alFinance_PF14


Summary of 6 scenarios:

Miles awarded by the airlines in return for flying with them - NO, not taxable.

Miles awarded in connection with credit-card use - NO


Miles awarded in connection with business travel - NO

Miles awarded as a promotion for opening an account, such as a bank account - Maybe

Miles awarded as a promotion for putting money in a mutual fund - Likely

Miles awarded as prizes - YES

net net...if you get a 1099, report it. If not, then not taxable.

ss

I agree completely, and find this entire post to be an excellent summary of the situation. Regarding a couple of the points:

Interestingly, the use of 1099-MISC has changed for 2011. For 2010 it appears (from FT postings) that Citibank was consistently issuing 1099-INT for interest-bearing accounts and 1099-MISC only for non-interest-bearing accounts. I personally received a 1099-INT for opening a savings account. This makes it less plausible that Citibank is now making a simple mistake. Perhaps they believe they have enough justification to use 1099-MISC, and figured that with the higher threshold it would lead to fewer complaints than last year. If so, they miscalculated. :-)

Even if they fully understand that IRS ruling, they may be assuming that the same logic would apply in this other situation. The ABA (American Bankers Association) has provided precisely this guidance to its members. See post #146 in this thread.

ss

AA sells a mile for 2.7 cents and buys it for 0.4 cents. Neither of those numbers defines the fair market value of a mile, but they do put objective bounds on that value. It would be hard to argue that a mile is worth more than 2.7 cents or less than 0.4 cents. The truth, of course, lies somewhere in between.

Xyzzy

When reporting it, you can dispute the amount and use the fair market value instead. I think the FMV of 25k miles could easily be argued to have a FMV of $250. You might wish to use a different number. As long as you have documentation and reasoning to back up your calculations you should not have a problem with this apprach.

FWIW, I've done this. Some years ago we won a prize and received a 1099. The 1099 had the manufacturer's suggested retail price listed. The fair market value was considerably less than that. It was easy to adjust this information on our tax return and nobody from the IRS ever asked about it.

MilesTalk

I just got a call from Citi to alert me to the fact that they have issued me a 1099 to tax the value of all the Thank You Points I *REDEEMED* in 2011.

Not earned, not from a bonus, and not from the bank side - just points I got instead of a 1 or 2% cash back on my Citi Credit Cards and REDEEMED.

Can this possibly have any basis in IRS law? I don't see how as the points are in lieu of a cash rebate. I don't even know where to begin with my frustration from this call.

So if I redeem for more than $600 in a year in flights (or anything else) from TY, I need to pay taxes on that credit card rebate?!

Anyone else? I'm still waiting for the 1099 to come in the mail and I know I will be livid when I open it.

MilesTalk

Going to follow up my own post - because I see now this dates back to 2009 according to this thread.

What's odd, though, is I didn't have any bank bonuses and at most I earn 14,000 TYPs a year from banking products, so I'm real curious to see how they then say the redemption attributable to banking was over $600.

This will be fun - will post if I'm able to have anything explained in a way that makes sense once I have the actual 1099.

Andy2

The fact that you received a phone call is an extraordinarily bad fact for others who received a Form 1099-MISC from Citi. Stand-alone Forms 1099-MISC were due to the recipient by January 31, with the IRS copy due to the government by February 28 (I guess the 29th this year). Presumably since Citi is sending them late, they are calling to minimize the number of people who would otherwise file based on the belief that they had received all 1099s and W-2s (those receiving Forms 1099-B wouldn't have received those yet, since an automatic extension was provided allowing the recipient copy to be sent in February).

The point I am making is that Citi's response to all of this criticism seems to be "Let's go find benefits we have provided other than frequent flier miles and send some 1099-MISCs to those recipients, also." I had hoped their response would have been, "Let's fix the mileage 1099s to reflect a more reasonable value and definitely not send out any more."

I know nothing about these ironically named Thank You points. Let everyone know if Citi is overvaluing them, also.

It really would be great if you explained how Thank You points work. It is strange that Citi would not issue a Form 1099-MISC when Thank You points are earned from a banking product, but do exactly that when frequent flier miles are "earned". If the Thank You point can only be valued based on redemption, why isn't the same true for an AA mile?

EsquireFlyer

My goodness. Citi may as well rename Thank You Points as F You Points, with these ridiculous taxes they are hitting you with, without notice, a year later!

codybear

I mailed a letter around the 25th. I haven't heard anything and I highly doubt Citibank will reissue the 1099. I'm wondering if maybe the best option is to dispute the 1099 MISC and say it should have been a 1099 INT based on their cost of the miles. When I get their rejection letter from my first request, I think I may try that route. Since I will not be filing until October, I have plenty of time to mess with this.

JATR4

Citi ThankYou points are relatively easy to value.

50,000 points can be redeemed for $500 in gift cards or $625 in airline tickets--or a combination thereof. That is a value of 1 to 1.25 cents per point.

Will have to wait and see exactly what any specific 1099 shows to see what the implications are.

Andy2

When I glanced at their web page, it appears someone can earn Thank You points for opening/maintaining a bank account, opening a credit card & making purchases with the credit card, buying merchandise & services from affiliates, and actually purchasing Thank You points from Citi.

When determining how to issue a 1099-MISC for the banking activities, how in the world could they determine the portion of redemption value that is attributable to just the banking portion instead of the other three activities that are protected from direct taxation under the rebate rule or the basis rule? How would someone even begin to approach that? Are the "banking" points the first ones redeeemed, the last, or is it an average?


I did see this gem of a disclosure. Love how valuation is at Citi's sole descretion. And if the AA miles are taxable in the year of receipt, why aren't Thank You points?


Redemption of ThankYou Points received for Products and Services may result in your receipt
of taxable income from Citibank in the tax year in which the ThankYou Points are redeemed.
In accordance with U.S. tax law, Citibank may be required to send to you and file with the IRS
a Form 1099-MISC (Miscellaneous Income) for the year in which a reward is issued to you. The
valuation of ThankYou Point redemptions for Form 1099-MISC tax reporting purposes will be at
Citibank’s sole discretion. You are solely responsible for any personal tax liability arising out of
the redemption of ThankYou Points. Please consult with your Tax Advisor if you should have any
questions regarding your personal tax situation.
ThankYou Points are not property, and cannot be bought, sold or transferred in any way
(including upon death or as part of a domestic relations matter) except through the Transfer
Points feature offered and administered through Citi ThankYou Rewards. ThankYou Points do
not constitute debits to the Account and cannot be offset against your obligations to Citibank