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Are miles tax deductible?

Are miles tax deductible?

Old Apr 19, 2010, 12:11 pm
  #1  
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Are miles tax deductible?

Are frequent flyer miles donated to a nonprofit organization ever tax deductible?
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Old Apr 19, 2010, 12:13 pm
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For something to be a tax deduction, it must be taxable in the first place. If you were not paying taxes on accumilating miles, how would you be able to deduct their use on your taxes? At least that is how I would interpert IRS guidance on this issue.
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Old Apr 19, 2010, 12:29 pm
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Not sure if Pedro is right for all situations. If you were to buy miles from an airline and then donate them to charity then I would guess there is some way to deduct this no differently than if you buy canned food and donate it to a charity.

However Pedro is right if you donate miles you have earned "free" from flying. You don't count it as income when you receive them (thank goodness) so you can't deduct them when donating.

Here is a kicker though: If you pay a FF mile surcharge to a car rental agency then, technically, you have paid for the miles. I can't help but wonder how that might work with the IRS.

"Sacrifice" is not deductible according to the IRS. If you donate your time to a charity you can't deduct what you WOULD have been making doing your job. I think this would apply if you used your miles to get a charity-worthy ticket for someone. You couldn't say "I sacrificed using the miles for myself so I get to deduct them." Not to the IRS!
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Old Apr 19, 2010, 1:58 pm
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Miles and taxes

Thanks for these answers about donating miles, tax deductions and the perspective of the IRS. Good points made.
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Old Apr 19, 2010, 2:10 pm
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Originally Posted by Evan!

Not sure if Pedro is right for all situations. If you were to buy miles from an airline and then donate them to charity then I would guess there is some way to deduct this no differently than if you buy canned food and donate it to a charity.

However Pedro is right if you donate miles you have earned "free" from flying. You don't count it as income when you receive them (thank goodness) so you can't deduct them when donating.


The above two statements are correct.


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Old Apr 20, 2010, 1:03 am
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Some of this information is marginally correct.

The earlier arguments in this thread all (somewhat indirectly) try to get at basis. This is a good place to start with any question about a charitable deduction. If the IRS viewed the miles as yours, you would likely be correct that trying to get at basis would be a good way to go about things. As with pretty much everything else, you can deduct the difference between your basis and "fair market value." <-- EDIT: Sorry, this is so completely incorrect that I can't believe I wrote this, but that's what I get for posting at 3 AM.

Clarification:
you can deduct the full FMV, but you need to make an argument that the FMV is above your basis, or else you can only deduct basis.

Of course at this point it might get tricky -- calculating both basis and FMV are somewhat open questions for FF miles and points. I won't get into the valuation and attribution problems involved, as they can (and have been) debated ad nauseum. Suffice to say, the Service has ducked the issue.

The miles aren't your property. They belong to the carrier. For a variety of different reasons, charities are obligated to recognize direct donations of frequent flyer mile as donations from the carrier. The Red Cross has something good about this on their donations page: http://www.redcross.org/portal/site/...0089f0870aRCRD ("The IRS currently recognizes the donation of frequent flyer points as a gift from the airline to the charitable organization, therefore miles donated to the Red Cross are not considered tax-deductible by the individual donor.")

Private donations (e.g., donating a round-trip ticket) to a charity (say, for an auction) may be a different matter, but the law is extremely untested in this area. Since the IRS' general treatment of miles, combined with the general understanding of miles as property belonging to the airline and not the individual, it would seem to invite an audit if one were to deduct for the donation.





IRS CIRCULAR 230 NOTICE: To the extent that this post and others made by this user in this thread concern tax matters, they are not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Last edited by ldpeters; Apr 20, 2010 at 9:39 am Reason: Update Circular 230 to cover other posts in thread; correct egregious error in 3 AM logic
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Old Apr 20, 2010, 9:01 am
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Originally Posted by ldpeters
The miles aren't your property. They belong to the carrier.
That's a massive misunderstanding of the Red Cross's not-necessarily-correct position. If I sell miles to you, that's not income to the airline.

Since the IRS' general treatment of miles, combined with the general understanding of miles as property belonging to the airline and not the individual, it would seem to invite an audit if one were to deduct for the donation.
There is no such "general understanding." The IRS, as a matter of policy, isn't pursuing the argument that miles earned through deductible/reimbursed/employer-provided travel are taxable; that doesn't make that the law, and it certainly doesn't mean that your miles aren't actually yours.

You're going to want to treat things consistently on your own returns, but there's no good reason you couldn't deduct the fair market value of miles you had held for more than a year, regardless of your basis.
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Old Apr 20, 2010, 9:12 am
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Originally Posted by LH2004
If I sell miles to you, that's not income to the airline.
Selling the miles is against (most?) airline policies. They consider them property of the airline.

But it's true that if I steal my neighbors bbq and sell it the IRS expects me to count that as income even though it's an illegal venture.
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Old Apr 20, 2010, 9:30 am
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Believe me, we don't want mile donations to be tax-deductible, because you'd have to fix a fair market value, and pretty much the only thing that stops the IRS from taxing miles, which they would dearly love to do, is their floating value. Smart people maximize their value, but others let them lapse or throw them away buying trampolines at a lousy redemption rate. If you're smart enough to trade your miles for first-class tickets with an MSRP of $30,000, as so many of us have, do you want the IRS to add $30,000 to your adjusted gross income? No. We're a lot better off if miles have no fixed value and no presence on your charitable donations list.
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Old Apr 20, 2010, 9:38 am
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Originally Posted by LH2004
That's a massive misunderstanding of the Red Cross's not-necessarily-correct position. If I sell miles to you, that's not income to the airline.
This is true, but its irrelevant. The airline will argue in court that you owe them the proceeds from your sale as damages, under their terms and conditions. Once they collect, THEN it's income to the airline.

Originally Posted by LH2004
There is no such "general understanding." The IRS, as a matter of policy, isn't pursuing the argument that miles earned through deductible/reimbursed/employer-provided travel are taxable; that doesn't make that the law, and it certainly doesn't mean that your miles aren't actually yours.
There is non-tax case law on ownership of miles; I've posted the cases to another thread. The miles aren't actually yours, in the sense that you don't have property rights in them. The cases are largely instances where airline T&C have been enforced against ticket brokers. For example: airlines can revoke your miles at any time and your legal recourse is limited; airlines have successfully resisted efforts in court to characterize airline miles as personal property (and thus litigated under a property regime); and the IRS has determined in (albeit limited circumstances) that basis in mileage is zero. To clarify, the consistent general understanding to which I refer is that miles are creatures of contract, not property (my language was imprecise in an effort to explain to those unfamiliar with the legal distinctions).

There's no good reason you couldn't deduct the fair market value of miles you had held for more than a year, regardless of your basis.
Here you have a valuation problem. If you sell the miles, you have a good argument for FMV. Here's an analogy to clarify. Let's say you collect 1,000 50-cent off coupons through your purchase of groceries. The coupons clearly state no cash value. You donate these coupons to the food bank. Do you get a deduction? What's the FMV of coupons with no cash value. What about if they are traded on eBay? One way to think about this (and one way the IRS thinks about these sorts of things) is as a deemed transaction. If I sell the coupons on eBay, I take a taxable gain because my basis in the coupons is zero (now we have an attribution problem). I get a deduction which offsets this income, but the net tax benefit is zero.
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Old Apr 20, 2010, 9:44 am
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Originally Posted by Evan!
Selling the miles is against (most?) airline policies. They consider them property of the airline.
That means they're property you can't transfer, not that they're not yours. That's no different from other things like restricted stock.

They're an obligation of the airline, not an asset: if the airline is insolvent, it can't suddenly make itself richer by doubling the miles in everyone's account.

Anyway, whatever the airline chooses to call the miles themselves, I have certain rights with respect to them, including, subject to availability and all of the other conditions, the right to get a free flight for myself or someone else. That right is mine, and that's what I can give away.
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Old Apr 20, 2010, 9:51 am
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Originally Posted by ldpeters
Let's say you collect 1,000 50-cent off coupons through your purchase of groceries. The coupons clearly state no cash value. You donate these coupons to the food bank. Do you get a deduction? What's the FMV of coupons with no cash value.
Fair market value is fair market value. If an independent third party would have paid 25 cents each, that's the FMV.
What about if they are traded on eBay? One way to think about this (and one way the IRS thinks about these sorts of things) is as a deemed transaction. If I sell the coupons on eBay, I take a taxable gain because my basis in the coupons is zero (now we have an attribution problem). I get a deduction which offsets this income, but the net tax benefit is zero.
If you sell them on eBay, you have gain equal to the excess of the value realized over your basis; your basis may well be zero. If you give them to a sec. 170(c) charitable organization, you can deduct your basis plus the amount of gain that would have been long-term capital gain if you had sold them. If you're not a dealer, and they wouldn't produce ordinary income on a sale for some other reason, and you've held them for more than a year, that means you can deduct their fair market value.
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Old Apr 20, 2010, 11:57 am
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Originally Posted by LH2004
That means they're property you can't transfer, not that they're not yours. That's no different from other things like restricted stock.

They're an obligation of the airline, not an asset: if the airline is insolvent, it can't suddenly make itself richer by doubling the miles in everyone's account.
This simply isn't true. For most purposes, frequent flyer miles aren't property (even if they are an asset). They are contract rights, transferable only pursuant to the terms of the contract. See, e.g., TransWorld Airlines, Inc. v. American Coupon Exchange, Inc., 913 F.2d 676 (the discussion is lengthy, but here's the summation: "In summary, prior judicial treatment of tickets in general and tickets of passage in particular has emphasized their contractual nature. The frequent flyer coupons before us resemble paradigmatic property rights even less than do the tickets considered by those earlier courts.").


Originally Posted by LH2004
Anyway, whatever the airline chooses to call the miles themselves, I have certain rights with respect to them, including, subject to availability and all of the other conditions, the right to get a free flight for myself or someone else. That right is mine, and that's what I can give away.
You do. Those rights are contractual rights, not property rights. This is a really important distinction, as contract rights are much more flexible than property rights.

Because of the way airlines have structured the contract, you really don't have any rights with respect to the miles. Read the relevant T&C. I'll give you two salient examples (emphases added):

AAdvantage:
To ensure you receive credit for your AAdvantage transactions, please provide your AAdvantage number when you make your travel reservations or use the services of our partners American Airlines may, in its discretion, change the AAdvantage program rules, regulations, travel awards, and special offers at any time with or without notice. This means that the accumulation of mileage credit does not entitle members to any vested rights with respect to such mileage credits, awards or program benefits. . . . American Airlines may amend its rules of the Program at any time without notice.
Mileage Plus:
Accrued mileage and certificates do not constitute property of the member.

As we say, RTFC: read the !*@$%*# contract.
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Old Apr 20, 2010, 12:16 pm
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Is there really no basis in miles even if only conceptually not legally? It seems as though there is. One way to conceptualize miles is that they are merely prepaid travel (or prepaid contractual rights to other benefits). We pay for them with a portion of whatever transaction it was that earned them. They arent free. If they didnt exist, wouldnt the cost of travel necessarily go down or airline profits go up?

Consider someone who purchases 4 trips of 5,000 miles each, for $500 per ticket. The 20,000 miles earned gives him a free ticket for a 5th trip. (Just using round numbers here, not realistic ones). Couldnt it be said that all he really did was purchased 5 trips, not 4, for $2,000? I could definitely see the IRS saying that if you want to apportion it this way, you cant declare $500 per flight as a business expense AND $400 for a charitable deduction of the miles. But thats not my point you paid $2,000 for 5 flights. If instead of taking the 5th trip, you give away the fifth trip in the form of giving away the miles, why isnt your basis in what youve given away $400?

It shouldnt matter that miles are not personalty. They are also not gifts. They are earned and paid for in one way or another. Perhaps they are paid for in the promise to use a credit card that gives the lender entitlement to transaction fees. Perhaps they are paid for by some portion of each expenditure that caused you to obtain status, which in turn gave you the miles as a bonus. I get that basis is exceedingly difficult to calculate in many of these circumstances, but does this mean it doesnt theoretically exist? Perhaps the answer that this question is irrelevant, because thats the law. But that doesnt really answer the question whether it should be the law, and I guess I see a pretty firm theoretical and economic basis for saying we all have a basis in our miles (or more accurately, perhaps, we have a basis with respect to the benefit for which the miles may contractually be transferred).

I dont agree that the hypotheticals about cash back or coupons are apt in all circumstances. Suppose a car dealership is selling cars for $10,000 each if you buy one. But, if you buy two, it will give you $500 off of a motorcycle that it would otherwise sell for $2500 and the FMV of which actually is $2500. In one transaction you buy two cars and a $2500 FMV motorcycle for $22,000. Is your basis in the motorcycle really only $2000? Perhaps a tax lawyer will say it is, because thats the law. If it was all one transaction, I would say the economic reality is that your basis in each car is a bit less than $10,000 and your basis in the motorcycle is more than $2000 I think that is a much more realistic view of the purchase transaction. And even though the $500 off, just like miles, was never your property or even a right that you could ever use or dispose of for anything other than buying a $2500 FMV motorcycle for $2000 from that dealer at that time, it seems as though tax law should permit you to make your basis in the motorcycle some number above $2000 (calculation is tricky, but call it $2150) if you give it to charity, so long as you dont claim your basis in the cars is $20k but instead is $19,850. Again, perhaps tax lawyers will say, but you cant. Still seems you should.
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Old Apr 20, 2010, 12:44 pm
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Originally Posted by lkar
Is there really no basis in miles even if only conceptually not legally? It seems as though there is. ...
.
.
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. .... Again, perhaps tax lawyers will say, but you cant. Still seems you should.
When I worked for Block I had to say this many times: "You've convinced me, now you have to convince Uncle Sam."
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