EsquireFlyer

Yup. ThankYou points are now F***You Points.

aubreyfromwheaton

How can you find out if a 1099 was issued by Citi?

EsquireFlyer

You get it in the mail.

Andy2

I still can't agree with your analysis. The IRS had to consider valuation in Announcement 2002-18. They can certainly limit their analysis to miles earned from employer-paid flights, however.

The IRS can't make a law. They can't pass a tax exemption from compensation income for frequent flier miles, only Congress and the Treasury Department (in certain situations) can do that. The only way for the IRS to hold that miles earned from business travel are nontaxable without considering valuation would be to interpret that the miles are an exempt working condition fringe benefit or a de minimis fringe benefit pursuant to the Treasury Dept. regulations.

The IRS did not do that. The only way to conclude that the IRS was within its interpretive and enforcement function in holding that the miles earned from business travel are nontaxable is that the IRS held the FMV of miles to be worth $0.00 in that particular circumstance. They reserved the right to change their minds later and provided execptions to this general rule of nontaxability. One of those stated exceptions was the conversion of the miles into cash, which is consistent with the Charley case in which the taxpayer charged his client for first-class travel, paid for a coach ticket, generally used his mile to upgrade, and pocketed the cash difference without paying tax. He was held responsible for the tax and interest on the cash he pocketed by the court, but he did not have to pay any penalties.

I certainly agree that the IRS can limit Announcement 2002-18 to miles earned from employer-paid business travel, but if it does so it has to have a valid reason to place a different value on the miles than $0.00 per mile. In its response to the Citi banking miles question, it has cited its letter ruling 9746048, in which miles were received as a result of opening a mutual fund. The customer received "more" investment income as a result of receiving miles from investing in mutual fund shares and might incur more tax when he sold the mutual fund shares as a result of having to reduce his basis in the shares by the FMV of the miles received.

This is a valid departure by the IRS from Announcement 2002-18, just like it might be in the Citi banking situation. But if the reason for the departure is that the Citi banking miles are investment income, I personally think it is valid to calculate the FMV of the miles based on the interest income the customer would have earned if he opened and maintained a similar Citi bank account that paid only cash interest, with perhaps some premium to account for the fact that the customer favored the miles. This "investment income" is very small in this low-interest environment and the premium would need to pass a sanity test.

EsquireFlyer

This is definitely not the only possibility, and not what happened. The IRS said that due to "administrative issues," it would not challenge taxpayers' failure to report income from frequent flier miles earned from business travel. It was not interpreting tax law to say that FMV is $0 (which is why they don't mention FMV at all); instead, it was announcing that it would not exercise its enforcement powers in a particular context.

For example, a criminal prosecutor has discretion to decide not to file charges against someone arrested for a minor crime because the burden of proof would be too difficult to meet (and the DA's office's limited resources would be better used to fry bigger fish), or only file charges against some, and not all, suspected participants in a conspiracy (because the evidence against them is stronger, or they were the leaders). The fact that the prosecutor did not file charges does not mean that they believe that the action was legal, or that the suspect was innocent.

Similarly, the IRS can decide not to challenge a particular return position or take enforcement action in a particular case, even if it thinks that the position is probably wrong, because of the administrative burden involved in enforcement. And it can announce this position if it chooses to (or decide not to announce it but to reconsider the decision every time on a case-by-case basis). That is what the IRS did in Announcement 2002-18. It did not make a legal ruling that frequent flier miles have a FMV of $0; it simply announced a policy of not going after taxpayers in the limited context of frequent flier miles earned through business travel:

http://www.unclefed.com/Tax-Bulls/2002/ann02-18.pdf

In fact, the IRS declined to resolve the issue of valuation in that Announcement:

(emphasis added)

nsx

Exactly right. Nor did the IRS resolve the issue of taxability beyond what the law says. The IRS simply said that determining the correct tax for miles earned on business travel is impractical so we're not going to do it unless the miles are converted to cash.

Furthermore they said that we are such nice guys that (a) we are going to make this non-pursuit policy official and (b) if we ever figure out how to compute the tax and decide to change this policy we will give fair warning: "Any future guidance on the taxability of these benefits will be applied prospectively."

The IRS most certainly did NOT decide that miles earned for business travel were not taxable (which wouldn't cover miles earned from banking anyway). The clearly worded IRS announcement cannot be read that way no matter how much you wish that to be the case.

Andy2

Thanks for the analysis collegeFlyer and NSX. I had not previously read it in the light of a negative ruling providing a positive result.

dhuey

Exactly -- the IRS simply made an enforcement decision, nothing more.

dhuey

By the way, it's pretty amazing to me how often Announcement 2002-18 has been misinterpreted. I don't mean to pick on you, Andy2 -- we've had some disagreements, but I've never questioned that you are reasonable and that you've put a lot of thought into this.

Ten years after this IRS announcement, we have Senator Sherrod Brown saying:

Furthermore, the Internal Revenue Service (IRS) has made clear that frequent-flier miles are not taxable income. In a ruling made in 2002 - which still stands - the IRS highlighted that frequent-flier miles are not subject to income tax due to the "numerous technical and administrative issues relating to these benefits." Furthermore, the IRS stated that it "will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel."

Most importantly, given the IRS's ruling, why is Citibank sending its customers 1099 tax forms? Reporting frequent-flier miles as taxable income is inconvenient to consumers, raises their anxiety unnecessarily, and is not required by law.

http://consumerist.com/2012/01/senat...le-income.html

This isn't just any senator -- he's the Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection!

I doubt very much that there is a tax law professor in the nation who would agree that Senator Brown's statement above is legally accurate. If he can't get it right, it's no surprise that others will get it wrong.

vortix

You would have received it in the mail by now.

EsquireFlyer

But unlike most of us, he has the power (with others) to simply pass a law which will suddenly make himself right and the IRS wrong. Let's hope he uses it!

NYBanker

This may have been picked up elsewhere, but I posted on this topic earlier this year. <URL REMOVED BY MOD>. A quick read if you're interested...

EsquireFlyer

When I clicked the link, Norton gave me a warning saying that an intrusion attempt by www.sitinfirst.com was blocked (Risk Name = Web Attack: Blackhole Toolkit Website 12). Should I be concerned?

nsx

It dodges the crucial issue: valuation of the miles. Go directly to the linked article instead: http://millionmilesecrets.com/2012/02/11/tax-on-miles/

codybear

DON'T LAUNCH THIS WEBSITE. It loaded a virus/malware onto my machine. NYBanker, please edit this link out of your post.