Taxation of Frequent Flyer Miles

By Stanley E. Rose, CPA, MST, Baker Newman Noyes, Portland, Maine

Editor: Anthony S. Bakale, CPA, M. Tax.

Gross Income

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 prospectively.

This 10-year-old announcement seems to represent the most recent meaningful authority on the taxability of frequent flyer mile awards, but it does not provide much clarity to the law, or even an interpretation of the law, and instead merely indicates the IRS does not plan to pursue enforcement. In addition, the announcement deals only with frequent flyer miles a taxpayer earns from business or official travel, not with frequent flyer miles given to a taxpayer as part of a product promotion. The IRS has seemed willing at times to give taxpayers a pass on certain items that are relatively modest in amount, involve subjective estimates of value, and are difficult to enforce. Recent changes related to the value of employer-provided cellphone benefits are one example, and this seems to be another.

With this announcement in place, why did Citibank file Forms 1099 to report the miles as income? Perhaps its communication on the matter had room for improvement, but one could argue for reserving judgment, given the possible exposure the company faced. The law is vague at best, and the instructions to Form 1099-MISC call for reporting of “prizes and awards” as income.

Penalties for nonfilers of Forms 1099 were recently increased to as much as $100 per form, up to $1.5 million per calendar year for inadvertent omissions (and, presumably, Citibank files many of them). For intentional disregard, penalties equal $250 per form, and there is no cap on the penalty. Finally, the IRS has made no secret of its intention to increase scrutiny in this area, and in fact, most 2011 business tax returns (e.g., Forms 1120, U.S. Corporation Income Tax Return ; 1120S, U.S. Income Tax Return for an S Corporation ; and 1065, U.S. Return of Partnership Income ) include new questions asking whether Forms 1099 are required and whether they have been, or will be, filed. Notably absent from the list of responses to the new questions is, “Possibly required, but the IRS assures us they will look the other way.” How, exactly, should Citibank answer the new questions, under penalties of perjury? While conservative, Citibank’s approach may not be unreasonable under the circumstances.

It will be interesting to see what, if anything, comes of these events. Rules related to employee use of company-provided cellphones were relaxed through two changes. The first was statutory, with the delisting of cellphones as listed property via the Small Business Jobs Act of 2010, P.L. 111-240. The second was Notice 2011-72, which stated the IRS deems the value of employees’ personal use of cellphones provided by employers for noncompensatory business purposes to be excludable from income. (Contrast this with Announcement 2002-18, in which the IRS did not indicate the proper treatment but instead merely stated its intention not to pursue enforcement.)

It is unfortunate that the proper treatment of these awards has not been codified by Congress or clarified by the IRS. Announcement 2002-18 is weak guidance; it does not take a firm position on any technical issue. However, there is nothing stopping the IRS from following it up with a useful interpretation of the rules. There also is nothing preventing Brown or his Senate colleagues from introducing a bill that puts this matter to rest via the Code. One can only hope that one of these parties will act before more taxpayers feel forced to play defense the way Citibank apparently did.


Anthony Bakale is with Cohen & Co., Ltd., Baker Tilly International, Cleveland.

For additional information about these items, contact Mr. Bakale at 216-579-1040 or

Unless otherwise noted, contributors are members of or associated with Baker Tilly International.

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