Frequent Flyer Miles Attributable to Business or Official Travel

Announcement 2002-18

Most major airlines offer frequent flyer programs under which passengers accumulate miles for each flight. Individuals may also earn frequent flyer miles or other promotional benefits, for example, through rental cars or hotels. These promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services, or other services or benefits.

Questions have been raised concerning the taxability of frequent flyer miles or other promotional items that are received as the result of business travel and used for personal purposes. There are numerous technical and administrative issues relating to these benefits on which no official guidance has been provided, including issues relating to the timing and valuation of income inclusions and the basis for identifying personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures. Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.

Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer�s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.

This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.

Dont the feds have better things to do with their time?

I would guess enough people have asked the IRS for a ruling that they had to make one. There, now that is out of the way.

Whew!


[This message has been edited by NoStressHere (edited 02-25-2002).]

What will they think of next??

Posted this on another thread but reposting on this one as it seems more apropos:

I got hit by the AMT in 2001, a bit of a shocker too! My brother did not and made donations of some of the kelloggs products to his local food pantry. Does he have to deduct the value of the 100 mile certs from the donation? This must have been covered already somewhere on FT but my searches haven't turned up anything. If anyone knows where the threads are hiding I would appreciate the info. Thanks.

Yo, V60t, the Feds are hereby admitting that they do have better things to do & are exclaiming, 'FORGEDDABOUDIT!'
Hooray for us!

Mvic, you should post your question at fairmark.com, where experts will likely respond. They tend to be a conservative lot, siding with the IRS on almost all issues, but it's free advice and mostly darned good.

Actually they had to make the ruling because congress changed the rule for federal employess, allowing them to keep their FF benefits for personal use... and of course that led to our brethern in the IRS itself asking if this was now income to all of us Fed FF's out there...

Doomed to Coach

Thanks NSX. Just checked it out,good site.

My take on your original question is to consider an analogy: suppose you buy a piece of real estate at a bargain price, split off a portion to use yourself, and donate the rest. I am not an expert in this, but there are conditions under which you can deduct the fair market value for the donated portion, even if it exceeds the amount you paid for the entire original parcel.

You have a similar situation, in that the FF benefit makes the item worth more than you paid for it. So check up on the rules for donating appreciated property (there are some limitations based on a percentage of your income, and perhaps other limitations), post your findings at fairmark.com, and see what their gurus think.

My non-expert feeling is that you probably get the full deduction. However, once you take that full deduction the cost basis in your FF miles is zero. The IRS could then have a strong argument that you owe tax on the use of the miles. Here is where the recent announcement may come to your rescue. You didn't accept the miles in lieu of payment for services (in a bid to evade taxes), so you may be relatively safe. Without the announcement, I would have said that you almost certainly owed taxes on the miles due to the zero basis. My $.02, worth at least what it cost you. :-)

I'd sure like to see the look on the face of the IRS agent who audits a form (8332?) listing all those donations of property and sees $x000 of magazines! This is a humorous way of saying that these donatinos are a red flag, and the rest of your tax return had better be audit-proof if you try this...