For anyone who spends a lot of time traveling by air for business purposes, one of the
nice things that typically occurs because of all of that travel is frequent flyer
miles. Even better, about 14 years ago the IRS addressed the controversial question
of what happens tax-wise if someone earns those miles (from air travel, rental cars,
hotels, etc.) on trips paid for by their company, but uses them for personal
purposes. Happily, the IRS said it wasn't going to assert that someone has taxable
income merely because they personally benefited from frequent flyer miles or other
in-kind promotional benefits resulting from their business or official travel.
That all sounds good and seemed like the end of the matter - until a recent Tax Court
decision said a taxpayer, who cashed in points to purchase a plane ticket, was taxed
on the value of the ticket. What happened?
Rewards that weren't so free
In the recent court decision, the taxpayer opened a bank account with a large
financial institution and was awarded enough points because of this to earn an
airline ticket. He cashed in the points, the bank acquired the ticket for him
(apparently spending $668 in the process), and at the end of the year sent him a Form
1099-MISC reporting the $668 as income to him. When he ignored the 1099, failed to
report the income, and had a couple of other problems with his return, he and the IRS
ended up in Tax Court arguing over whether the ticket should be taxable to him.
The IRS's position was that, of course, it's taxable. After all, he received a Form
1099 reporting it as income. The taxpayer's position was basically that he didn't
remember receiving the points or the ticket - thus, nothing should be taxed to him.
The Tax Court took a more methodical approach to its conclusion, noting that gross
(taxable) income includes all income from whatever source, unless otherwise excluded.
It also acknowledged (without challenging) the IRS position from 2002 regarding
points or miles earned from business travel and used personally. However, its view
was that the current taxpayer's situation was different.
Instead of the taxpayer receiving miles or points due to purchases that he had made
(which would effectively make what he received nontaxable purchase price
adjustments), he received an award for making a deposit with a bank or leaving funds
with the bank for some period of time. This, to the Court, looked similar to interest
and, thus, it agreed with the IRS that the $668 was taxable income.
What's the takeaway value of this case? A couple of key points: First, although
probably no one was looking for it, it's nice to have the Tax Court's support of the
IRS position on business miles used for personal purposes. Secondly, purchase rebates
and awards are different. The former should be nontaxable (whether from credit card
companies, airlines, hotels, rental car companies, or somewhere else), while the
latter, even if you don't receive a Form 1099, are generally going to be taxable.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015