dhuey

I don't think the fact that miles are often wasted is very pertinent to placing an FMV value on those miles. Lots of items of substantial value go wasted.

Andy2

Part of my irritation with Citi for breaking with the banking tradition of not issuing 1099s for miles is the long-term complications that arise when miles are considered taxable. If a taxpayer doesn't discount the value of miles now, what are the consequences if they do go unused? If someone reports $625 of income from the receipt of miles and they expire unused, most tax practitioners would argue that a taxable loss is generated upon expiration. But where? Entering a negative amount in a later year on the Other Income line is certainly a strange entry, much different than entering a negative amount to simply reduce a corresponding positive amount in the same year. Some would take the loss on Schedule D, but the long-standing IRS resistance to a charitable deduction for miles probably keeps the miles from getting capital asset status. There are no good answers, other than the fact that no financial institution other than Citi does this.

dhuey

Why would letting miles go to waste be a loss of any kind for tax purposes? Unused miles seem to me no different than any other sort of personal property that goes to waste.

Andy2

To me, when Citi make it investment income, they give it basis and make it an "investment asset" rather than a "personal asset", although I could certainly be wrong. There is a deduction for early withdrawal penalties on certificate of deposits that I would use as an analogy, although it isn't a perfect analogy. They paid interest in the form of miles that Citi claimed to have a value of 2.5 cents per mile. AA makes it clear that those miles cannot be converted to cash and the only way to utilize the value is to use the miles to book a flight or hotel. If the miles expire without being converted to actual value, it would seem to me that a loss is in order if tax was paid on the 2.5 cents per mile. Of course, the IRS could argue that miles are always a personal asset and the lack of use doesn't produce a loss, especially when the lack of utilization is the recipient's fault. I have never really dealt with investment income that is unilaterally valued by a third party but has substantial restrictions regarding conversion to useability, let alone what happens if the conversion to useability never occurs.

The IRS was pretty wise to hold that the administrative hassle isn't worth the attempt to value the miles in the limited circumstance that it ruled on. Although that IRS ruling is inapplicable in this situation, Citi should have respected the logic, in my opinion.

Maybe the lack of certainty regarding whether the miles will ever be used serves to help support a greater "valuation discount" when the miles are received from Citi, rather than a "loss" later on if never used?

JATR4

I think that it is possible that Citi is defrauding the U.S. government.

I presume that Citi purchased the miles from AA. They certainly didn't pay 2.5 cpm for these miles. I would be surprised if they paid more than 0.2 cpm.

If Citi paid less than 2.5 cpm how can they value them higher than what they paid? They are taking a tax deduction on the 1099s issued be the bank but are probably taking the same deduction for ALL the miles awarded throughout Citi. Can the basis of the miles that Citi bought from AA be increased?

I would like to be able to buy miles for 1 cent and take a deduction for 10 cents. That would be a nice way to reduce business income.

Andy2

You are certainly correct that if Citi is taking a deduction for 2.5 cents per mile, they would be required to make an accounting entry to also recognize income for the difference between what they paid for a mile and the 2.5 cents per mile.

None of us will ever know if they do this. When I was working to get an amended 1099 from them last year, I asked to speak with someone in the tax department. The representative very confidently informed me that Citi does not have a tax department. I doubt that she was correct about this, but it does reflect the enormous decentralization that seems to exist at Citi.

Personally, I have always believed that the decision to value the miles at the 2.5 cents that a person would purchase the miles directly from AA on a retail basis was made by an outsourced tax reporting operation, probably outside the U.S. It is a very literal reading of the Form 1099 instructions with no consideration for practicality or industry standard. I imagine that when the U.S. tax department prepares the actual U.S. tax return, they only take a deduction for the cost that Citi paid for the AA miles, but that is a complete guess on my part.

azepine00

I am glad the issue is drawing attention:

http://www.latimes.com/business/la-f...1228880.column

(very nice column by David Lazarus)

bocastephen

Doesn't a taxpayer have the right to file an adjusted or corrected 1099 to indicate the correct amount? 10k miles should be no more than $100 of value at 1c/mile, which is the generally accepted industry valuation, no?

Smr1972

Hello,

Per the IRS, frequent flyer miles are not taxable. Citibank refuses to acknowledge this and is basically committing fraud by sending a 1099 for frequent flyer miles and valuing them at such a high price. I have filed a complaint with the Office of the Comptroller and Currency. It would be great if others could do so as well. Here is the website: http://www.occ.gov/topics/dispute-re...omplaints.html

codybear

So what happened with you last year? Were you able to get an amended 1099 or did you file a negative amount on your return?

Redbull3

A credit card sign up bonus is considered a "rebate" off the purchase price. When you open a retail checking account, it is eligible for misc-income and Citi must report it if its over $600. At 2.5 cents per mile, 25k miles is $625 and 40k is $1000 (these are promos citi has had in the past). It is not a coincidence that the new "Citigold offer" in the 2nd half of 2011 has been for 23,500 miles - Citi realized the PR nightmare they will have from the previous offers and wanted to curtail it to only those old 25k and 40k promotions.

How in the world do you guys think Citibank benefits from sending out 1099s? They are only doing this because they have to, legally, based on the value of the promotion they gave out. The terms in the past have said "customers are responsible for taxes, if any." In the begining of 2012 they may go back to AA offers over 25k but they will only do that if they are even more explicit in their T&C (something like, this WILL generate a form 1099-MISC and miles are taxed in the year they are received).

Redbull3

AA values their miles at 2.5 cents, not Citi. What does the purchase price of Citi to AA for the miles have to do with the tax value? Even if they could determine the value, why would they benefit from having their customers pay more money in taxes. Your post makes no sense.

Milezjunkie

Nice article. Clearly the Citibank spokesperson didn't read the 1099 instructions. Here is what is says in respect to awards:

"Box 3. Other Income
Enter other income of $600 or more required to be reported on Form 1099-MISC that is not reportable in one of the other boxes on the form.

Also enter in box 3 prizes and awards that are not for services performed. Include the fair market value (FMV) of merchandise won on game shows. Also include amounts paid to a winner of a sweepstakes not involving a wager. If a wager is made, report the winnings on Form W-2G, Certain Gambling Winnings."

It says to list the FMV for "merchandise won on game shows." I would argue miles are not merchandise nor were they won on a game show. So if Citibank was still insistent on issuing a 1099 for the miles they should not use the FMV since they were not won on a game show.

Here is the IRS ruling for those interested:
http://www.irs.gov/pub/irs-drop/a-02-18.pdf

Here is the key sentence: "Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles."

Andy2

Well, it got complicated.

I had opened many different accounts with Citibank in 2010, two of which offered account opening bonuses. It was the wonderful year that Citi allowed bank accounts to be opened with a Citi credit card at $15,000 - $25,000 a pop and ran the charge as a purchase. By the way, I have a love/hate relationship with Citi. Loved that they gave so many miles from the credit card for allowing the opening of bank accounts with a credit card. Hated that when I closed those accounts, they left two of them open so that, literally, $0.02 of interest would post at the end of the month and a $20 service fee for a low balance posted to the accounts. Disliked the letters that I received threatening to send me to a collection agency if I didn't pay the $19.98 negative balances and disliked the many calls that I needed to make to the call center in Asia to get the negative balances removed.

I realize I digressed, but that is the way Citi seems to work, even in the 1099 situation. It was another love/hate thing.

I received a 1099-MISC from Citi for $750. I started calling and faxing letters discussing my genuine belief that the miles should be valued at $0.00 per mile, based on the many arguments detailed in these various threads and the fact that many other financial institutions offer similar deals for the opening of bank and brokerage accounts and do not issue 1099s. I also cited the Bank Direct example that clearly shows that bank uses a value of $0.00 per mile.

I received a letter back indicating that I would receive an amended 1099-MISC for $500 due to a miscalculation regarding the number of miles awarded. I did in fact receive this amended 1099-MISC. It just so happens that the $500 corresponded to the value of the miles awarded on one of the two accounts that I opened. It is possible that the rep. did not realize that an account opening bonus occurred for two accounts.

I continued to correspond with Citi making arguments that the miles have a value of $0.00 per mile. I also asserted that there should be no such thing as a 1099-MISC for $500, since the minimum is $600 for issuance. If they wouldn't have issued the original 1099-MISC for $500, I shouldn't be punished by receiving an amended 1099-MISC for that amount if they made a mistake by issuing an incorrect original one for $750.

I got a call from a great Citi rep. from the United States. She took my cell phone number and said she would look into the matter and see if she could help. She even gave me her direct dial phone number. She called me a few days later on a Saturday morning and told me I would receive an amended 1099-MISC reflecting $0.00 of income. Back to loving Citi. She seemed to have located this Citi tax department that the telephone representative in Asia did not believe to have existed. Everything in my dealings with her were perfect. Sorry, I didn't keep her name and number.

Many weeks later I received my highly-anticipated 1099-MISC showing $0.00 of income. But follow this closely - I don't know if that is because they agreed that a 1099-MISC should not be issued for less than $600 (but Citi still genuinely believed that I should theoretically report $500 of income on my tax return), or if they accepted the argument that miles have a value of $0.00, or if I was such a pain that they wanted to quit getting my faxes discussing the theories of why frequent flier miles have a value of $0.00 and they should follow the industry set by their competitors. Since Citi issued 1099-MISC for 2011, it would appear that it was reason #1 or #3.

I didn't open any Citi bank accounts in 2011. If the Citi rep who helped me ever reads this, thanks you were great.

pinniped

But miles aren't my property. They aren't an asset that I own, they aren't a currency, they aren't a commodity, and I can't legally buy and sell them on an open market. They aren't a contract, coupon, security, option, prepaid service, accounts payable, or otherwise a binding promise of any sort of future value.

They're legally nothing. That's written clearly in every airline T&C statement in the world. If I annoy the airline in any way, they can erase my miles with one stroke of the delete key. If the airline decides unilaterally to delete ALL of our miles, it can do so. (I think most programs say they'll give six months notice, how kind of them.)

The airlines always own the miles. Therefore, I don't see how they can be considered part of my income or my net worth. It's different from my personal property that I legally own and can have independently appraised to determine a value.

As an FT'er, I like today's system. I don't want to see my miles declared property, because that would quickly lead to an SEC-style government overlord of miles. I'd probably gain the right to buy and sell miles on a trading floor but we'd all inevitably lose every cool loophole, sweet mileage bonus, and "prime" award (think the most expensive and best int'l F itineraries) we all enjoy today. Airlines would have to account for them closer to current trading values (perhaps reduced by some sort of breakage factor), so they wouldn't be able to mint jillions of them the way they do today.

I wish the IRS would rule against businesses issuing 1099's on FF miles they buy to use as a marketing tool.