Like GregL I was the lucky winner of 100,000 United Airlines Mileage Plus Miles in the Radisson Hotels and Resorts “Stay for The Fun of It” Sweepstakes valued at $2,500 (2.5 cents/mile). For both contests we have a valuation of 2.5 cents/mile.

I have been entering sweepstakes for years. I have reported adjusted fair market valuations to the IRS in the past, which have been accepted. The key to me seems to be that the sweepstakes valuation is obviously too high and one can show a reasonable alternative valuation with supporting documentation. One should report the valuation received from the sweepstakes sponsor and put in the adjusted fair market valuation to be added in with other income. If one takes a reasonable approach, the IRS is not going to waste it time auditing you further. If one should be picked for audit, the fact that you have reported the valuation from the sweepstakes sponsor and used a reasonable understandable valuation approach should make the audit review go smoothly.

Now the valuation of miles with its many variables is interesting and a not so easy question to answer. By the way I was thinking what other sources are out there to supplement the answers already given in this thread and others from the past? Of course who is the ultimate king of miles? I have sent an e-mail to Randy Petersen via his USA Today column asking him to weigh in on the subject of the taxable valuation of miles won in sweepstakes. Whether he deems it is worthy of his attention is another matter, although I would be interested in his thoughts on the subject matter. Since no one else has mentioned comments by Randy on this subject, I am guessing that perhaps he has not addressed this subject matter in the past.

It so happens that this week I used my 100,000 miles to book a trip with United to Sydney and Cairns in Australia for 14 nights this summer (USA). It will be BOS-ORD-SYD and coming back CNS-AKL-LAX-BOS via Air New Zealand. OK I had to pay $60 to receive 20,000 points from the United VISA Card, because this neat award is 120,000 miles. I will have to pony up the air fare from one of the Australian airlines to get from SYD to CNS. The award ticket allows me one stopover or open jaw. So I picked to head for CNS. It is coach, but the price is right and an opportunity to visit a place with my son that we have never visited. Thank you United for a neat contest and to FT for helping me find out all these neat travel things I would have never known.

So how much would it have cost me to go from BOS to SYD and return? Using the same dates United come up with five options with an average price of $1,445.50 per person or $2,891 for two people. So let’s see $2,891/120,000 miles=2.4 cents/mile. In allocating for the fact that I won 100,000 miles for 5/6 of costs and miles shows $2,409/100,000 miles=2.4 cents/mile. Not an exact science here with the variables, but it seems to be a reasonable ballpark number to play with.

They will issue a 1099, if they haven't done so already, and whatever they list the value is , well, that's the value.

I think one of the things that will be a bit difficult to change is that you said the value was in the rules, which you agreed to before entering, so you are probably stuck with them.

That's what AA sells the miles for according to the posts here, so that's probably how they came on the value.

I once won a mickey mouse tote bag from disney in a stupid sweepstakes, they actually 1099'd me for the $15 value of the bag, and it was enough to bounce me into the next tax level, so I had to pay an additional $18 in tax. I still have the bag someplace.

In tax circles, the fair market value is usually the price that a knowledgeable seller would sell to a knowledgeable buyer, neither being under any compulsion to participate. However, in determining the value, items which cannot be freely transferred are often subject to a lack of marketability discount (which would seem to be relevant in this situation).

Exactly what you agreed to with respect to the Terms and Conditions would be a legal matter. If I were challenging the value, I would go with the "TurboTax approach" of reporting the amount reported on the 1099 on one line and a negative adjustment with an explanation on a different line.

IIRC, Consumer Reports Travel Letter (now out of print) used to suggest a range of value for points. CR is accepted by many (but not everyone) as relatively unbiased, so their estimate of value might carry more weight than looking at the possible things you can or could have spent the points on. You many find CRTL in your local library or the same info may be on ConsumerReports.org.

Since there are several situations in which we pay excise tax on the value of miles (miles on car rentals, AX MR t/f's, etc.), check the values being used in determining the amount of excise tax. If there is an industry standard rate, that would seem to be an important indicator of value.

(As to one of the tangents above)-->if I were in OP's shoes and intended to donate the miles after I received them, I would think that there is at least a position that the miles did have value and that I had basis in the miles equal to the amount I had paid tax on. IIRC, the IRS's position that there is no deduction allowed for donating miles is more of a trade-off for avoiding the issue of taxing the miles. In this case, since the receipt of the miles was taxed, it would seem only reasonable that a donation is allowed. If I were going to take that position, I would donate the 100% of miles received as soon as I received them. No guarantees of success, but sometimes a reasonable position will prevail.

I guess I cant understand how that is possible. The US Tax system is progressive. So if it bumped you into a higher bracket, then it would only cost you an elevated rate on the $15 or whatever part of it was in the next bracket. There would be no way to pay $18 income tax on $15 worth of income. You would have paid 31% on 15 bucks instead of 28% on $15.

Ken in Phx

Ken in Phx, the tax tables are stepped in increments of $50. ;)
Agreement to the terms and conditions is not automatically an agreement with the the donor as to Fair Market Value.

Even if it were, no such agreement has any direct relevance as to actual FMV, except perhaps as one more data point. If the agreed value were artificially high or low, that would certainly not bind the IRS.

Other posters have given able advice on methods of evaluating FMV that will likely pass muster.

Oops, then I stand corrected. Note: THis is not the first or the last time THIS will happen.

You weren't entirely wrong. If you use the formulas instead of the tables, you were correct. If your taxable income comes out near the bottom of a table bracket, as cordelli's must have been, using the formulas will often save a few $$.(If your income is high enough, you have to use the formulas. The tables only go up so far.)

It was a jump from one increment to the next one, using the tables. It was a very long time ago, way before I really cared, but you are correct, I should have used the tables and just paid on the difference.

The buyer's feedback from the auction says "A very thoughtful person, Thank you !!! A plus plus (smile)" so I'm thinking that a typo was made somewhere and that the seller ended up cutting the buyer some slack... 10c/mi is insane.

IIRC, if your taxable income falls within the range covered by the tables, the IRS instructions require that you use the tax printed in the tables.

Edited to add: Some personal experience here: about 15 years ago I tried using the formula tax calculations when it yielded a slightly lower tax than the tables, since I ended up in the lower portion of a table bracket. I received a notice from the IRS that my refund had been adjusted by a few dollars to correct the tax to that shown in the table.

My goof. That's what happens when you use a computer for several years - you don't track that sort of thing, you just trust the TurboTax folks to get it right.

I played with my computer return for last year to see what happens. Sure enough, I could increase my income by about $30 with no change to the tax, but another dollar put it over the line and raised the tax by $15.

on http://www.orderaamiles.com AA sells miles to other businesses at 2.2 cents per. Not much of a difference, but it does show that they sell their miles for less than 2.5 cents.

Think about this
 

There have been a couple of reasonable ways to arrive at FMV offered. Here is one to think about.

You can join Admiral's club for either $450 per year or 100,000 miles if you have no status. If you have status, the cost is somewhat less in both dollars and miles. But the point is, to a reasoable flyer, is this not saying $450 and 100K miles have the same value because they can buy the same thing?

Think about it.

Few people, at least on FT, use miles for AC membership because they find the value per mile too low. There have been threads on this specific point, one of them fairly recent.

The same logic, applied to international upgrades, results in a much higher value per mile. Using that value has also been attacked on the grounds that few of the people who use them would have purchased the upgraded ticket at the usual fare. In my case, at least, that's absolutely correct.

The problem is that there is no single calibration point, AC membership or anything else. The available calibration points vary over a range of at least 20 to 1. Selecting a particular one leaves one open to charges of trying to prove a point by selecting that one and not another. This is a difficult charge to refute, especially if it comes from the IRS and one's tax liability (which taxpayers are understandably motivated to minimize) is at issue.

Randy Petersen via his USAtoday.com column I believe tomorrow (February 1, 2005) will weigh in on the subject of the taxable valuation of miles won in sweepstakes.

Here is the link:

http://www.usatoday.com/travel/fligh...sk-randy_x.htm