Tuesday, February 14, 2012

Are Frequent Flier Miles Taxable Income?

As  lawyers and faculty members spend more time hopping on and off planes, the question arises whether those accumulating  frequent flier miles are taxable. Recently, my colleague Jim Maule addressed this issue on his blog,  Mauled Again. (Feb. 3) Here is the current IRS position:

According to this story, the IRS considers frequent flyer miles received for opening a bank account as gross income, but considers miles received for making purchases on a credit card or for paying for a hotel room or rental car not to be gross income. The distinction, according to the IRS, is that the first situation is equivalent to receiving cash or a toaster for opening an account, which under long-settled law generates gross income, whereas the second situation is equivalent to a rebate. Though it is easy to see the rebate when the airline provides frequent flyer miles to the purchaser of a ticket, it is a bit more challenging to see the rebate when the rental car agency provides the miles to a customer. Though some tax practitioners find the distinction difficult to understand, the key is to think of the miles as a rebate, not on the airline ticket, but on the cost of renting the car. Technically, if a person receives frequent flyer miles for making a credit card purchase, and the item purchased is one that requires a record of basis, the basis in that item should be reduced to reflect the rebate. Compliance with this principle surely is far from 100 percent.

The full analysis gets complicated, as Jim’s blog posting explains.



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