Andy2

Thanks for the kind thought.

With some reluctance I attach an old article. It has to be read with caution although it provides some interesting history. It was written prior to the IRS announcement that the IRS would not challenge a FMV of $0.00 per mile for valuing frequent flier miles earned by an employee from flights paid for by an employer. Apparently, the IRS once issued a technical advice memorandum suggesting otherwise and eveyyone went nuts especially after the media reported that Congressmen got to keep miles earned with taxpayer-funded flights. The IRS withdrew the unfavorable technical advice memorandum and later issued the favorable Announcement.

I attach the article because it provides a nice summary of Letter Ruling 9746048, which an IRS spokesman referenced in support of the statement that miles earned from opening a financial account may be taxable. I have read the full letter ruling but I can't link to it due to lack of computer skills. It is interesting to say the least.

A mutual fund provided frequent flier miles as an inducement for investing in the mutual fund. The IRS applied the rebate rule and required the investor to adjust his or her basis in the mutual fund. So any taxation occurred when the mutual fund shares were sold, not in the year the miles were awarded.

I don't know about you, but the last time my mutual fund gave me something of value, I got a Form 1099-DIV. I can't help but be curious if the reason the rebate rule was used was a lack of confidence on the part of the IRS that the framework of tax laws supported immediate taxation (but that is pure speculation on my part).

The mutual fund was instructed to provide guidance to the investor regarding the reduction in basis. Presumably that involved a communication regarding FMV outside of the Form 1099 framework.

It is interesting to consider how the literal application of this rule would effect the Citi transaction. They wouldn't have been required to issue a Form 1099 if the rebate rule applied, but the recipient would have been required to recognize taxable income when he withdrew the cash, I guess. Citi would have advised the customer of this outside the 1099 rules (and the taxpayer compliance would have been close to 0% presumably).

Perhaps the IRS believes the rebate rule doesn't apply to a pure cash transaction like opening a bank account, but if so the spokesperson really shouldn't then reference LTR 9746048, in my opinion. If the rebate rule does apply, I am left wondering what year the tax event occurs and whether any of the rebate can be applied in a nontaxable netting against the nondeductible fees that the customer pays Citi.

All of that being said, it still comes down to FMV of a mile, which some of us believe might be $0.00, some believe to be $0.01, and Citi seems to be the only one asserting $0.025 per mile, and some believe to be somewhere in between these levels.

http://www.thefreelibrary.com/Freque...ts.-a021183386