Taxation of frequent flyer miles.

• Author: Rose, Stanley E.

A benefit has only lately received attention after flying under the radar for many years: tax-free receipt of frequent flyer miles.

Earlier this year, several news outlets reported that Citibank surprised many of its customers by issuing Forms 1099-MISC, Miscellaneous Income, to report the value of frequent flyer miles the customers had received in exchange for opening new accounts as part of an ongoing promotion. Understandably, the customers were upset because, the value of the miles notwithstanding, many of them ended up paying dearly (through potentially as much as several hundred dollars in taxes) merely for opening an account.

Two customers have filed a federal lawsuit seeking class action certification (Hirsch v. Citibank, N.A., No. 1:12-cv-01124(S.D.N.Y., filed 2/14/12)), and Sen.Sherrod Brown, D-Ohio, wrote Citibank to reprimand it and ask it to discontinue the practice. In addition to questioning the method of valuing the award and claiming that Citibank did not tell its customers of its reporting plans, the lawsuit and Brown assert that the award is not taxable in the first place.

This seemingly should be a cut-and-dried matter, but the rules carry a story of their own. The Code and the regulations do not address the taxability of frequent flyer miles. Rules addressing de minimis fringe benefits seem to come closest. Without a specific exception, the reference in Sec. 61 to "all income from whatever source derived" would include the award in income. The most on-point guidance is found in Announcement 2002-18. It specifically addresses frequent flyer miles and reads, in part:

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...