Call the IRS at (800) 829-1040 early in the morning, when you stand a better chance of getting through. Tell them that you received the 1099 and disagree with the amount. Tell them that you've tried to resolve the situation but have been unable. Tell them that you were advised to have IRS complete a Form 4598, Form W-2 or 1099 Not Received or Incorrect. The form is for IRS use only so you won't find it on its Web site.

You'll need to give the IRS the payer information from the 1099 and the details of how you arrived at your figures. The IRS will send the complaint form to the payer, who has 10 days to respond. A copy will also be sent to you. Assuming everything works as it should, you'll receive a corrected 1099 from the payer.

If you don't receive a satisfactory response by the due date of your return, include the amount that you believe to be correct on your return (line 21) and attach the Form 4598 and an explanation. The IRS may later send you a notice of the discrepancy, so keep your records in good shape.

You're certainly not obligated to pay tax on more than the value of the prize but you'll need to devote some effort in straightening out this matter.

But that's just it, a reasonable person wouldn't pay anything for the miles because in a non-clandestine transaction, AA would void the miles immediate because the sale violated their program rules. Accordingly, the purchaser would not receive any value for the miles.

But AA is a monopolistic seller. They could charge $5.00 per mile and probably find some idiots to buy them. That doesn't mean that they have a value of $5.00.

I am kind of just playing the anti-IRS advocate here because I hate taxes.... but it still makes you think.

On a more serious note that the OP may want to consider in his challenge to the IRS: AA can and does sell miles for 2.5� per mile. But, I have to believe that they typically sell those miles to people wanting to top off their accounts for awards. Someone may be willing to pay $25 (forget about the processing fee for now) for 1,000 miles to get to 70,000 for 2 coach tickets to Hawaii. But, that same person would not be likely to purchase 70,000 miles for $1,750 for the same award tickets.

So, while there may be some transaction history at AA to suggest that 1 mile is worth 2.5�, I'm betting there isn't much transaction history to suggest that 50,000 miles can be sold for $1,250.

To support your lower valuation for the FMV of the miles, you might cite the example of www.officialpayments.com. For years, both Delta and United have offered double miles on tax payments through this middleman. They charge a "convenience fee", but what this really comes down to is you are buying miles for about 1.23 cents per.

Search my name in the American Express forum for more details on this, if you like.

Because Sales/Excise tax is completely different from Income Tax.

Shoulda thought of that when reading the terms and conditions of the contest, and the fact that by entering the contest, you accept those terms.

OP - yes, it certainly diminishes the value of the prize in these days of lower fares, but if you truly believe the value of the 50K miles is less than the $400'ish in taxes you will owe, I'm sure you can return/refuse the prize.


The only other alternative I can think of is proving what you actually use the miles for. The fact that you can blow it on $200 worth of tickets isn't sufficient. But if you did go and book coach tickets selling for $99 at the time you use the miles, and have the documentation, and take the flight, then you have an arguement. But you will also be out 50K miles for $200.

While I agree with you in principle, folks at AA will have better things to do and will point out that the value was printed on the entry form. Your other path is with the IRS, and they aren't known to be very flexible in reducing your tax burden. And engaging a lawyer would probably burn any possible tax savings in about a 1 hour consultation. And I can't think of alternatives.

I have to disagree. This is the very definition of value.

I think you'd be laughed out of the office for trying this. You could also claim that since one Visa gives you 1 mile per dollar, while another gives you 1 cent per dollar, that miles are worth 1 cent per mile. Or, if you played Delta's Dash to the Gate, that miles are free since airlines give them away. If you get audited and try this, I'd be willing to bet you get slammed with additional penalties - the IRS has no sense of humor.

Marathon Man: Please review your math. As has been pointed out above, the tax you reference is Sprint (allegedly) making itself whole for the excise tax it pays when buying miles for you. To see the valuation used, you need to calculate as follows: Let "E" be the excise tax rate and "x" be value of a mile. 1000x*E=$1. For example, if the excise tax rate is 7.5% (I believe it is, but please check me on this), then the valuation used is 1.33 cents per mile. While the IRS certainly would not be bound to follow Sprint's excise tax valuation for income tax purposes, it may be a helpful argument.

My apologies if the above analysis is exactly what you were implying. (But somehow I think a man with your penchant for longgggggg posts would have spelled it out a bit more.)

By the way, if you pay a tax of $1 on 1000 miles, then the tax on 50,000 miles would NOT be $500. It would be $50.

The IRS may not have a sense of humor, but they are only entitled to tax based on the fair market value of those miles. I think it would be quite arbitrary and incorrect to use the retail price offered by airlines on their website.

I'm willing to bet that very few miles change hands at that retail price of >two cents. It is widely reported that in business to business transactions (i.e., credit card companies buying), the price is close to one cent. It is also widely reported that large numbers of miles are "purchased" via the double miles tax payment route I mentioned above. It's so popular that they had to cap it at 100,000 bonus miles.

Come back to what we agree on the definition of value -- what someone would pay for something. How many people are willing to pay the 2.75 cents per price? Not many (and almost zero FTers!). How many are willing to pay the effective price of 1.23 cents in the double miles promotions? Quite a few more.

What if you win a home theater from Sharper Image? Are you stuck with their price as the FMV when the exact same system sells for 30% less at Wal-Mart (and W-M sells 100x more of them)?

I checked with tax experts. This is not a new problem. Travel prizes are often valued by donors at full Y fares and hotel rack rates, for example. FTers, and the IRS, know that nobody pays those. So the IRS won't be surprised to hear that you value a travel-related gift lower than its donor.

Suggestions were to report the amount from the 1099-MISC so the IRS computers find a match. Then, either (depending on who you ask) either subtract your adjustment in the next line, or file an amended return with the adjustment later.

In either case, you have to explain the logic behind your valuation. That's easy for a travel award. A travel agent can document what the itinerary ought to cost. (Some will charge a fee unless you're a regular customer, but that's beside the point for this thread.) It's tougher with miles, unless you've already used them for something and can document what that ticket would have cost. Expect to be questioned. A likely outcome is that they'll suggest a compromise between your valuation and the giver's. Take it.

Added later: This is from TurboTax help for 2003 returns. TurboTax is in the "subtract the adjustment" camp. I doubt things will change much for 2004:

Extremely helpful post, Efrem.

An alternative valuation method is to look at the prices paid by brokers who are willing to buy your miles. Yes, such exchanges might violate AA's terms, but this is a real marketplace that is not in violation of any governmental laws (breach of contract is different).

A firm offer for your miles from a broker is very strong evidence of the FMV of your miles.

I think one of the best ways to support a lower valuation for your prize is to use a "miles" contest that has a lower valuation per mile...something like this one I posted almost 3 years ago:

http://svc.travelocity.com/promos/mi...LOCITY,00.html

If you click on the rules, you'll see under "Prize Details" that the ARV is $10,000 for one million miles (any airline) - $0.01/mile.

I don't know if this one is too old to help (the contest ended 3/14/02), but if you can find a newer miles contest with a similar valuation, that may be all you need.

This topic has been discussed in depth on prior occasions.

I think the most helpful is this thread:

http://www.flyertalk.com/forum/showthread.php?t=1451

However, these also are worth a look:

http://www.flyertalk.com/forum/showthread.php?t=3760
http://www.flyertalk.com/forum/showthread.php?t=6144

(Some of the reflexive links won't work, since FlyerTalk has revised the archiving, but the information in the posts themselves may be valuable.)

To get a low valuation why not use the valuation airlines themselves use on their financial statements, which is about 0.1c/mile (actually about $23 per 25,000 miles for Delta) ?

I would argue that since the IRS allows only $0.001/mile as a liability for the airline tax return, they should not tax you at a higher valuation.

Most valuations based on actual economy class tickets overvalue frequent flyer miles, since paid tickets are not subject to similarly strict capacity controls. Thus even if I value them at $0.01/mile when I have a choice between a FF ticket and an actual ticket, many times I need to be much more flexible with dates just to have a chance to get a FF ticket, and any fair market valuation must take into account a discount for this loss of flexibility.

I think you could show that on the "open" market these AAdvantage miles are sold for less. See the listing at EBay - item #2290639693. $499.99 for a 25,000 mile award. Not a big savings over what AA said it was worth, but nonetheless it shows that you could find a lower price for the same miles.

I once won a 100 disc CD changer. The company awarding the prize had it valued at $1,000. As it happened the next model had already come out and the value of the CD player was less than half that. Easy to show the IRS the actual fair market price by enclosing an ad with my tax return.

This will not work. The question is what's the fair market value (i.e., what someone would pay for it in an arms-length transaction)? That is quite different than the liability the same miles represent to the airline. For liability purposes, the airline must record its estimated marginal cost of delivery of transportation for those miles.

Since putting an extra person on a flight results in almost no additional costs for the airline, the miles represent a very low financial liability (note the real opportunity cost for the airline, though, when someone uses miles rather than cash). Again, that really has little to do with how the market values those same miles.

I'd be careful when relying on eBay. Some of the auctions are very skewed, either down (because the seller didn't use enough "search" terms in the heading, or misspelled them) or up (because two folks started bidding against each other without a good idea of what the item was worth).

For example, the Kellogg's AA Miles certificates sell all over the map. I've seen them go for $1 per 100 mile certificate (which would support a valuation of under 1 cent per mile, remembering that you still have to mail the certificates in to get the miles posted to your account) to (believe it or not) over $25 for a 250 mile certificate (which would indicate a valuation of over 10 cents per mile). Most seem to go in the $1.80 to $2.50 per 100 miles range, but there can be some wide variations.