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Citibank issues 1099MISC for frequent flier miles

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    Citibank issues 1099MISC for frequent flier miles

    Citibank deems frequent-flier miles taxable, but does the IRS?
    The bank is sending tax forms to customers who received thousands of airline miles as a reward for opening a checking or savings account. The IRS should say what implications that has for taxpayers.
    Frequent-flier miles clearly have value — why else would people want them? But do they also represent taxable income?

    Citibank seems to think so. It's sending tax forms to people who received thousands of miles as a reward for opening a checking or savings account. Those forms value each mile at about 2.5 cents and list the total dollar amount as miscellaneous income.
    This is news to tax pros.

    "I've been practicing for 25 years and I've never had an instance where miles have been treated as taxable," said Gregg Wind, a West Los Angeles certified public accountant.

    But he said that because Citi is reporting this as people's income to the Internal Revenue Service, customers may be on the hook for paying the taxes. "Otherwise," Wind said, "your chances of being audited could go up."

    As tax time rolls around, the question of whether airline miles are a form of income is something that potentially affects millions of people. Miles are one of the most common rewards doled out by credit card issuers.

    Larry Fechter, 66, of Palm Springs was among numerous Citi customers who received a Form 1099 in recent days. He opened a checking and a savings account with the bank last summer after being promised 25,000 American Airlines miles.

    "The mileage was a very strong inducement," Fechter told me.

    He said there was nothing in the original sales pitch that warned of the tax consequences of accepting the miles. As such, Fechter said it was a big surprise to get the form in the mail informing him that he has to pay taxes on $645 worth of miles.

    If he were in the 28% tax bracket, that would mean a payment of $180.60 owed to Uncle Sam.

    Adding insult to injury, Fechter said, his new Citi accounts paid less than $4 in interest on the cash he'd deposited.

    "I'm shocked that they want me to pay taxes for mileage points," he said. "I've never had to do that before with any company I've done business with."

    And there's a good reason for that. In 2002, the IRS issued a policy brief noting that because there are "numerous technical and administrative issues" relating to miles, such as how they're valued and used, the agency "has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles."

    "Consistent with prior practice," it said, "the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel."

    In other words, the tax man won't come after you for undeclared miles.

    Or will he?

    Catherine Pulley, a Citi spokeswoman, cited the 2012 instructions for Form 1099-MISC, which state that income tax must be paid if at least $600 in "prizes and awards" is received.

    "The Internal Revenue Code recognizes rewards as taxable income," she said. "This recognition by the Internal Revenue Code is disclosed to customers prior to their election to participate in the promotion."

    Not so much, actually. Buried in the fine print of Citi's letter offering the frequent-flier miles, it says only that "customer is responsible for taxes, if any." That's not quite the same as saying Citi will be ratting you out to the IRS for receiving hundreds of dollars in miscellaneous income.

    So where does the IRS stand on all this? I found the tax agency surprisingly reticent on the matter of miles.

    An IRS spokeswoman told me only that the 2002 policy brief "still stands." She declined to comment on how this squares with the prizes-and-awards provision of Form 1099, or what taxpayers should do in light of Citi's reporting their airline miles as income.

    Wind, the accountant, was stunned by Citi's defense of reporting miles as taxable income. He said he couldn't think of any instance in which miles would be given out except as a prize or award.

    "This opens up the notion that all miles are taxable," Wind said.

    It does. And it's insufficient for the IRS to avoid taking a stand and to say only that it won't go after people for failing to declare their frequent-flier miles.

    At the very least, the tax agency needs to clarify what happens when, as in this case, a business declares your miles as income paid to you. What happens if you don't do likewise?

    As I say, this potentially affects millions of people — virtually anyone with airline miles. It'd be nice to know where we all stand.



    Discuss.

    #2
    Frequent flyer miles. The current position of the IRS is that frequent
    flyer miles used personally by employees that were accumulated
    on business are not taxable. (Announcement 2002-18)
    This was in TTB. Miles might reduce expenses for business.
    I know this doesn't completely cover your thoughts, but just a start.
    JG

    Comment


      #3
      Might be time for him to switch banks. I've wondered if the IRS will go after rewards programs. If you get miles or cash back personally then it's a reduction in the cost of non-deductible expense and so tax free. However if you get cash back rewards for a card you use for business where you keep the rewards personally and the business pays the bill I can see the arguement for taxability.
      In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
      Alexis de Tocqueville

      Comment


        #4
        Contribution of miles to charity is not deductible.

        Hence, the miles received are presumably not taxable.
        Evan Appelman, EA

        Comment


          #5
          I see a big difference here between Citibank's reporting of income and the non taxability of skymiles earned as a result of having already bought and paid for tickets from major airlines.

          In the latter case one "earns" a future discount with the same airline.

          In Citibank's case they must value the premium given to encourage new business. Of course nobody wants a free toaster from a bank any more it seems.
          ChEAr$,
          Harlan Lunsford, EA n LA

          Comment


            #6
            Mileage Credit Cards

            Citibank, Chase, Capital One, etc offer mileage credit cards for annual fee of $85 or so.
            Is that deductible? I don't think so.

            On their statements, they credit mileage earned based on
            1) Air traveled miles
            2) $ amount charged on the cards
            3) Additional incentive mileage for using their preferred vendors.

            A credit cardholder does not get the benefit of those miles unless he uses for flying and thereby reducing his listed air ticket price.

            Mileage credit is just a "Deferred Benefit". Until the cardholder is able to use it and reduce his air ticket price, and derives the $ benefit. A "taxable event", in my opinion, has not occurred.

            Granted that taxable benefit was derived, but that benefit comes from Airline Company, not from credit card company. Because, Airline Company reduced the price of air ticket.

            Also important question is does the credit card company offer "Cash $" for redemption of mileage, in which case issuing Form 1099 makes sense.

            Let us look at this scenario:

            In "Wheel of Fortune", Price is Right" and host of other TV game shows, winners get prizes both $ amount and materials and services. I believe they get Form 1099, if it is over $600.
            If they reject these prizes, I don't think they get Form 1099s, even though they won it or earned it.

            Let us look another scenario:

            If a business hires a contractor, and he performed the job, and the business is unable to pay for his services, for lack of funds or any other reason, that business cannot issue Form 1099 until it pays the amount to that contractor.

            To me it appears, that Citibank has created jobs for "some people" for record keeping, data storage, and other related work, at the cost of taxpayers.

            But they sure opened up a can of worms for tax payers.

            Thank you all, It was very interesting topic to think.

            Comment


              #7
              I'm making a note never to get a CITIBANK card. Are the 1099's going out for the miles used or just because they got them? This is insane. There will be a riot and they will have to resind this but for now if the TP doesn't report the 1099 the IRS letters for under reported income will come a flying!
              Believe nothing you have not personally researched and verified.

              Comment


                #8
                It's on Business Insider today:

                "A man that holds a cat by the tail learns something he can learn no other way." - Mark Twain

                Comment


                  #9
                  Those miles are not worth anything unless they are USED. Just being credited with miles does not merit constructive receipt, in my opinion, as in many cases they can expire. I see a court case looming on this one.

                  Comment


                    #10
                    Frequent Flier Miles

                    This is certainly uncharted waters. Personally I would love to get some of these cardholders as clients, and fight the issue.

                    With that being said, the fact pattern may be getting a little garbled somewhere in the media...

                    The article in the Los Angeles Times says that

                    [Citibank] is sending tax forms to people who received thousands of miles as a reward for opening a checking or savings account. Those forms value each mile at about 2.5 cents and list the total dollar amount as miscellaneous income.
                    The bank's decision to issue a Form 1099-MISC may be limited to those who received a special allocation of miles as an incentive for opening a new account.

                    Getting a toaster as a "free gift" for opening an account has been the butt of jokes for the last twenty years. But this type of "gift" has always been taxable. Many banks simply offer cash incentives. When the incentive is tangible goods, such as a toaster, the fair market value is taxable income.

                    That doesn't mean I agree with Citibank's accountants and lawyers. Someone else in this thread pointed out that the points may not have any quantifiable value until they are used. And even setting that issue aside, we could have a field day challenging the fair market value.

                    I'm not convinced that the points are taxable at all. But I'm making the observation that Citibank may have decided to issue Form 1099-MISC only for points awarded for opening an account--not to those who received points by spending on a card.

                    Also...

                    The IRS notice that was cited and linked in the article is not, to borrow a phrase from many tax court decisions, "a model of clarity." It does appear to provide a genuine safe harbor, in that it says that any future guidance will only be applied prospectively.

                    But if you read the notice carefully, it could be interpreted to address a very narrow issue. The notice says, in pertinent part:

                    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.

                    * * * * *

                    [t]he 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.
                    The notice appears to be saying that you don't have to worry about reporting income if you earn frequent flier miles through business travel and then use the miles for personal travel.

                    Think about this long and hard. The notice is ten years old. It was written at a time when most people accumulated frequent flier miles by... flying. So you could fly on business, and get reimbursed for the cost of the trip (or deduct it on your Schedule C), and then use the miles to take your wife and kids to Disney World.

                    Particularly in the context of an employee who is reimbursed for the travel, it raises the very obvious question of whether the frequent flier miles are a taxable benefit to the employee.

                    The IRS notice clearly says that this is not an issue the IRS intends to pursue.

                    Read through this admittedly narrow lens, the IRS notice does not clearly address whether frequent flier miles are taxable in general. It only seems to address whether points earned through business travel expenditures will generate taxable income if they are used for personal purposes.

                    Whether miles earned some other way are taxable might be a completely different question.

                    Citibank's decision is not completely irrational. It may be wrong, but it's not crazy.

                    I've seen banks offer travel vouchers as incentives, such as a coupon that allows a free "companion" airline ticket. This would seem to be taxable income. There is still the question of whether the voucher is ever used. This sort of promotion almost always has an expiration date, so it might expire worthless. But it arguably had some fair market value at the time the bank gave it to the customer. Good luck trying to actually determine the FMV.

                    Frequent flier miles are not travel vouchers. There is a difference. And Citibank is probably going to find itself with a real public relations nightmare over this.

                    But I actually understand the reasoning.

                    And Citibank is probably entitled to some sort of expense deduction. That's where you might get into a dispute about the fair market value of the points.

                    But Citibank must have paid, or perhaps must be contractually obligated to pay (in the future if and when the points are used?) some amount of money for those points. The airlines did not agree to allow the use of the points without getting anything in return from Citibank. The bank must have incurred some cost in order to offer the promotion...

                    BMK
                    Last edited by Koss; 01-25-2012, 10:22 PM.
                    Burton M. Koss
                    koss@usakoss.net

                    ____________________________________
                    The map is not the territory...
                    and the instruction book is not the process.

                    Comment


                      #11
                      Incentives

                      Back in the 80s, when the S&Ls were failing, I remember hearing jokes about how you could buy a toaster and get a free savings and loan...



                      BMK
                      Burton M. Koss
                      koss@usakoss.net

                      ____________________________________
                      The map is not the territory...
                      and the instruction book is not the process.

                      Comment


                        #12
                        I'm wondering why they're using 1099-MISC and not 1099-INT (or is that an incorrect inference from the article?). Pub. 550 indicates that a gift or service for opening an account at a savings institute is interest, and must be reported if the value is more than $10 for a deposit of less thank $5K, otherwise if it's more than $20.

                        It also states that the value is determined by the cost to the institution. I suppose that the $645 amount for 25K miles is a plausible cost, but how much do you have to deposit in a bank for them to want to reward you with a gift like that?

                        Comment


                          #13
                          LA Times Weighs In

                          CCH, a Wolters Kluwer business
                          The @latimes takes a look at whether or not #airline frequent-flier miles should be #taxed. http://ow.ly/8Hnzf
                          Citibank deems frequent-flier miles taxable, but does the IRS?
                          ow.ly
                          Frequent-flier miles clearly have value — why else would people want them? But do they also represent taxable income?..

                          Comment

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