For many years, banks have provided incentives to open a new bank account-30 years ago they handed out silverware and toasters, now they offer cash and frequent flyer miles. The IRS has for the most part ignored these incentives, but Citibank’s overzealous interpretation of the tax code may have just changed all that.
Shankar v. Commissioner
In 2009, Citibank provided Parimal Shankar, one of its banking customers, with 50,000 “Thank You” points, which he apparently redeemed through the bank in the form of an airline ticket. Mr. Shankar later received a 1099-MISC from Citibank, indicating that Shankar received “other income” of $668 (the apparent value of the airline ticket) from the bank. Mr. Shankar and his wife did not report this “income” on their Form 1040 in 2009 and the Commissioner’s determination of deficiency that year included this amount.
Shankar denied having received any points or award from the bank. Citibank, however, produced evidence that his miles had been received and redeemed for an airline ticket valued at $668. The Tax Court ruled that under the circumstances the reward constituted “income,” and affirmed the tax deficiency.
Frequent Flyer Miles and Income
The IRS has been quite clear since it issued Announcement 2002-18 that it will not tax frequent flyer miles (nor other promotional benefits) acquired through business or official travel. It has also ignored other frequent flyer awards that technically constitute “income” under IRC Section 61(a). However, where a 1099 has been issued, the IRS computers have to make an adjustment if the taxpayer’s return does not match. That, in addition to the inability of Shankar to demonstrate that the award was for business (he appeared pro se), made the reward a taxable event.
The Court in Shankar was careful to qualify its ruling. It not only referred to Announcement 2002-18, it also indicated that it was not considering whether the frequent flyer award itself was the taxable event, only that in this case the award was given in exchange for a deposit of money (“something in the nature of interest”) and was therefore taxable income. Note that the IRS has made it clear in the past that if a frequent flyer award is made as an incentive for opening a bank account it is considered gross income-if it is a rebate, it is not.
Unanswered questions
Shankar leaves many unanswered questions, so we haven’t heard the last on this issue. For example:
- What if the bank adds miles to those already owned by the taxpayer? Is the entire cost of the ticket taxable, or only a portion of it? How do you determine the amount of income? Who is responsible for tracking what portion of the miles constitute a rebate from previous flights and what portion is from the bank?
- Does this apply to credit card incentives and points? Car rentals? Hotel clubs?
- What happens if the taxable reward points expire?
Experienced Tax Attorney Advice and Representation
The tax law attorneys of Moskowitz, LLP can help you determine the best course of action to resolve any tax dispute with the IRS or state. We are thoroughly familiar with all aspects of tax collection, audit and litigation and it is our duty to successfully resolve our clients’ tax issues. If you are being audited or believe that you have been assessed taxes that you do not owe, contact our tax law office today.