hotelmotel

Where can this option be found? I only see options for trade or exchange.

Here's my thinking:

AA claims they are the owner of all miles, and provides the only outlet to buy or sell miles.

On the day I was issued a 1099 I logged on to AA.com and was offered to purchase miles for 2.0 cents per mile.

Through points.com, miles can be sold back to AA for 0.4 cents per miles.

Thus, the owner and only available transactor of these miles benefits from the arbitrage between 2.0 cents and 0.4 cents, so logic would dictate the FMV sits somewhere between these bounds. Where between them? Who knows. So perhaps I'll just take the midpoint and adjust the FMV to value them at 1.2 cents each. (Of course, if Citi had something something equally as sensical and logical, I never would have received a 1099 at all, given the $600 threshold )

Andy2

Here is my logic on the 0.0 - 0.4 cents per mile.

If I received 25,000 AA miles for depositing $5,000 in a bank over a period of time, I have to place a FMV on the miles in order to pay tax on them. The tax rules say the FMV is what a willing buyer would pay a willing seller for the miles, neither being under the compulsion to buy or sell. There is no market for such a sale of miles, so I have to look at other facts and circumstances. Citi says that market is what AA would sell 25,000 miles to a customer for, but that isn't correct, in my opinion, because the only buyers in that market are flyers needing to purchase miles to top off an account for a large redemption transaction - they are under enormous compulsion to buy. So i rightly reject that market in performing my valuation of the miles.

I try to find out in what market I can legally sell my 25,000 miles for cash without putting my entire account balance at risk. I find this complicated transaction involviing points.com and paypal where I can get 0.4 cents per mile. It is a lot of work and this market can disappear if any player withdraws, but maybe it sets a value.

I ask myself why the IRS Announcement 2002-18 doesn't set the value at $0.00 for this situation. In that Announcement, the IRS said it would not challenge the valuation of frequent flier miles at $0.00 for personal miles earned through employer-paid travel, largely as a result of the administrative difficulties in valuing the miles. The most often cited reason as to why the logic set forth in IRS Announcement 2002-18 doesn't apply is that these miles are essentially investment income earned as a result of leaving the $5,000 on deposit. Several commentators have noted IRS Letter Ruling 9746048, in which a mutual fund investor was required to reduce his basis in the the mutual fund shares by the FMV of the miles he received from investing in the mutual fund.

So logically I calculate the interest that I would have earned in cash had I invested the $5,000 over the same period of time that it took me to earn the miles. Citi does not pay particularly high rates of interest, so this equivalent calculation amounts to only $50 - $75 or so. Granted, I chose miles over cash, so I must place a premium on the miles. But there is a cap to this premium, so I don't think I take that $50 up too much. Otherwise a lot more people would have opened this type of account. Maybe I take the $50 - $75 up to $100 - $125 when I value the miles. Maybe.

I look to see if other banks and brokerages offer miles to open accounts that pay interest. If I can determine what similar players value the miles when performing tax reporting, perhaps that gives some evidence of FMV. I find that Bank Direct, Fidelity and TD Ameritrade award miles in return for opening an account. Many recipients report getting 50,000 or more miles from these institutions without receiving a Form 1099. Importantly, the terms and conditions for receiving the miles from these institutions would seem to require them to issue a Form 1099-INT rather than a Form 1099-MISC. According to various banking articles, Citi seemed to have a reasonable position to issue a Form 1099-MISC. Since the minimum filing threshhold for a Form 1099-INT is $10, unlike the $600 threshold for a Form 1099-MISC, it would appear that Bank Direct, Fidelity and TD Ameritrade value the miles at an extemely low amount, possibly even 0.00 per mile, when doing tax reporting to customers.

That is my logic for the 0.00 - 0.04 range. I could certainly be wrong and it is subjective. Everyone must determine FMV on their own and I think it would be useful if someone set forth the logic for the often mentioned FMV of 1.0 cent per mile.

dhuey

(my emphasis)

This is not accurate. Here's the full announcement -- nothing in there at all about the proper valuation of miles:

Announcement 2002-18

Most major airlines offer frequent flyer programs under which passengers accumulate miles for each flight. Individuals may also earn frequent flyer miles or other promotional benefits, for example, through rental cars or hotels. These promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services, or other services or benefits.
Questions have been raised concerning the taxability of frequent flyer miles or other promotional items that are received as the result of business travel and used for personal purposes. There are numerous technical and administrative issues relating to these benefits on which no official guidance has been provided, including issues relating to the timing and valuation of income inclusions and the basis for identifying personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures. Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.

Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.

This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.

Andy2

OK, but I find it a matter of semantics.

I have to include anything in taxable income that gives me an accession to wealth that I can't find an exclusion for in the tax code or regulations.

There is not really a statutory or regulatory exclusion from income for miles earned and kept by me when I take a flight paid for by my employer. Unlike the miles I earn from credit card spending that I can reduce the basis of the personal property I purchased, instead of recognizing taxable income.

So I must in theory I must place a FMV on the miles I earn from "business" travel and include it in my taxable income. If I pick a FMV of $0.00 per mile, Announcement 2002-18 says the IRS won't argue that I understated my taxable income with respect to that transaction. So I will pick $0.00. Maybe someone else will pick $0.01 to value miles earned from business travel, and pay more tax.

The IRS doesn't make any tax law, they interpret and enforce it. When I discover that I must place a FMV on the miles I received from Citi for opening a bank account (because I can't find an exclusion from taxable income for that transaction), I ask myself if I can place a value of $0.00 on those miles, too. I look to Announcement 2002-18 to see if the logic the IRS applied to that factual situation could also apply to the miles provided by Citi. If so, the IRS might not argue that I understated my taxable income by choosing a value of $0.00.

I don't know if the logic in the Announcement applies to these facts or not. A U.S. Senator has asked the question to the IRS, so if a lawmaker has asked the question to a law interpreter it must be a legitimate question. The miles are definitely hard to value in both situations, but the miles earned from Citi seem to be a substitute for investment income, which is taxable. So the logic in the Announcement might not apply. If not, then I consider how to quantify that investment income.

Dhuey, you make everyone play defense all of the time. I would be interested in your logic and formulas as to why the FMV of the miles are 1.0 - 1.5 cents, which I think is what you asserted earlier.

dhuey

You rarely would have any need to determine the FMV of these miles for tax purposes, but if you ever did, Announcement 2002-18 would not support a valuation of $0. Imagine if you accumulate millions of personal miles from business travel. Announcement 2002-18 makes it clear that you need not report the value of these miles as taxable compensation.

However, if you were to give these miles to someone else, nothing in Announcement 2002-18 would estop the IRS from asserting that gift taxes are due, based on the FMV of the gifted miles. So, it is not accurate to say that if you pick $0 for the FMV of the miles, the IRS won't argue with that -- they might indeed challenge that if the FMV became relevant for tax purposes.

nsx

Here's mine: Every time an airline offers an opportunity to purchase or earn miles at a cost of 1 cent or less per mile, FTers are all over it. Unless they are DL miles.

EsquireFlyer

I agree with this assessment. For example, the IRS sometimes allows people (stated in at least one Private Letter Ruling, not binding on other taxpayers' cases) to take tax deductions for donations of miles/points to charity. In those cases, the IRS considers the FMV to be higher than $0 (or else the tax deduction would be pointless), but I don't remember how they calculated it.

MilesTalk

Finally got my 1099 - for about $740. I looked up my redemption history on TY and it was approx 74,000 points.

Thing is, at least 80% of those points came from credit cards - not banking. Using the banking only policy, my value should have been under $600. Unless they are starting to consider credit card points (i.e. cashback) as income.

I called Citi to ask them to provide a detailed account of how they arrived at $740 *from banking* (no, I had no banking bonuses or the like). They told me I'll receive a response in 5-7 business days. I'll of course report in.

fromfall98

Wow!!! That is simply unbelievable act by Citi!! What are they trying to do? Punish us for using their products / services?

Do you think they would have hit you with 1099 if you redeemed less than $600? Or would they have hit you if you redeemed $350 on Dec. 31, 2011 and then $350 on Jan. 1, 2012?

dhuey

Citi appears to be trying to comply with the tax laws and regs. I think they got the form wrong (should be 1099-INT, not -MISC), and they used way too high of an FMV for the miles. Still, I think they were legally required to file a 1099-INT.

JATR4

ThankYou points, not miles. Valuation seems correct.

And 1099-MISC (prizes/awards) seems correct, also.

dhuey

If you look at the statute, regulation and tax cases involving prizes/awards, you'll see that neither the regulation nor any case involves a benefit available to anyone who signs up for a commercial offer. Thus far, a taxable prize/award has meant you were lucky or special.

I realize "award" is a common term in our world, but it means something very different in the tax world.

JATR4

Receiving TY points for purchases doesn't seem like interest to me; no deposit is required.

I personally would report TY point redemptions on a 1099-MISC.

Andy2

I don't know if you picked this up from Daveland's post, but he received only a small portion of his Thank You points from his banking products, most were from credit card activity. Although the 1 cent valuation might be "correct" in the opinion of some, if Citi used the "value" of the Thank You points he obtained from credit card bonuses and spending in calculating his 1099 income, they did not respect the rebate rule.

What I find interesting is that Citi uses the redemption date as the income triggering event for Thank You points rather than the issuance date. This is different than their treatment of AA miles.

If Person A opens a Citi bank account and receives 25,000 AA miles in Year 1, Citi is sending him a 1099 in Year 1, even if he doesn't use the AA miles until Year 3.

If Person B opens a Citi bank account and receives 25,000 Thank You points in Year 1, and redeems those Thank You points in Year 3, he doesn't receive a 1099 from Citi at all until Year 3.

From a practical perspective I understand why Citi is doing this. They are aware of the redemption date for Thank You points and it is easier to value them at the redemption date. From a legal perspective, I don't believe it is correct. If Citi argues that the intangible points I receive for opening a bank account have value and are subject to tax reporting, they are obligated to send the 1099 to me in the year they provided me with the intangible property.

What is the effect for AA mile recipients who received a Form 1099 but didn't redeem the AA miles? Maybe nothing, but it would appear to be one more argument for a low value of the AA miles at the issuance date. If Citi says their own Thank You points are valueless until redeemed, why wouldn't the same be true for the AA miles they awarded me?

If my tax event is in the Year 3 that I redeem the AA miles, it is up to me to report the correct FMV of those AA miles, even though I wouldn't receive a Form 1099 from Citi in Year 3.

Citi has historically used an averaging formula to determine the portion of Thank You points earned from banking when determining the income on the Form 1099. If it is up to me to do my own tax calculation for the AA miles I redeem in Year 3 of my example, my taxable income from the transaction might be quite low. If those 25,000 miles were added to my 300,000 mile account balance and I redeemed 50,000 miles in Year 3, the portion of the redeemed miles attributable to "banking miles" is quite small, even though I might have to calculate a little bit of taxable income each year I redeem AA miles during the next decade or so.

Long story short, if Citi wants to support their providing of 1099s for AA miles in the year of issuance, they should also be issuing 1099s for the "banking" Thank You points in the year of issuance rather than the year of redemption. If not, it provides some interesting arguments when the recipient of the 1099 for AA miles goes to value those AA miles.

dgordon

I received a citi 1099-Misc for $932.24. I contacted Citibank and then thank you points and they said I redeemed 173,003 points last year. Yes, $1200 in gift cards, the balance for two flights. I was told that credit card points are not taxable but banking points are. Apparently they have a way to figure out that 93,224 points were banking points and the balance were credit card points (including matching flight points). I asked for an itemization of the calculation. They said that they would. I told them how upset I was that there was no way that I could know which points were being used so that I could decide to postpone gift card purchases so that I could postpone those purchases so that i would be under the $600. After going around in circles, I told them I have been a citibank customer for 18 years but this is is outrageous. It leaves me questioning if it worth doing this banking. I am waiting for the detail of my accounting.