If a carrier has a local nexus, it is usually the case that you can pursue them on the basis of local laws. Given both that EK operates in Australia and that it actively markets its programs in a way that may be deemed to constitute false advertising per (any) local laws applicable, pursuing EK locally may work; and if a judgment against them is handed down by the local courts then collecting locally may be possible although not necessarily easy. Just because a frequent flyer program's terms and conditions does not necessarily make that true or binding; for example, clauses that say disputes are to be resolved in a jurisdiction, or under the laws of a jurisdiction, of the program operator's choosing should not necessarily dissuade you from pursuing the matter locally.

I swear I heard a story on FlyerTalk about someone procuring an order for a sheriff to seize an aircraft, and when they showed it to a ticket agent, corporate ordered the ticket agent to pay the judgment out of her till.

Or maybe I was just having a really happy dream...

Last year, I used miles I earned via personal travel to buy an air ticket for a business trip. I am a sole proprietor. I deducted what I considered to be the FMV of the miles as a business travel expense (1.6 cents per mile, IIRC).

I looked up the price paid by mileage brokers as the best indication of the true value of the miles. FlyerTalkers are all over the map on what they think miles are worth, but the mileage brokers work in a much tighter range.

What I find curious about arriving at FMV this way is that the whole mileage broker industry is unlawful (not criminal, but contract breaching). I wonder if there is legal precedent for using an unlawful market in determining fair market value.

The IRS issued a position about this years ago: http://www.irs.gov/pub/irs-irbs/irb02-10.pdf They didn't question that the miles have value, but in light of the administrative difficulties surrounding the taxation of employee-earned miles, they decided that they would not consider such miles to be included in income.

Other than that position, the IRS has had precious little to say about miles.

When you "bought" those miles from yourself, then deducted that "cost" on your business return, how did you treat the resulting "income" on your personal return? Did you treat all of it ([1.6 cents] x [number of miles for the award]) as an ordinary gain, one with a basis of zero, since you had not purchased the miles from the airline or anyone else? What advantage was there to doing it the way you did, which I think should have been a wash.

I am neither a tax attorney or CPA, and I claim no expertise on the subject of taxes. I do question, though, the assumptions that seem implicit in the way you treated that anything but arms-length transaction between your sole proprietorship business and yourself. If I am mistaken in my take on it, please set me straight.

If I had pulled out my personal checkbook to buy that business airfare, it would be very simple: the personal dollars I spent on the fare is a business expense. Likewise, if United had accepted a personal coup of chickens in lieu of cash, the fair market value of the coup would be my business expense.

Here, the airline accepted miles from me that were a personal asset (earned via leisure travel). Personal assets used to pay for a business expense are deductible to the extent of the asset's fair market value. By analogy, if you take a personal car and convert it to business use, you can start deducting depreciation and other auto-related expenses in proportion to the car's business use.

I have no doubt on the legal soundness of my position generally, and I doubt very much the IRS would ever challenge me on this. Still, I wonder about the proper way of determining fair market value, for the reasons stated above.

Avoiding a deductible expense you otherwise could have had is not the same thing as having a deductible expense. The logic behind taking a deduction for an award ticket "purchased" with miles you didn't pay for is the same as that behind taking a $500/night deduction for a stay at the Ritzus Maximus when you stay at Motel 6 for $50, or deducting the cost of a steak dinner after eating a PB&J sandwich you brought from home in your room. You didn't pay for a $500 room, a steak dinner, or this plane ticket, though you could have. If you don't spend money, or use something for which you previously spent money and for which you therefore have a cost basis, there is no deduction. Period. How you impute a value to the award is irrelevant: you cannot deduct 5� for it. (Taxes and fees you may have paid in conjunction with it, such as the security screening fee, are deductible.)

You'll probably get away with it unless that part of your return is audited for some other reason, as it's probably not material enough to raise an audit flag by itself, but that doesn't make it legal.

If you had paid for the miles, as in some airlines' mileage purchase programs, that might establish a cost basis and thus justify a deduction, but I'm not 100 percent certain that it would.

(Having said all that, keep in mind that tax advice you get here is worth at most what you paid for it.)

Actually, it's the lesser of fair market value or basis. The issue of basis for miles is not simple. I happen to agree with you in the hypothetical situation you posed, but many others contend that the basis in miles is always zero. It comes down to a question of whether you paid for travel or for travel+miles. If the latter, then you have to figure out how to allocate your fare outlay between the travel and the miles. Given that others paid the same fare and got no miles (because they were not FF program members), you have a serious hill to climb if you want to allocate part of your purchase price to the miles.

Incidentally, deductions for Employee Business Expenses are subject to significant restrictions, including complete denial when computing your Alternative Minimum Tax. Many unfortunate taxpayers who shell out for legitimate business expenses end up paying the whole thing with after-tax money.

Efrem and I, neither of us with professional expertise as tax advisors, agree that your handling of the ticket "expense" would almost certainly not stand up if you were to be audited. Did an accountant or other suitably qualified professional tell you that it would?

Imagine that you see a floral arrangement in a florist's shop and think it would look lovely in your office's reception area. You don't care to pay what it costs though, and it so happens that you know where flowers just like those in the florist's shop grow wild. You hike a great distance and climb a mountain to pick flowers identical to the ones in the florist's arrangement. Back home, you arrange them just as they were in the shop, and very satisfied with the results and pleased not to have spent the money,though you did put a great deal of time and effort into it, you take them to your office the next day. Can you deduct the fair market value of those flowers, what they would have cost if you paid the florist for them from your business' return? Maybe, but only if you reported a corresponding amount on your personal return as income.

THANK GOD!

Yes, me. And you don't have to be a lawyer to work through this. You just have to understand general principles of tax law and applicable statutes and regulations. I have researched this.

As for the audit idea, I'd welcome that. I think the IRS knows better than to do that, though, as I'd be willing to take this to the U.S. Court of Appeals. Given that I'm an appellate attorney, that's no idle threat.

That's where your analogy breaks down. You are adding a big complication not present in the personal miles for business expense fact pattern. Here, someone is using their personal labor to create an asset to be used in the business. That raises questions about whether there is a gain or income to be recognized when that asset is used in the business.

Much more analogous is a simple situation where you take a personal asset (e.g., desk, car, computer) and convert it to business use. See, e.g., Publication 587:

http://www.irs.gov/publications/p587/ar02.html#d0e2758

Personal Property Converted to Business Use
If you use property in your home office that was used previously for personal purposes, you cannot take a section 179 deduction for the property. You also cannot take a Liberty Zone or GO Zone depreciation allowance for the property. You can depreciate it, however. The method of depreciation you use depends on when you first used the property for personal purposes.

If you began using the property for personal purposes after 1986 and change it to business use in 2006, depreciate the property under MACRS.

The basis for depreciation of property changed from personal to business use is the lesser of the following.

The adjusted basis of the property on the date of change.

The fair market value of the property on the date of change.


If you began using the property for personal purposes after 1980 and before 1987 and change it to business use in 2006, you generally depreciate the property under the accelerated cost recovery system (ACRS). However, if the depreciation under ACRS is greater in the first year than the depreciation under MACRS, you must depreciate it under MACRS. For information on ACRS, see Publication 534, Depreciating Property Placed in Service Before 1987.

If you began using the property for personal purposes before 1981 and change it to business use in 2006, depreciate the property by the straight line or declining balance method based on salvage value and useful life.

Obviously the depreciation part is irrelevant in the case of using personal miles for business expenses, but the idea is the same. Your adjusted basis and the fair market value of the personal miles are probably the same. Although you might not realize it, you pay for miles when you travel -- it's not a gift from the airline. Part of your fare is attributable to the flight and part is attributable to the miles. You can see this quite clearly in many examples of discount airfares that do not include miles.

By the way, the flower hypo above isn't as complicated as I thought. If we consider the labor involved in gathering and arranging the flowers to be within the scope of the trade/business, then there is no conversion of any asset. If we consider that same labor to be personal in nature, then there would be a conversion of a personal asset, but the adjusted basis in that asset would be zero.

The key difference with the miles is that there is a substantial adjusted basis and fair market value in those miles.

two issues are clear:

1. Miles earned on business trips belong to the company, unless there is an agreement to the contrary, which may be contained in an implied regulation at the level of the enterprise, the individual employment contract, or - hard to think of - other places. In part, the fact that the miles can be used for third party trips was a reason for this understanding.

2. If the employee gets to use the miles, thatis taxable income. LH has an agreement with the Minstry of Finance to pay a lump sum to cover these. However, there may be situations where there is a taxation: a company requires all employees to hand over their miles, and the company as a bonus pays F class tickets for their best employees. This would have to be taxed. Income is the price of the ticket, as this is gained.

This is the crux of your argument. Again, I agree with it, but many others do not.

Try this example: Suppose you buy three $99 intra-California round trips on Southwest. Under this fall's promotion, you earn a round trip award plus some flight credits. Forgetting about the flight credits, what's your basis in the award? Is it the full market value of an award (on the order of $300)? No, that can't be right because you only spent $297 and you got three round trips in addition to the award ticket. Is your basis 25% of your outlay, since you got 4 trips for the price of 3? No, because the award trip can be used for an expensive long-haul flight and the paid trips were cheap short-haul flights. In my opinion your basis in the award is somewhere between $75 and and $297. Precisely where is a judgment call.

You can see in this example that the question of basis is messy and murky. Do you really want to drag an IRS auditor into this muck?

That is disgusting!!!!! Are other EU countries the same? What about Switzerland?

Is it possible for German frequent fliers to set up an account with a program based outside of Germany, and thereby avoid taxes on miles earned?