oops. dupe.

nsx, I think the pertinent question is whether the IRS General Counsel would want to wade into this muck. The status quo is very much in their favor as hardly anyone is deducting the FMV of miles in the way I do. If the IRS were to win, they'd get a few hundred dollars from me and a small number of people who take this approach stop expensing business use of personal miles.

If I were to win, all sorts of people would start doing what I do. The financial press, tax professors and tax software companies watch tax cases closely. The revenue loss of an IRS loss on this issue would be large. In short, little upside and huge downside for the IRS to challenge someone willing to fight on this issue.

As for your hypo, I would first try to determine the value of those three RTs without flight credits or the award (X). Then, put a value on the award (Y). Finally, put a value on the six RR credits (Z). Assuming this is personal travel, your adjusted basis in the RR credits would be [$297 / (X+Y+Z)] * Z.

Domiciling the frequent flyer account elsewhere is what I was referring to before; but Germany was not the only European example I was thinking of therein.

To answer your first question, yes some other EU countries are much akin. To answer your last question, yes.

Well, I have posted versions of this same theme for many moons in many different threads across FT, and I find THIS to be one of the biggest issues of all when it comes to miles and points:

CAN THERE BE A WAY to make sure we get all our miles that we sign up for in a timely matter and in full, as promissed, when doing promos and other second and third party activity as marketed to us by the airlines and hotels?

My feeling is that what they SHOULD do is this:

If you signed up to get xxxx miles by doing xxx promo, then you should receive it right away and THEY should go chase their partners. They are selling you things that right now end up more like promissed rebate scams that never come through and they are telling you it's YOU who has to wait when one of their partners delays the process. And this is always their excuse... "the other partner is delaying the process, not us."

Waiting up to 12+ weeks is unreasonable in this day and age. It's bait and switch because we are sold the concept that something we do will reward us. Be it shopping in the airline malls (United being one of the worst for posting correctly and on time) or doing some car rental promo or any of a number of things found in this very part of FT. Sometimes it works, sometimes it doesnt. I find more and more that I must wait and keep thick printed files only to fax and mail things to airline marketing people and wait wait wait for them to post what I should have rightfully gotten weeks ago!

I could go on and on, but what I need to see is law working for me, and no more of this "sorry sir, policy does not allow us to override our own internal stupidy that we all somehow accept blindly for no one's benefit but the very higher ups"

(breathing now)

thank you.
MM

You are an accountant (preferrably a CPA) and/or a tax attorney, that is someone admitted to practice before the US Tax Court, or otherwise specially qualified in tax law? If there is one area of law where "general principles" least avail one, I expect it is tax law. And appellate practice comes in all flavors in state and federal courts, so unless your appellate experience is in tax cases, I think it of little relevance.

You cite a lengthy passage from the IRS playbook on "Personal Property Converted to Business Use," but it is hardly on point here. So you then say,
"Obviously the depreciation part is irrelevant in the case of using personal miles for business expenses," but "the depreciation part" is essentially the entirety of it, and surely you wouldn't tell an appellate panel, "...but the idea is the same."

I don't pretend the knowledge to get deep into this, but I do know a tax partner in a large, prestigious NYC firm and one in a large, prestigious DC firm, and I can't imagine them agreeing with the position you are taking. Of course, that settles nothing, but I would bet a substantial sum against you getting an opinion letter from a competent tax attorney or CPA saying you were right as to the law.

Just my opinion, FWIW, and I freely admit that ain't much.

Let's move away from my resume and toward the matter at hand. The publication I cited above shows the deductability of personal property when converted to business use. That well-established concept is expressed in many publications; I just cited the first one that came up in a search on irs.gov. See also Publication 535, p. 4: "Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you." http://www.irs.gov/pub/irs-pdf/p535.pdf

The question then is what the miles cost you when they came from leisure trips you paid for personally. A particularly easy case would be if you bought the miles for personal use, but later decided to use them for a business expense. Can we agree that in this situation, the cost of the miles used is the amount of the deductible business expense? Good, let's move on.

What about personal travel in which you earn miles? In the typical situation, you pay an airfare and you get two separate things: travel and miles. Since you are getting two separate things, you need to allocate a basis to each. See Publication 551 ("Basis of Assets") at p. 4 ("Allocating the Basis"). http://www.irs.gov/pub/irs-pdf/p551.pdf

Some have claimed that the IRS has stated that miles have no value, so your basis in such miles is zero. That is wrong both factually and conceptually. Above I posted the link to the IRS's position re taxation of employee-earned miles. The IRS does not opine that miles have no value. Such a view would be ludicrous. If one of the major airlines stopped issuing miles for travel but kept the same fare structure in place, passengers would be leaving it in droves.

The miles do have a value, and I submit that what the mileage brokers are willing to pay for them provides the best indication of what that value is. What that value is becomes, in most cases, the portion of your airfare that should be allocated to the miles.

Now if you disagree with any of this, please say precisely what you disagree with and on what authority. Let's dispense with my credentials and what you believe your tax expert friend would probably say.

I agree completely.

If UA, AA, CO, DL, or NW offered the option of paying a greater price to fly a certain itinerary earning miles or paying a lesser price to fly that same itinerary earning no miles, then there might be a case for considering the price difference to be the cost of the miles. But to my knowledge they don't.

And if they did offer that option to earn or not earn miles, would the cost per mile, and hence the deduction he/she could take when using the miles for business travel, be less for the elite earning a 100% or more bonus than for the non-elite earning only the actual miles flown? It would be rather anomalous, wouldn't it, if the elite traveling on a 25K domestic saver award could take deduct only half as much for using 25K of his miles to travel on business with a domestic saver award. The miles would, however, be equally valuable in the hands of a broker, though, who would be indifferent to whether they came faster to an elite or slower to a non-elite.

"Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you." You couldn't buy that personal travel without the miles rolled into the price, whether you had an FFP account to drop them into or not. The airline doesn't split out a price for the miles you can earn, and if they are carried on the airlines books at some very low value, perhaps <$.001 (see story on AC FFP when it was spun off), then why shouldn't the IRS take that as the "official value" rather than what you think a ticket broker would pay for your miles. It would be a different story if you actually purchased miles from a ticket broker, giving the broker actual $s for the miles, and use the miles for business travel, but that isn't what you are doing. If "deduct only what the property costs you" has the more expansive meaning you would give it, one that "deduces" or "imputes" a value based on a purchase that never in fact takes place, then how about some decided cases supporting that interpretation?

If a CPA prepared your returns taking a deduction on the business one and recognizing no corresponding income on the personal one, signing his name to those returns, that would be something. But none did and you seem disinclined to ask one if that approach would fly if you should happen to be audited and the IRS picked up on it. And you aren't going to seek a letter ruling from the IRS on it either, are you? So, I don't think we can take this any farther. (Maybe a CPA or tax lawyer will come along and give us the "answer," along with the reasoning and citations to support it.)

You are limited to deducting the lesser of i) adjusted basis (usually cost) and ii) fair market value. So, for that reason the elite might have a lower cost per mile than the non-elite.

The IRS wouldn't take that view because they understand financial statements. The low value of miles carried on the books of airlines historically is their liability for the miles' redemption, which has nothing to do with fair market vaule. Essentially, airlines treated that liability as the trivial increase in cost of carrying an extra passenger.

Interestingly, United has departed from that accounting approach:

Frequent Flyer Accounting. In accordance with fresh-start reporting, the Company revalued its frequent flyer obligation to estimated fair value at the Effective Date, which resulted in a $2.4 billion increase to the frequent flyer obligation. The Successor Company also has elected to change its accounting policy for its Mileage Plus frequent flyer program to a deferred revenue model. The Company believes that accounting for frequent flyer miles using a deferred revenue model is preferable, as it establishes a consistent valuation methodology for both miles earned by frequent flyers and miles sold to non-airline business partners.

Before the Effective Date, the Predecessor Company had used the historical industry practice of accounting for frequent flyer miles earned on United flights on an incremental cost basis as an accrued liability and as advertising expense, while miles sold to non-airline business partners were accounted for on a deferred revenue basis. As of the Effective Date, the deferred revenue value of all frequent flyer miles are measured using equivalent ticket value as described below, and all associated adjustments are made to passenger revenues.

(United's most recent 10-K at p. 53, available at http://www.sec.gov/Archives/edgar/da...25698_210k.htm )


The purchase did take place. For an airfare, I got travel and miles. I've already cited the IRS publication on allocating basis, so there no need for cases holding that you allocate basis to the components of a lump sum purchase.

If you think there's an "answer" to this question, you are ignoring the implications of how no case, statute, regulation or IRS publication addresses it directly. In such a situation, you have arguments, some better than others. You have no "answer".

What tax advice would you offer this person who wants to take a deduction on his business return based on the value he imputes to miles and doesn't want to report the miles his sole proprietorship purchases from him as income on his personal return: ...the person joins an FFP and the first miles into his account are 25K for opening a credit card account, that the exact number of miles redeemable for a domestic saver award. Then he flies 25K miles on the airline, making him an elite and meaning he will earn a 25% RDM bonus subsequently. Now, he uses 25K out of his account for a ticket he uses for business. A broker is offering 1.5 cpm. How much can/should he treat as a deductible business expense on his return?

Would you advise him in the future, when he is getting 125% RDM, that he should then take less of a deduction because his "cost" of miles will be less, or will his "cost" for RDM stay the same and his "cost" for the flights themselves go down though he may pay the same ticket price then as now? How would you tell him to handle the RDM earned from any business travel he might do on a paid ticket, should he recognize those miles as taxable income?

Do you prepare your own tax returns?

As I understand it, no contract would have ever formed. In order to have a contract there must be an offer by one party and an acceptance by another. The old Frequent Flyer program seems more like a benefit that DL made available to customers for free. Since there was nothing of value given by the customer, the program carried no contractual obligations. Do DL is free to modify their behavior without any legal liability. Although they may have promised not to take away the extra benefits attached to the old FF miles, it is very difficult to enforce a promise. Generally a party would have to demonstrate that they relied on that promise to their detriment. I don't think this would be possibly be actionable (and probably still pretty tough) until someone actually had their miles expire. Even then DL would have a solid defense in the fact that they gave fair warning that FF miles were being converted to skymiles.

I would be interested to hear other thoughts on this and/or any info from the IBA conference.

1. Re: divorce - anyway to keep miles, lodging points out of a divorce case.. how about if they were all or mostly awarded for biz travel hence could you claim they belong to the company you work for? No I'm not getting a divorce but I've always wondered

2. Using miles for travel for medical service, For example, by voting in the AA road warrior contest I had to agree to the T&C's which stated the 25K award was worth like $625.. if I used 25K miles to go to a hospital where I have to fly too to do a medical procedure, could I deduct the same value aa places on them when they give them out.. in other words deduct 625.00 on taxes for airfare and use the t&c's where they state this is the value of 25,000 miles as my supporting documentation?

thanks

Using classical law text definition of contract - it is a contract. In exchange for the promise of upgrades, better seats, free flights, etc. the customer to his detriment forgoes flying other, often cheaper airlines, and directs his business to the specific airline who to airline's detriment suppose to deliver on the promises.
If it is a contract - than the usual: "we can change, close or do anything we desire" without consumer agreement is not a valid clause in the contract.
Result of broken contract at USAirways:
(1) Promised - "our miles never expire" - now they expire in 3 years.
(2) Promised - "Chairmen prefered get unlimited upgrades" - but becasue the number of 1st class seats was severly reduced - they are almost impossible to get;
(3) Promised - " Chairman's Pref. get once a year free Bus Class upgrade for 2" - now it is only if the fare paid is min. $1,200; same for mileage upgrades for the rest of frequent fliers;
(4) Promised - "miles can be used on Star Alliance" - but availability of Star Alliance to USAirways members is getting limited (in business or 1st) becasue USAirways is unable to reciprocate due to its cut in number of front cabin seats.
And many more.

If the miles/points in fact belong to the company you work for, then there would be nothing for you to part with. You can't be compelled to hand over to a soon-to-be ex-spouse or anyone else that which isn't yours. But if the claim that you don't own/control those miles/points, that a business you yourself do not own/control does, is a bogus one, forget it.

see the back and forth below between dhuey and myself about this. I think definitely not, especially your 25K is worth $625 because that is the value UA assigns them, but dhuey differs with me, at least with regard to the deductability of the "expense."

$625 for 25K miles works out to 2.5 cpm, but you might have earned them for less. (In July, with the help of the wonderful "triple miles" bonus, I earned a goodly number of miles, as well as EQM, at a cost of 1.3 cpm, and they threw in the flights themselves for "free.") Even if this approach to income taxes was a legally sound one, why wouldn't the cost of the least expensive ticket for the itinerary you flew be the metric rather than the value stated by UA in the announcement of that contest? (No, not going to go into the miles that would be earned doing the business travel on a paid ticket, nor basing it on the "least expensive" ticket, etc.)

And TrojanHorse, I think it would be very imprudent for a self-employed high earner to try for such a deduction, even if your accountant was willing to sign your return. Self-employed high earners are among those most likely to be audited by the IRS.

You want it to be a contract, but at the same time you say it can't be a contract as written, that is with "we can change, close or do anything we desire" in there. Why wouldn't a judge say it is in there, and it is not a contract because according to its own clear, unambiguous terms stated at the outset, there is no enforceable promise? Not likely to prove a winning legal argument.