In early 2012, Citibank started issuing Form 1099-MISC to customers who were given "thank you points" in exchange for opening bank accounts. The points could be redeemed for an airline ticket, similar to frequent flyer miles. (We discussed this in two prior posts, in February 2012 and March 2012.) By issuing the Form 1099-MISC, Citibank was taking the position the value of those miles were taxable to the account holder. Since Citibank reported the transaction to the IRS, the taxpayer should also have reported it to the IRS, and if the taxpayer did not do so, the IRS knew. In the case of Parimal Shankar, he did not report the value of the ticket as income, and the IRS determined a deficiency.
Though the Tax Court made a decision in Shankar v. Commissioner, (the value of a ticket purchased by redeeming points awarded for opening a bank account is taxable), the case is fact specific and likely isn't the end of the discussion. The Tax Court did make a distinction between points awarded for opening an account and frequent flyer miles attributable to business travel. The Tax Court also seemed to give weight to the fact that Citibank had taken a position and issued the Form 1099-MISC. (As discussed in our prior posts, the IRS position had been that frequent flyer miles earned from business travel were not taxable.)
The case is creating quite the stir, and various tax blogs have already commented on the ruling. See the Tax Update Blog, the TaxProf Blog, Tony Nitti on Forbes, and Kelly Phillips Erb also on Forbes.