Andy2

In retrospect, dhuey, I really appreciate your posts and wisdom on the many aspects of this. I had been biased by the headline reporting regarding the IRS Announcement and I had not read it correctly.

As you have noted many times, it all comes down to FMV, which is subjective, and no two people will ever agree entirely.

Even when a taxpayer describes a method of valuing a mileage program, the IRS does not provide an opinion regarding FMV or the appropriateness of the technique. For instance, I read some TaxAnalysts information on the subject and found this letter ruling issued to a mutual fund that had an "airline" promotional program somewhat similar to Citi's Thank You Points program. In arriving at their redacted FMV of a point, the taxpayer grappled with the same issues all of us have raised, and the IRS gave no opinion regarding the validity of the FMV.

http://www.irs.gov/pub/irs-wd/9920031.pdf

Even if the IRS came out with a bright-line figure, most of us would disagree with it as either being too high or too low, and there would be no way for the IRS to easily update for changes in the miles programs that continuously occur. If the IRS extended the non-enforcement Announcement to "banking" miles, it might create a situation whereby a rich guy who isn't quite wealthy enough to have his own plane might get offers for hundreds of thousands of "tax-free" airline miles as a result of investing millions in a hedge fund. Airlines would then only bother to offer first-class seats as "standard" awards and the rich guys would get them all with their huge mileage balances and the Citi banking customers would be even more displeased. So maybe it is better that things stay the way they are - everyone has to determine FMV on their own - with no change in tax policy.

I have certainly used miles in situations in which I obtained a lot of value. But I can also point to situations in which I extended my Southwest rapid reward certificates so many times that I genuinely paid more in fees to use them than it would have cost me to just have bought the ticket - a negative value. So I simply can't figure out what the value of a given block of 25,000 miles is based on my flying experiences.

There is a bit of irony when a person reads the other blogs. One commenter finds irony in the fact the someone who would argue that miles are often used for valuable trips would argue that a block of miles are worth $0.00 for tax purposes. What I find equally ironic is that a person who agrees with Citi's valuation of 2.5 cents per mile might have received 25,000 miles from Fidelity or TD Ameritrade under very similar circumstances without "self-reporting" a dime of taxable income for the miles received from Fidelity or TD Ameritrade (or Bank Direct). As many commenters have pointed out, it isn't the recipt or non-receipt of the 1099 that controls the determination of taxable income.

aviators99

Looks like it was a bad advertisement on the page. It seems to have been fixed now.

aviators99

Since the antivirus programs are still warning about it, I have removed references to the article.

dhuey

FMV of airline miles is particularly challenging, for the reasons you have outlined. There are plausible arguments one could make for 0.4 cents per on the low end, and all the way up to Citi's 2.5 cents on the high end.

TennisPro

SylviaCaras

I happened to be reading the Fidelity website tax help (I was downloading my tax info into TurboTax): While I know Fidelity is not a culprit in this thread, I found their paragraph interesting enough to share here, in particular that the MISC is not part of the import.

Adjustments to Form 1099–MISC

Information reported on Line 3 (Other Income) of Form 1099–MISC (mailed separately) is not imported into your TurboTax® return. There are many types of "Other Income," and different rules may apply depending on the type of income you receive. The amount on Form 1099–MISC, Line 3 is often reported on the "Other Income" line of Form 1040 along with a description that identifies it. See IRS Publication 525, Taxable and Nontaxable Income, the instructions for your tax return, and/or consult your tax advisor for information on how it should be reported on tax returns and whether any offsetting deductions can be claimed.

MJLouise

All 2011 1099s should have been issued by Jan 31st and received by mid-February 2012.

popot53

Slightly diff. situation. I have asked 5 diff. tax accountants about paying tax on miles that have been sold for cash and they all said that there is nowhere in the tax code that puts a value on miles, so you wouldn't have to pay taxes because its a rebate. Any thoughts?

Xyzzy

Sure -- I'll bite. If you received a 1099 it's fairly certain that the info has been transmitted to the IRS. Arguing with the 1099 issuer (a big bank) is likely to waste your time and lead nowhere. I suggest you simply calculate the FMV of whatever it is that the 1099 says you received. Whether the FMV is 0.5c/mile, zero, etc. is up to you. Write down your calculation and make the appropriate adjustments on the entry for this on your tax return as described above. In the rare event of an audit, you'll have documented what you've done and why. You'll also have filed appropriately (including the errant 1099) so you can't then be accused of fraud. The wrst thing that could then happen in the event of an audit would be to recalculate based on the bank-supplied numbers, which you could still argue were incorrect.

Andy2

I'm a little confused by the question., and those accountants might have been too If miles are truly sold in exchange for cash, a person has taxable income on the difference between the cash he receives and the basis in his miles (the basis is often $0.00). They can check section 1001 of the Code and the Charley v. Comr. case.

The rebate rule applies when a person receives miles as a result of making a purchase of goods or services. This rule keeps a person from getting taxed on the value of the miles since he reduces the basis of the goods and services he purchased. Usually there are no tax consequences to reducing the basis in personal goods or services. This is the rule that keeps credit card mile bonuses (and miles from credit card spending) from being taxable for purchases of goods and services that are never deducted for tax purposes.

It is hard to apply the rebate rule to the Citi banking situation, since it was a deposit of cash that generated the miles rather than a purchase of goods and services. I might argue that the many fees that someone pays Citibank after making the deposit might allow a little application of the rebate rule, but it probably wouldn't help much if the miles have significant value.

dhuey

Like most tax questions miles-related, determining the basis is a pretty tricky question. I've long argued that when you buy an air ticket, you are really buying two things of value: travel and miles. The basis in the miles would be part of the money you spent on the ticket. Exactly how much basis to allocate to the miles is a bit arbitrary, but it is probably close to the price at which you sell the miles, so there is likely no taxable gain on the sale.

So, what about personal miles earned on business travel where you did not pay taxes on those miles when you earned them? You didn't receive these miles as a gift, so the gift basis rules don't apply. This really was a taxable fringe benefit you got, but you legally paid no taxes on it because you heard about Announcement 2002-18 and realized that the IRS is officially looking the other way on that.

Does that mean that these miles have a zero basis? I'm not sure about that, and I have my doubts.

Imagine if there were no 2002-18; you earned personal miles on business travel and paid no taxes on the miles. You later sell the miles to a mileage broker. The IRS discovers this and claims that i) you underreported your income by not including the value of the miles, which are taxable compensation and ii) you failed to report a taxable gain on the sale of the miles, your basis for which is zero. It seems to me that i) and ii) are mutually-exclusive. If you agree to amend your return and include the miles in your income, then you have a positive basis in the miles, so there is probably no gain in the sale.

The bottom line is that this stuff is so hopelessly complex that unless there is a 1099 involved, it is unlikely the IRS would ever bug you for the sort of tax issues ff miles raise for the typical travelling taxpayer.

nsx

I'm sure they have zero basis if someone else bought all your tickets.

The basis question is harder if you bought all your own tickets. Suppose I spend $2,000 on useful (not mileage run) travel and I trade the miles for a painting worth $2000? Do I have a 100% rebate, non-taxable? Do I have a $1000 non-taxable rebate plus a $1000 taxable gain? I claim the former, but there is no firm answer and certainly no guidance for such a situation.

I avoid this question by using my miles for family members. Simply redeem in J or F as needed to keep your balances down.

Incidentally, the credit card bonus game has continued many, many more years than I ever expected. If 1099's were required, the end might arrive very suddenly. We might as well enjoy the game while it lasts and burn those miles as quickly as we earn them.

Andy2

I said the basis if often $0.00, not always. I agree that basis exists in some, and perhaps, many situations.

So as to not confuse the less tax savvy and confuse the person who posed the question, can you, NSX, or anyone think of a situation in which the receipt of cash in exchange for miles would not result in taxable income (to the extent the cash received exceeded the basis in the miles)? EDIT: I didn't see your example dhuey, when I asked this. But it is safe to say that few people report taxable income from the miles prior to selling the miles to a ticket broker, wouldn't you agree?

I have sold miles to ticket brokers (I confess), and I did report the gain (believe it or not), even though I did not receive a Form 1099.

dhuey

Imagine that I do odd jobs for most of my income, and I receive payment in various items of value such as old cars, computers, snowmobiles, etc. I don't pay taxes on any of this stuff, year after year. Is my basis zero in these items? If it is, then I would owe taxes on both the gain from the sale -- the full sales price since it's a basis of zero -- and I still owe taxes on the unreported income in the FMV of these items when I received them.

That can't be right. It seems to me that basis of these items is their FMV when I received them as payment for my services. My tax noncompliance was when I failed to report that income, not when I failed to report a gain on sale (assuming no increase in FMV between receipt and sale of the item).

nsx

Prior year misreporting aside, cash received in excess basis is a gain. But you still have to figure out what is the basis. That's always the hard part. After that it's easy.

OK, you got me on that one.