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[Consolidated] 1099s for miles & cash rewards from all banks

[Consolidated] 1099s for miles & cash rewards from all banks

Old Feb 4, 2012, 5:21 am
  #406  
 
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Originally Posted by BF263533
This is a fair analysis.

Citi needs to fire quite a few people. American needs to re-evaluate their affiliation with Citi.

Did Citi make adequate disclosure on the account application?

Letting banks like Citi survive was a real big mistake. That place is run by people lacking practical and common sense.

Is there a link on the American board alerting AA's FFs ?
+1
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Old Feb 4, 2012, 1:44 pm
  #407  
 
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so how big a first purchase would people recommend for a certain *A or major hotel chain's cc that offers a slug of milavios when a person chooses to use that plastic initially?
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Old Feb 4, 2012, 6:19 pm
  #408  
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From what I've seen Citi was right to file 1099s, but they made two mistakes: i) they should filed 1099-INT forms (rather than 1099-MISC) and ii) the FMV of the miles should have been way lower -- probably somewhere between 1 and 1.5 cents per.
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Old Feb 4, 2012, 10:48 pm
  #409  
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Originally Posted by Andy2
Miles for opening and maintaining a bank account are different from several of the activities you describe.

The opening and maintaining of a bank account probably doesn't fall under the Rebate Rule.

Personally, I believe that miles issued in increments of less than 25,000 at a time have no value. Bank Direct must take this position, and I believe it is correct. A recipient simply cannot do anything of value with a small amount of miles and the miles may expire unused. If a person receives a one time award of 25,000 - 50,000 miles, it would logically have some minimal value since a ticket could be booked, but the value would seem quite small due to the lack of availability of flights using the lowest mileage threshhold. That is just my opinion. I don't know what the value is, I just know it is not 2.5 cents per mile.
from Andy2's first post - thanks for the continued posts ^
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Old Feb 5, 2012, 9:35 am
  #410  
 
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First, we have income miles vs rebate miles. Income is when you park your money and don't have to spend anything to get miles. Rebates are when you have to spend to earn miles.

Originally Posted by Andy2
How could someone write an article on this subject and not bring up the concept of the fair market value of a mile?
For me, I think they should be valuated at whatever the consumer can redeem them for in cash. For example, 25,000 ThankYou points only gives you $175 cash. Make them 0.7 cents per points then.

The AAMiles are much harder to valuate because you don't necessarily have a clear redemption value. Still, I don't they 2.5 cents per mile is right... At most, perhaps 1 cent per mile.
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Old Feb 5, 2012, 11:22 am
  #411  
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Originally Posted by sunk818
For me, I think they should be valuated at whatever the consumer can redeem them for in cash. For example, 25,000 ThankYou points only gives you $175 cash. Make them 0.7 cents per points then.

The AAMiles are much harder to valuate because you don't necessarily have a clear redemption value. Still, I don't they 2.5 cents per mile is right... At most, perhaps 1 cent per mile.
Your post makes me think of United States v. Cartwright, 411 U.S. 546 (1973). There, the Supreme Court had to determine the fair market value of mutual fund shares in the early days of that industry. Back then the mutual fund shareholder could sell shares back to the company for $x/share, and this was the only way the shareholder could sell the shares.

The government in Cartwright sought a higher FMV for the shares so as to increase the estate tax liability. It argued that the FMV should be $y/share, which was the price at investors could buy the mutual fund shares. This "retail" price for the shares included a sales load, which could be as high as 8%.

The court rejected the government's argument and agreed with the estate representative that the price at which the shares could be redeemed is the correct FMV.

I think Cartwright supports the argument that Citi's FMV of 2.5 cents per is not the proper FMV. Sure, it's the "retail" price at which consumers can buy miles, but Cartwright teaches that this is not necessarily the FMV. I think a more appropriate value would focus on what holders of miles can receive when they sell or redeem miles.
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Old Feb 5, 2012, 3:38 pm
  #412  
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Originally Posted by Kagehitokiri
from Andy2's first post - thanks for the continued posts ^
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

Last edited by Andy2; Feb 5, 2012 at 4:25 pm
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Old Feb 6, 2012, 11:52 am
  #413  
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Another article about the Citi 1099s, with quotes from a law professor who authored a treatise on tax law:

New: Taxation of Frequent Flier Miles

http://www.forbes.com/sites/baldwin/...t-flier-miles/

He weighed in on FMV:

Worse, the bank evidently came up with the lavish valuation of 2.5 cents a mile. Ridiculous, says Dominic Daher, co-author of a West hornbook on tax law and adjunct professor of taxation at the University of San Francisco; the fair market value of miles is more like a penny each.

---

While this professor explains how to adjust your return to this penny per mile FMV, there is nothing in the article about why this FMV of a penny is reasonable. I think there is a good argument to make for a penny per mile FMV, and I wish we had seen it here.
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Old Feb 6, 2012, 12:17 pm
  #414  
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Originally Posted by dhuey
Another article about the Citi 1099s, with quotes from a law professor who authored a treatise on tax law:

New: Taxation of Frequent Flier Miles

http://www.forbes.com/sites/baldwin/...t-flier-miles/

He weighed in on FMV:

Worse, the bank evidently came up with the lavish valuation of 2.5 cents a mile. Ridiculous, says Dominic Daher, co-author of a West hornbook on tax law and adjunct professor of taxation at the University of San Francisco; the fair market value of miles is more like a penny each.

---
I liked that the author got his hands at least a little bit dirty and talked about values and how to do the tax forms. The other articles by "tax experts" were the classic professor types who quote some statutes and run away from how to actually do a tax return, and I liked that they pointed out that Fidelity is doing it differently, i.e. "correctly" in my opinion by valuing the miles at an amount that doesn't require a Form 1099-MISC.

While this professor explains how to adjust your return to this penny per mile FMV, there is nothing in the article about why this FMV of a penny is reasonable. I think there is a good argument to make for a penny per mile FMV, and I wish we had seen it here.
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Old Feb 6, 2012, 2:42 pm
  #415  
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The article from my link two posts up goes over how to do a Schedule B (interest) adjustment to lower the reported FMV of the miles. However, recall that Citi inexplicably issued 1099-MISCs, claiming these miles are a prize or award. That compounds the mess Citi made for its account-holders.

This should have been reported as interest on a 1099-INT. A "prize or award" could be a lot of things, but it can't be something anyone can get as a bonus for opening an account. I looked at the statute, the reg and summaries of cases involving prizes and awards, and every time the prize or award involved some sort of random drawing or accolade for the taxpayer. In other words, someone was either lucky or special -- never simply signed up for a deal available to anyone.
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Old Feb 6, 2012, 4:51 pm
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Originally Posted by dhuey
The article from my link two posts up goes over how to do a Schedule B (interest) adjustment to lower the reported FMV of the miles. However, recall that Citi inexplicably issued 1099-MISCs, claiming these miles are a prize or award. That compounds the mess Citi made for its account-holders.

This should have been reported as interest on a 1099-INT. A "prize or award" could be a lot of things, but it can't be something anyone can get as a bonus for opening an account. I looked at the statute, the reg and summaries of cases involving prizes and awards, and every time the prize or award involved some sort of random drawing or accolade for the taxpayer. In other words, someone was either lucky or special -- never simply signed up for a deal available to anyone.
I would rather have a 1099-MISC than a 1099-INT. The FMV adjustment for a 1099-MISC is easily done on line 21 (Other Income) where the 1099-MISC is entered.

I made the following post previously which describes exactly how to take the FMV adjustment for the 1099-MISC.

"Intuit tax programs (I am using ProSeries) treat it this way. The 1099-MISC amount is entered on line 21 (Other Income) of form 1040 But if you want to do a FMV adjustment you double click (very technical term) on line 21 which opens up the Other Income Form for line 21. On line 3b of that form the amount from line 3 of the 1099-MISC is entered. Line 17 of the form is for Other Taxable Income and is where the FMV adjustment (a negative value) is made). I would suggest something such as "FMV adjustment for American Airlines miles received from Citibank".

As an example it your 1099-MISC had $1000 in box 3 that would be entered on the Other Income Form in box 3b. A FMV adjustment of -$600 would be entered on line 17 (just using $600 as an example).

When the return is printed for filing the 1040 indicates $400 (1000-600) on line 21 (Other Income). It also prints out "SEE STATEMENT L21" to the left of line 21. This Other Income Form prints out as part of the filing copy and is an integral part of the tax return.

This is information that may only be of interest to those preparing their own returns."

Last edited by JATR4; Feb 6, 2012 at 4:55 pm Reason: Content change.
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Old Feb 6, 2012, 6:11 pm
  #417  
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JATR4, I should clarify that the messier part from my perspective is that Schedule B (interest) adjustments are much less likely to ring the computer alarm bells at the IRS. Negative adjustments to interest payments on Schedule B are very common -- you have them whenever you buy a taxable debt instrument at a premium. I am concerned that a 1099-MISC adjustment might be lot more likely to raise electronic eyebrows on the IRS systems.
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Old Feb 6, 2012, 7:54 pm
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Just wonder if anyone knows if the initial Fidelity and TD Ameritrade deposits are immediately swept into an interest-bearing account? I have made these deposits, but I quickly buy mutual funds with the cash.

If Fidelity and TD Ameritrade were required to issue 1099-INTs, it would be quite the data point for a low value of miles as an industry standard in the financial world, since the threshhold for filing 1099-INTs is quite low, like $10 or something.

As SS pointed out, banks might take the position that a Form 1099-INT is not the correct form if the account does not pay any cash interest. As the articles I linked, pointed out, if there is a requirement for the depositor to utilize a service such as direct deposit or bill pay, the Form 1099-INT might not be the correct form. I'm not sure that either of these exceptions is true for Fidelity or TD Ameritrade. If that is the case, neither of these institutions could be valuing the miles at an amount that exceeds $0.00 per mile, since it sure doesn't take much value to get over $10 (unlike the relatively higher value that might not cause a filing requirement for the $600 1099-MISC threshold). If this is the case, we can add Fidelity, TD Ameritrade and Bank Direct to the list of financial institutions that value the miles at $0.00 per mile.

I suppose that Fidelity and TD Ameritrade could cite the letter ruling holding that the miles reduce the basis of mutual funds or stocks purchased with the deposits, but that wouldn't seem correct since some depositors never leave their position of cash.
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Old Feb 7, 2012, 10:06 am
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I received 1099 MISC from Citi as well for an account I opened in 2011. However, when I opened the account I was offered a promotion by the bank manager of receiving $125 OR 25,000 AA miles. I still have that promotion flyer in my possession. According to this offer $125 is equivalent to 25000 AA miles, thus the 1099 MISC issued should have been for $125 and not $625. Can I send a copy of this flyer with my tax returns and enter $125 as MISC income from Citi instead of $625?
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Old Feb 7, 2012, 10:22 am
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Originally Posted by triSSB
I received 1099 MISC from Citi as well for an account I opened in 2011. However, when I opened the account I was offered a promotion by the bank manager of receiving $125 OR 25,000 AA miles. I still have that promotion flyer in my possession. According to this offer $125 is equivalent to 25000 AA miles, thus the 1099 MISC issued should have been for $125 and not $625. Can I send a copy of this flyer with my tax returns and enter $125 as MISC income from Citi instead of $625?
That sounds like a good idea (although it would require filing on paper).
Maybe other people can even use this document to argue with Citi that they should change the 1099 vaulation to 1 cpm.
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