dhuey

You can make that argument and you have. I just hope others here don't rely on it as it has no basis in the tax laws or regs. I've made my arguments for what I think is a reasonable approach to miles and tax law, and I've acknowledged the reasonableness some different ideas others have taken. But to say that miles have a FMV of zero is absurd considering how much money is changing hands when miles are exchanged.

What is your take on the black market of mileage brokers when it comes to FMV of miles? We ignore that active market because it operates in violation of contractual terms? Do you understand that if someone pays you in cocaine for your services, you are obliged to pay income taxes on the FMV of that cocaine, regardless of how that market is operating in violation of state and federal criminal laws?

nsx

Exactly. What makes sense to you and what a court of competent jurisdiction say will not always agree. To believe otherwise is delusional.

This discussion reminds me of the endless debate about whether airlines MUST allow use of hidden city ticketing because "you are flying less than you bought". There are entertaining arguments to be made, but in the end a court will decide. The most valuable bit of information to be found here is accurate prediction of that decision based on actual past decisions. In other words, expert opinions can be taken seriously, whereas arguments from non-experts cannot, no matter how logical they may seem. The law is not always logical.

dhuey

Have you noticed the irony of this situation? Citi has explained its position that the account opening bonus is a "prize or award" that must be reported as income on a 1099-MISC. That's actually a very weak argument -- this is no prize or award. It is rather a checking account opening bonus of the type the IRS specifically addressed in Publication 550 (see posts 234-35, above). Such a bonus is taxable interest according to Pub. 550.

But here's the fun part -- the amount of interest for this bonus "is determined by the cost to the financial institution" (again, Pub. 550). That means that Citi is probably obliged to report its cost for these AA miles. From what I understand, that is very confidential information that neither Citi nor AA would want to reveal. Citi might not have a choice but to reveal it, though.

CodeAdam10

Delete.

dhuey

So...Citi might now be between the rock of its 1099-INT reporting obligations and the hard place of its confidentiality obligations to AA concerning the price paid for those miles. One way out of this mess and the brewing PR problems would be to seek a ruling from the IRS, and quickly.

What started as an incorrect prize/award report on a 1099-MISC could very well result with the most important IRS position regarding airline miles in a decade.

I'm plenty geeky enough to find that really interesting.

ss

Although Pub 550 doesn't make this at all clear, as explained in post #260 "the cost to the financial institution" is used to determine whether a non-cash premium is a "de minimis premium". If not, it must be reported to the IRS by the financial institution (subject to the 1099 reporting limits). The recipient of a premium that is not de minimis is required to report its fair market value.

Yes, there's a bit of a disconnect in the regulations there. But I don't believe it's sufficient to get you out of paying based on the fair market value. At the end of the day, if you're corresponding with an IRS examiner over the amount of interest you reported, I strongly suspect that the only question the examiner will have is: "How much were those bonus miles worth?" The examiner is not likely to understand or care about all of the finer shades of meaning behind such a simple-sounding question. Perhaps the examiner would be willing to stretch the literal meaning of IRS Announcement 2002-18 in your favor, but I'd think that's a long shot.

So if you're going to report an amount of income different from what Citi reported, be prepared to explain to an IRS examiner why that's what the miles were worth. That needn't be a scary thing: just be reasonable about it. And if you plan to state that they were worth zero, be prepared to have the examiner substitute his or her own judgement as to their value.

SirGareth

Answering the four quoted paragraphs below:

a) There is an add in my local paper offering to buy round trip mileage for $150 dollars. However, I received a 1099 for $1000. It appears that Citibank is engaging in tax fraud by overstating the value of what they are giving away. They appear to be giving away a worn out suit and claiming to the IRS that they gave away a brand new Brooks Brothers suit.

b)You are claiming that goods traded in a fraudulent transaction carry the same FMV as goods traded in honest and open transaction? I don't think the people who fence stolen property follow this example. Citibank is misrepresenting itself before the IRS. I suspect they will be held accountable at audit time. Especially with so many eyes having seen what they are doing. It will be harder for them to buy off the politicians on this one as they do in their standard operating mode.

c) The travel is clearly a reward for performance (ie compensation) these trips must be earned, and salesmen who make the sales get both the commissions and the trips as compensation for services rendered. Salesmen who do not make enough sales are not rewarded with this compensation. If the company offering the trips were using the trips to improve sales they would make sure the laggards were invited too.

d) Free airline travel is not "no cost" to the airline. First class accommodation (the usual mode of travel for pass holders) involves free first class meals, free liqueurs and wines and the cost of the additional fuel required to carry passengers and bags; none of it trivial - your example is again most seriously flawed.

In full disclosure, does the author have an employment or financial interest in Citibank?

SirGareth

[QUOTE=Happy;15904670]Actually it is in the fine print about bonus is taxable at Fair Market Value. The Fair Market Value Citi used is an established price AA sells the miles at regular price - so that stands up to IRS rules.

No, this is a fraudulent gimmick, no one buys enough miles to purchase the full amount to travel. Nice try for Citibank but this one will backfire on them. They are trying to pawn off the repairs to a disabled vehicle suitable to make it run as the value of the full repaired vehicle itself.

There is a FMV for these miles; it's what Citibank paid for them and they will not disclose this until they are dragged into court. The lawsuit must be on based on their overall misrepresentations to the IRS and not to your particular circumstances.

This is a great class action lawsuit; It will be taken up as soon as these forums highlight the issue.

SirGareth

Interesting argument, the fact that the sale of cocaine is illegal actually enhances its "FMV." If it could be legally traded its "FMV" would constitute a tiny fraction of this.

As applied to FF miles would the trade of mileage awards actually make the seats far more valuable than seats purchased legally through the airline?

If not perhaps your argumentation is weak and your example is not appropriate.

sdsearch

The important thing is that X<>Y<>Z. Miles has no one specific value. If they did, miles would already be taxable.

Miles aren't taxed not because they don't have a value, but because dont' have a determinable value (not even at a single moment in time, the way stocks, bonds, and commodities do).

Miles (used for airline trips) and hotel points (used for hotel stays) are so valuable to many us (who understand this) exactly because they have no fixed value, and we spend our time figuring out how to extract maximum value.

But that means that for the recipient the value ranges from the value you extracted for the Emirates F ticket all the way down to some poor person who wasn't paying attention and had their miles all expire (it's clearly documented that AA miles will expire with no activity for 18 months) for whom the value is indeed $0.00.

Furthermore, the value the miles have to the recipient have no fixed relationship to the value they had to the giver. A portion of FlyerTalk is built around getting more value out of bonuses than the donor could have possibly gotten out of you doing whatever was required in the bonus.

That makes miles very hard to compare to anything else. The most common things in the IRS world that have no fixed value are commodities and stocks, yet they still have an agreed value at a particular time; it's only if you factor out "particular time" that the value is not fixed. With miles, howeer, their value is not fixed not because it varies over time, but because it varies by if and how you use them (which is not predicatable until use).

There is a possible analogy in something else (non-miles) that could have at least one of these aspects that the IRS could see. If a financial institution gives a coupon or gift card that has an expiration date, then how does the IRS value that? It clearly has at least two values (the face value if used in time, and $0 if left to expire). Just because you can theoretically use it in time we know from experience that not all people do. So does the IRS value it based on the assumption that 100% of them will be used time? If it asseses full face value, does it allow you to amend your tax liability later if you let the coupon or gift card expire?

Andy2

I'm not giving anyone advice, although I find you response a bit harsh. As I detailed in post #236, the one time the IRS was asked to rule on the FMV of a group of frequent flier miles not protected from taxation under the rebate rule, they stated that they would not challenge a valuation of $0.00 per mile. While the IRS might decline to extend that logic to these facts, I don't find their opinion in that ruling to be irrelevant.

From a broad perspective, there are a few other arguments for nontaxable treatment beyond arguing that miles have no value at all. As many posters have pointed, there is the question of whether the recipient has received any property at all.

Further, most of us have been analyzing this as though the miles are a substitute for interest, which they really aren't since Citi didn't issue a Form 1099-INT. The rules for a 1099-MISC are different and they must be treated differently. We got an award for opening an account that had certain stipulations. I haven't read the rules for a long time, but I do know that is why the 1099-MISC was issued rather than the 1099-INT, so the FMV concept applies rather than the cost to Citi.

I was the one that said the rebate rule doesn't apply here, and Citi apparently doesn't think it does either since they issued Forms 1099-MISC, but when I really think about it, I'm not sure that is correct. A customer gets something when he opens an account. The right to store money in a protected environment and/or to trade stocks and financial instruments. If I get 25,000 miles for opening a Citi bank account and I pay them $20 a month because I my balance is below a certain threshhold, aren't my 25,000 miles just a nontaxable rebate that effectively reduces the nondeductible amount I pay for the service I received of them holding and protecting my money. That is exactly how the rebate rule works in every situation that we get miles for buying something at an online shopping mall and get a mileage bonus for doing so. None of us really signed up for these bank accounts with the mindset of earning "interest" in the form of miles.

Anyway, I respect your opinion but a taxpayer is stuck with reporting the gross amount from Citi and deciding whether to take a subtraction for a FMV adjustment, either because the miles are worth less than what Citi reported or because the taxpayer believes the 1099 was incorrectly reported. I'm not giving anyone tax advice, but that subtraction might be between 0% and 100% of the value based on what the taxpayer genuinely believes to be valid. I am not saying that a 100% subtraction is correct, but the opinion that such a level of subtraction is appropriate is not groundless at least in my opinion.

Jasper2

There is no way for anyone to establish a precise value, for all circumstances and at all times, to establish an unarguable, absolute FMV for mileage awards.

I recently attempted to use AA miles for a round trip from MSP to CAE (Columbia, SC). For the dates I needed, the cost for travel--each way--was 25,000 AA miles. Additionally, I would have to pay roughly $50 "service" fee to use the 50,000 miles. So I checked to see what it would cost me on the open market to fly round trip and it was $265.00 including all fees and taxes. Check it out and you will see this price is what you would pay for MSP-CAE round trip for March 27-April 2.

So by deducting the $50 "service fee" from the value of 50,000 miles, I come up with a FMV of $215.00 for 50,000 miles. Yet by Citi's valuation as reflected on my 1099-MISC, those miles are worth $1250.00.

Why is my FMV valuation of 1/4 of a penny less valid than Citi's valuation of 10 times as much? Also, I would have to fly MSP-MIA-CAE and back which would triple the time it would take to make my trip each way, discounting the value of the miles even more, so arguably, the FMV is significantly less under these circumstances. One might even reasonably conclude that under these circumstances, the FMV is LESS than zero.

Jasper2

One more consideration that all the FMV arguments put for thus far fail to recognize is that you cannot purchase a flight segment for any amount not evenly divisible by 2,500 miles. Thus, if I want to purchase a fare, which on the open market might be $101 (or 2,510 miles at 2-1/2 cents a mile), i would have to use 5,000 miles. The lowest unit of purchase is 2500 miles or $100 at 2-1/2 cents per mile. So of that 5000 miles I had to "spend," 2490 miles are worthless, since they won't purchase anything at all.

Isn't the FMV of those 2,490 miles ZERO? If not, why not?

Jasper2

The phantom "taxable income" is no such thing. Citi receives no revenue in the transaction, so how can there be any taxable income? The account will balance as soon as Citi gives away the AA miles--essentially immediately as I can assure you Citi has no "inventory" of AA miles The result is that Citi received no net income to Citi in giving away AA miles in various promo's.

FlyingBoat

My message to Citi.

I received a 1099 INT form valuing my miles at 2.5c per mile. This is insane! You can go to AA website at any time, choose to pay for your hotel with AA miles and see that they value them at 1 cent per mile. This is on their own website and at inflated hotel prices no less!

Here is another example. Last year I used AA miles for a hotel stay through AA.com. The stay was cut short a day because the flight was delayed. AA did not give me back the 20,600 miles for that night of stay. They gave me a voucher for $206 off a different flight! Again valuing their miles at 1 cent.

You are valuing these at 2.5 times their value! You are costing me money by extremely overvaluing their worth. In my tax bracket with your valuation, I pay more in taxes then I get for these miles. Thanks a lot!

Please amend my 1099 to give a correct value. You can't value something like the cost to purchase an incremental amount to get you to the level to buy something. No one would pay 2.5c a mile for their complete trip. It might make sense to do so to buy a few miles to get you up to a certain level.

Its like giving me a glass of water for starting an account, and then valuing it at what a person would pay for a glass of water when stranded in the desert versus someone at McDonald's.