In a February post, I discussed Citibank issuing a Form 1099 to customers who received frequent flyer miles in exchange for opening a bank account. Little did I know that two months later, it would still be highly publicized. This article, also from February, has more detail on the many ways you could receive frequent flyer miles (credit card use, rewards for flying, prizes), and the likely tax implications of each method. A March 2012 article in the Journal of Taxation is what prompted this post. The article discusses the possible ways to calculate the value of the miles to report on the 1099. The main conclusion to the article seems to be that there are many methods, and it seems there is a reasonable cause defense for each. Here are some of the methods discussed in the article:

• Sale Price: Look at the price the miles would sell for in the open market. For example, if you could purchase 5,000 miles from the airline for $100, a mile is worth two cents. But the problem here is most airlines will charge a different price per mile for 5,000 miles than for 10,000 miles.
• Cost to Company: Look at the cost to the company to get the miles. How much did the bank pay the airline per mile?  This seems logical, but an IRS spokesperson has already pointed out that income is valued at the value of the property received, not at the cost to the company.
• Average: Why not just determine the average price per mile, looking at the average ticket price across all companies and average number of frequent flyer miles to purchase the same ticket. That hardly seems like a method the IRS would follow.

The debate continues as to (1) whether the miles are taxable, and (2) if taxable, how to determine the value. The IRS has stated that any guidance on how to value the miles (and presumably whether or not the miles are taxed) would be prospective only. Until then, the uncertainty continues.

Jana M. Luttenegger
Tax Law Iowa
515.288.2500
www.davisbrownlaw.com