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Outstanding New Academic Article on Taxing FF Benefits

Outstanding New Academic Article on Taxing FF Benefits

Old Mar 25, 15, 4:05 pm
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Outstanding New Academic Article on Taxing FF Benefits

Duke's Lawrence Zelenak has written a comprehensive summary of taxation of frequent flier programs, from the state of the law and enforcement through possible options to start taxing the benefits. It's 46 highly readable pages, and it answers every question you might have. He even cites Lucky.

UP IN THE AIR OVER TAXING FREQUENT FLYER BENEFITS: THE AMERICAN, CANADIAN, AND AUSTRALIAN EXPERIENCES

The most novel point he mentions is that employers could actually benefit from a policy that prohibits employees from earning FF miles on company travel: See footnote 94 on page 39.

There is so much more in the paper that we could discuss here. I urge you to download the paper and take the time to read it. You will become an instant expert in taxation of FF miles.
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Old Mar 25, 15, 7:19 pm
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Virtually no tax on frequent flyer benefits is collected anywhere, and respect for the rule of law ... has been eroded
In terms of breeding disrespect for the law, it is a close call which of these approaches is worse
Umm..a bit much.

I don't think a proper cost-benefit analysis of the revenue generated, offset by the "serious problems of timing, valuation, enforcement," is destroying the fabric of our society.

Not spending X to collect <X in revenue is a smart decision. I think that's a very valid scenario/assumption here. In the prioritization of taxation agency efforts, this falls below the line.

In summary, sounds like an academic's theoretical analysis vs. what's efficient/effective in the real world.

But I agree, an educational read on the subject.
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Old Mar 25, 15, 9:03 pm
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Outstanding New Academic Article on Taxing FF Benefits

now if only someone could write an article on the taxation of miles and points bloggers and remind them that a blog post (or 17) about a leisure trip doesn't make the trip a "business expense"
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Old Mar 25, 15, 9:33 pm
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Originally Posted by nsx View Post
Duke's Lawrence Zelenak has written a comprehensive summary of taxation of frequent flier programs, from the state of the law and enforcement through possible options to start taxing the benefits. It's 46 highly readable pages, and it answers every question you might have. He even cites Lucky.

UP IN THE AIR OVER TAXING FREQUENT FLYER BENEFITS: THE AMERICAN, CANADIAN, AND AUSTRALIAN EXPERIENCES

The most novel point he mentions is that employers could actually benefit from a policy that prohibits employees from earning FF miles on company travel: See footnote 94 on page 39.

There is so much more in the paper that we could discuss here. I urge you to download the paper and take the time to read it. You will become an instant expert in taxation of FF miles.
I wouldn't really call it an academic article, nsx. It is not a detailed analysis of the law like several articles in Tax Analysts that appeared after the IRS Announcement.

He is extraordinarily biased toward a position that more miles should be taxable and he makes questionable assumptions to validate his bias. We all know that Citi did in fact significantly change its terms and conditions when it stopped issuing 1099s. The customer had to start using a debit card to buy a certain amount of goods and services in order to qualify for the mileage bonus, purportedly reclassifying the bonus from a possible interest payment to a possible nontaxable rebate on the purchased goods and services. That would have been a good place to have reiterated his earlier reference of the two revenue rulings commonly called the "rebate rule" guidance, and discuss whether they work the way Citi thinks they do.

If I were in Citi's tax department, I would be pissed that he ignored their substantial changes and said that Citi just got scared of its customer's wrath and decided to break the law like its competitors do (in his opinion).

I'm glad you were impressed by the article. If he is that angry that people who travel on business and/or open a near zero interest rate bank account might be getting an inappropriate tax benefit from the miles they earn, we should tell him about Manufactured Spending and how far most people want to stretch the rebate rule in that context. He would go on a crusade.

Last edited by Andy2; Mar 26, 15 at 5:20 am
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Old Mar 26, 15, 5:12 am
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Originally Posted by Andy2 View Post
Originally Posted by nsx View Post
Duke's Lawrence Zelenak has written a comprehensive summary of taxation of frequent flier programs, from the state of the law and enforcement through possible options to start taxing the benefits. It's 46 highly readable pages, and it answers every question you might have. He even cites Lucky.

UP IN THE AIR OVER TAXING FREQUENT FLYER BENEFITS: THE AMERICAN, CANADIAN, AND AUSTRALIAN EXPERIENCES

The most novel point he mentions is that employers could actually benefit from a policy that prohibits employees from earning FF miles on company travel: See footnote 94 on page 39.

There is so much more in the paper that we could discuss here. I urge you to download the paper and take the time to read it. You will become an instant expert in taxation of FF miles.
I wouldn't really call it an academic article, nsx. It is not a detailed analysis of the law like several articles in Tax Analysts that appeared after the IRS Announcement.

He is extraordinarily biased toward a position that more miles should be taxable and he makes questionable assumptions to validate his bias. We all know that Citi did in fact significantly change its terms and conditions when it stopped issuing 1099s. The customer had to start using a debit card to buy a certain amount of goods and services in order to qualify for the mileage bonus, purportedly reclassifying the bonus from a possible interest payment to a possible nontaxable rebate on the purchased goods and services. That would have been a good place to include a cite to the two revenue rulings commonly called the "rebate rule" guidance, and discuss whether they work the way Citi thinks they do.

If I were in Citi's tax department, I would be pissed that he ignored their substantial changes and said that Citi just got scared of its customer's wrath and decided to break the law like its competitors do (in his opinion).

Like most people who do not like to get their hands dirty, he makes some simplistic assumptions regarding the valuation of miles, picking a number that is easy to do math with, apparently so we can all see how much more tax the government could collect if the IRS took a more aggressive stance.

I'm glad you were impressed by the article.
I think you have a different understanding of "academic article" than the rest of us. Tax Analysts is not academic. Academic articles are not practice oriented.
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Old Mar 26, 15, 5:42 am
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Originally Posted by Adam1222 View Post
I think you have a different understanding of "academic article" than the rest of us. Tax Analysts is not academic. Academic articles are not practice oriented.
What I meant was that an academic article is an analysis of the law from a disinterested point of view - here is what the law says and here is how it should be applied by the different parties. Since the disinterested writer is only interested in the proper application of the law, he does not passionately advocate for more taxation or openly criticize those (the IRS) who enforce the law for occasionally choosing to subjectively ignore the letter of the law to make the overall system easier to comply with. A disinterested writer is a careful student of the underlying facts when discussing the law, which is why I was so blown away by what he said about Citi's decision to stop issuing 1099s with respect to AA miles. You can tell he did little study of Citi's program. I re-read the article after my initial post and was interested in his analysis of the timing of taxation when "taxable" miles are earned versus redeemed. The hardest thing to reconcile with Citi is the fact that they issued a 1099 for banking Thank You Points when redeemed but issued 1099s for AA miles when earned. Since he so loved dissing Citi for not continuing to issue 1099s for AA miles earned from bank deposit activity, he should have studied that fact so he could diss them some more.

I also questioned his lack of "back of the envelope" calculations regarding miles constituting interest income. He says that miles from opening a bank account are the equivalent of interest income as though that is a given fact. But something is amiss. If the AA miles were worth what Citi valued them at (or even what the author suggests valuing them at), it would make that bank account the highest yielding safe bank account of the decade. I am surprised that any of us could even log on, or get to a branch, to open the bank account since the demand should have been so high amongst yield-starved investors. But we all managed to do so quite easily. Perhaps that says something about the value (if any) of these miles.

That is why I did not think of if as an academic article, but more of a policy change suggestion article. It is an opinion piece that more miles are taxable than are actually taxed, and that more miles should be taxed for policy reasons, with some good citations but with a lot of bias on the author's part as to how the law should be interpreted to support his opinions.

This is what I think of as a great academic paper from a law school person. It is a little bit old, but there is a lot of frequent flier mile discussion and overlap with the one that nsx just posted. Note the well-reasoned thoughts, consideration of a sound workable tax system, lack of calling other people's positions (such as the working condition fringe benefit argument) weak, and the absence of over the top comments.

http://pymnts.com/assets/Uploads/Doi...rd-Rewards.pdf

Last edited by Andy2; Mar 26, 15 at 8:41 am
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Old Mar 26, 15, 11:05 am
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Originally Posted by Adam1222 View Post
now if only someone could write an article on the taxation of miles and points bloggers and remind them that a blog post (or 17) about a leisure trip doesn't make the trip a "business expense"
If they are earning reportable, taxable income (versus hobby income), then absolutely, trips taken and written about are deductible.
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Old Mar 26, 15, 11:47 am
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Originally Posted by Andy2 View Post
He is extraordinarily biased toward a position that more miles should be taxable and he makes questionable assumptions to validate his bias. We all know that Citi did in fact significantly change its terms and conditions when it stopped issuing 1099s. The customer had to start using a debit card to buy a certain amount of goods and services in order to qualify for the mileage bonus, purportedly reclassifying the bonus from a possible interest payment to a possible nontaxable rebate on the purchased goods and services. That would have been a good place to have reiterated his earlier reference of the two revenue rulings commonly called the "rebate rule" guidance, and discuss whether they work the way Citi thinks they do.
Good point on Citi's change.

The position that miles earned flying on an employer's dollar are income is very mainstream among economists. Non-cash benefits from employment normally need to be counted as income. Otherwise employers could compensate you in lupins or something to dodge taxes.

I don't think the principle of taxability of employee benefits is debatable. The article addresses the issues of practicality, law (e.g. has Congress carved out an exemption?) and public perception.
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Old Mar 26, 15, 12:43 pm
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Originally Posted by nsx View Post
Good point on Citi's change.

The position that miles earned flying on an employer's dollar are income is very mainstream among economists. Non-cash benefits from employment normally need to be counted as income. Otherwise employers could compensate you in lupins or something to dodge taxes.

I don't think the principle of taxability of employee benefits is debatable. The article addresses the issues of practicality, law (e.g. has Congress carved out an exemption?) and public perception.
I agree with what you are saying about true employee benefits, but I think there are real questions regarding valuation and de minimis issues. And I objected too much to his writing style to call this the definitive word on the issue, but it was an interesting, thought-provoking read and I appreciate you posting it.

I liked the article that the attorneys wrote on whether miles might be a nontaxable working condition fringe benefits. He cited their piece and seemed to call their argument "very weak". I am sure that will please those attorneys if they ever read his paper.

I'm sure if you ask some business traveler who is staying at a crappy airport hotel and trying to get to sleep while planes take off overhead if he values the miles he gets to keep from employer-provided travel very highly, you might get an earful - even if he someday does get to use them to go to Hawaii.

I think the author might have a higher perception of the value of those miles than many of the actual recipients of the miles might have, and suggesting that greater taxation should occur would not be a terribly popular idea amongst the rank and file business traveler. Given that the author is from Duke, I thought of the really good new ESPN feature "I hate Christian Laettner" when I read it, since the show was really about the common person's dislike of Duke (and its perceived elitism) rather than dislike of Christian himself.

Last edited by Andy2; Mar 26, 15 at 1:26 pm
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Old Mar 26, 15, 1:02 pm
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The author misses a very significant characteristic of most frequent flyer miles that undermines much of his argument. Expiration. Due to expiration, if frequent flyer miles are to be taxed, the only logical way to do so from a timing perspective is at redemption. Which means either (a) required reporting by airlines on redemptions and the equivalent cash price on that day for that exact itinerary in addition to collection and reporting of SSN of the FF account holder OR (b) self-reporting, which will inevitably result in under-reporting. Is the juice really worth the squeeze?
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Old Mar 26, 15, 1:28 pm
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Originally Posted by dukerau View Post
The author misses a very significant characteristic of most frequent flyer miles that undermines much of his argument. Expiration. Due to expiration, if frequent flyer miles are to be taxed, the only logical way to do so from a timing perspective is at redemption. Which means either (a) required reporting by airlines on redemptions and the equivalent cash price on that day for that exact itinerary in addition to collection and reporting of SSN of the FF account holder OR (b) self-reporting, which will inevitably result in under-reporting. Is the juice really worth the squeeze?
Not to mention the difficulty due to commingling of the miles. The IRS is really going to sit there and audit your AA account to see how many of the miles came from business travel vs personal travel, and business spend vs personal spend? What about a sign-up bonus on a CC? What if I sign up for a CC with a 50k mile bonus after $3k spend in 3 months (eg, Citi AA Platinum). Over the next 3 months, I spend $2k in reimbursed business expenses and $2k in personal expenses, and get the bonus. How many of the 50k bonus miles are taxable? Obvious answers are 0%, 33%, 50% or 100%. You could make an argument for any of those.
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Old Mar 26, 15, 2:21 pm
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Originally Posted by Mary2e View Post
Originally Posted by Adam1222 View Post
now if only someone could write an article on the taxation of miles and points bloggers and remind them that a blog post (or 17) about a leisure trip doesn't make the trip a "business expense"
If they are earning reportable, taxable income (versus hobby income), then absolutely, trips taken and written about are deductible.
I think the devil will be in the details. But the standard is "primary purpose." If I fly to a party for a week in Barcelona, with a primary purpose of getting drunk and partying with friends, or a romantic getaway with my partner, or because i have been dying to try First Class on an A380, one or two blog posts about the flight over with some affiliate links thrown in doesn't make it a business trip. If the primary purpose is not business, you get no writeoff. If 25% - 50% of your time on a trip is spent on personal activities, you can only deduct the proportionate amount attributed to business.

For the poster who suggested an academic law article is supposed to be objective, you must not read much legal scholarly writing. It is never written from a neutral perspective (by design).
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Old Mar 26, 15, 5:35 pm
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Originally Posted by VegasGambler View Post
Not to mention the difficulty due to commingling of the miles. The IRS is really going to sit there and audit your AA account to see how many of the miles came from business travel vs personal travel, and business spend vs personal spend? What about a sign-up bonus on a CC? What if I sign up for a CC with a 50k mile bonus after $3k spend in 3 months (eg, Citi AA Platinum). Over the next 3 months, I spend $2k in reimbursed business expenses and $2k in personal expenses, and get the bonus. How many of the 50k bonus miles are taxable? Obvious answers are 0%, 33%, 50% or 100%. You could make an argument for any of those.
He doesn't want the taxpayer or the IRS to do it. He wants to put the burden on the employer through the W-2 or 1099 system. Take a flight either paid for by your employer or reimbursed by your employer, with you getting to keep the miles, the employer will value those miles at an established rate (he suggests 1 cent per mile) and gross up your W-2 or 1099 to reflect it. Same with employer reimbursements of all purchases made with a personal credit card. If you use a mileage-earning card, and you get 50,000 of points from $50,000 in reimbursed purchases, here is an extra $500 on your W-2 and your regular cash pay for the period will be reduced to cover the tax withholdings on the $500. He does not address the sign-up bonuses that occur on credit cards used wholly or partially for business. He got too busy wandering off to Canada and Australia.

It would work. It works for a large number of similar transactions that generally apply to executives such as personal use of company cars and private aircraft. But it would anger a lot of rank and file business travelers and many of them would consider it unfair, based on the real value of those miles in their minds. It would put extra burden on the administrative departments of businesses and their payroll service providers, and likely result in companies keeping the miles and/or not permitting employee reimbursements involving the use of personal reward credit cards.

And we are talking about peanuts in the larger scheme of tax revenue. As I said, I really liked the scholarly law article from the lady who wrote it while a law student at Michigan. She points out many of the same inconsistencies that the Duke guy does, includes more discussions of credit card rewards, and comes to more conclusions supporting arguments for either nontaxable treatment by taxpayers or continued non-enforcement by the IRS.
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Old Mar 26, 15, 10:48 pm
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Originally Posted by Andy2 View Post
It would work.
It would not work. The employer doesn't know what kind of credit card I have. Maybe I use a 1% CB card. Or a 2% CB card. Or a card that earns 1 AA mile per dollar. Or a card that earns 1 VX mile per dollar. Or maybe I am in the middle of a promo and earning double miles. Or maybe I have an Amex Plat that earns 1 MR pt per dollar. Or maybe a PRG that earns 3 pts per dollar on those airline purchases. Or maybe I just use a normal credit card that doesn't earn any rewards. Or maybe I paid cash. Or wrote a check. Or used a debit card. Maybe my debit card earns miles, or maybe not.

All the employer sees is a receipt showing how much I paid. They don't know my method of payment, and they certainly don't know what agreement I have with my payment processor with respect to rewards, should I have one.
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Old Mar 27, 15, 12:05 am
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Originally Posted by VegasGambler View Post
It would not work. The employer doesn't know what kind of credit card I have. Maybe I use a 1% CB card. Or a 2% CB card. Or a card that earns 1 AA mile per dollar. Or a card that earns 1 VX mile per dollar. Or maybe I am in the middle of a promo and earning double miles. Or maybe I have an Amex Plat that earns 1 MR pt per dollar. Or maybe a PRG that earns 3 pts per dollar on those airline purchases. Or maybe I just use a normal credit card that doesn't earn any rewards. Or maybe I paid cash. Or wrote a check. Or used a debit card. Maybe my debit card earns miles, or maybe not.

All the employer sees is a receipt showing how much I paid. They don't know my method of payment, and they certainly don't know what agreement I have with my payment processor with respect to rewards, should I have one.
They don't know now, but if the Treasury Department were to write a regulation disallowing the employer's deduction for the reimbursement if it did not determine whether the employee used a reward card and if it did not adjust the employee's W-2 for any rewards he/she keeps, I am pretty sure your employer would require you to give them the full credit card statement prior to them reimbursing you.

If the author's policy suggestions were adopted, there would a lot more intrusiveness. That is one of the reason's I do not like his suggestions or agree with his assertions that the lack of taxing miles and points makes for a bad tax system.
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