An article in the Los Angeles Times today (1/25/12) -"Citibank deems frequent-flier miles taxable, but does the IRS?" by David Lazarus covers a story that raises question about what does the "income" in "income tax" mean. Citibank issued Forms 1099-MISC to customers who received frequent flyer miles from Citibank for opening accounts, if the points were valued at $600 or more. This caught the customers by surprise.
Are the miles taxable? Good question. And do note that the answer has little to do with their value. Even customers who received points worth less than $600 have income if this is indeed income. Just because you don't get a 1099 doesn't mean you don't have income. It is just that $600 is the threshold for reporting such income to the IRS. But, if the bank gives you a cheap pen or a cup of coffee, it's not taxable to you.
Here is what the US Supreme Court said in 1955 in holding that punitive damages were income to the recipient - "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion" is income (Commissioner v Glenshaw Glass, 348 US 426).
Could the points be considered a gift? I don't think so. In 1960, the US Supreme Court said that a "gift in the statutory sense ... proceeds from a "detached and disinterested generosity," ... "out of affection, respect, admiration, charity or like impulses." .... And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention."(Commissioner v Duberstein, 363 US 278).
It doesn't seem to be a gift because Citibank wanted something in return for the points - your money!
The Citibank situation is not like two slightly similar situations that do not generate taxable income:
- You buy a new car and the dealer gives you a $500 rebate. The $500 is not income to you. The substance of this transaction is that the car really cost $500 less. This is a reduction in the purchase price. (This is also the view of the IRS - Rev. Rul. 76-96.)
- You use frequent flyer miles you earned by buying airline tickets. In Announcement 2002-18, the IRS stated, "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." So, the IRS isn't saying the miles are not income, just that there are difficulties in making the determinations. But in some cases though it may be possible to reach a more definitive answer. For example, you only purchase airline tickets for business use. When you cash in your miles, you obtain more travel used for business purposes. This is really like the car rebate example - no income. The challenge is that many people earn miles for both business and personal travel and likely redeem them for personal travel which means they should pick up income or reduce the business deduction for the miles - but how do you value them. The IRS also notes in the 2002 announcement that, "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"
Perhaps the IRS will step in and say something again in light of this Citibank action. Perhaps customers will ask more questions before taking the points.
How can this be made more simple? Here are two possibilities. (1) Require the giver of the award to issue the 1099 at the time the person is about to take the action so they can stop the action if they don't want to income. Also, while you are generally not allowed to turn your back to income you should be allowed to in the case of awards and rewards. (2) Enact a de minimis threshold for rewards that are excludable from income, such as $50.
What do you think?
