Value of Frequent Flier Miles

There's a raging controversy over this, as Citibank gave American Airlines miles as a promotion for opening new accounts, then sent customers 1099's valuing the miles at 2.5 cents per mile.

Assuming (as seems sensible) that the miles are considered bonus interest on an account, what should the value be.

Let me give some parameters:

a) If you redeem the miles optimally, you can potentially get a value of 5 cents per mile, say 100,000 miles for an international business class ticket that would cost $5000. (But how many people would buy it for cash if they had to pay $5000?)

b) If you buy miles from airlines directly, they usually cost between

2.5 cents and 3 cents per.

c) If you want to redeem them for merchandise, gift cards, or travel not directly related to a frequent flier award, they usually can be redeemed for value of 0.6 to 1.0 cents, occasionally 1.25 cents.

d) Black-market transactions generally take place at 1.0 to 1.5 cents per mile.

e) In practice, when used for award tickets, the value can vary greatly. At one extreme, I once got a last-minute ticket on a high- fare route that would have cost $2000 for 25,000 miles, a value of 8 cents per mile - but I wouldn't have bought the ticket for $2000. I have seen other times that a $100 ticket would take 50,000 miles, a value of 0.2 cents - but nobody would buy that ticket with miles of course.

f) Bulk purchasers (like Citibank) probably pay about 1 cent per mile.

g) Under the terms and conditions of the programs, miles remain the property of the airline. As such, you could argue that there is no constructive receipt until you redeem them, because the airline could revoke them at any time. (This has a bit of a tinge of a tax protester argument, but I think it's a good deal stronger that arguing that if you're not paid in gold, it's not income. I'm not sure I'd actually try it. But considering that Citi was giving American Airlines miles, and that AA is bankrupt, it makes an interesting argument.)

So what should the miles be valued at, and what is the recourse for a taxpayer who got a 1099 that overvalued the miles?

Also, assuming Citi bought them for 1 cent, what are the implications to Citi? Do they get a deduction for 2.5 cents? Do they report the difference between the purchase price and 2.5 cents as income? Is this just a con game to pump up their profits and make their customers pay the taxes on them?

Reply to
Hank Youngerman
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The entire problem with this issue revolves around valuation. The IRS has avoided controversy by saying FFMs have zero value and zero basis.

I would be interested to know how Citibank came up with values to put on those 1099s.

Frankly, I consider this event to be yet another reason not to do business with Citibank.

Reply to
Bill Brown
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If I, or one of my clients, were the recipient, I would treat it the same as a

1099 received from a TV show where they value gifts at full retail. I would document a lower value and report accordingly. In the case of miles, I would look for the cheapest (dollar) trip that cost the most miles and use that to calculate the value of the miles.

Ira Smilovitz Leonia, NJ

Reply to
ira smilovitz

Actually, I thought the IRS fudged by basically saying they're going to punt on the whole FFM thing and will not go after people for it, but never actually came out and said they have zero value.

Reply to
Rich Carreiro

I believe that IRS's position varies. (See article on page B8 or B9 of last Saturday's Wall Street Journal.) In many cases they consider them a non-taxable rebate. For employees keeping the miles accrued from business use, IRS announced in 2002 that they were not concluding they were non-taxable, but they were not taking action at that time and any future action would not be retroactive. However, for miles given as a bonus for an investment, they are apparently considered taxable interest.

It does puzzle me that Citibank would value them at such a high amount. Maybe they want their customers to think they got something of great value, but if you put a dress on a pig, it's still a pig.

Reply to
Hank Youngerman

How do you treat a toaster or $50 given by a bank when someone opens a new account?

___ Stu

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Reply to
Stuart A. Bronstein

The $50 and the toaster are reported on a 1099. De minimus gifts such as a coffee mug or t-shirt are not reportable.

Reply to
Hank Youngerman

Thanks. I wasn't sure if it was treated that way or as a sort of pre-bate for money the customer would spend with the bank later.

I'd think mileage should be treated in a similar manner. ___ Stu

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Reply to
Stuart A. Bronstein

If the miles have an expiration date, zero is a reasonable value, as they only have value when redeemed, not when issued. In contrast, cash has a value that doesn't expire. [It may lessen due to inflation, but it never actually hits zero short of the United States itself declaring bankruptcy*.]

  • - Probably a good discussion for another thread - cf. IRC 165 and "worthless security" [currency].
Reply to
D. Stussy

I'm not disagreeing, but the dollar amount here is much greater than a $50 toaster. For $50 I wouldn't waste time trying to document a lower value.

Ira Smilovitz Leonia, NJ

Reply to
ira smilovitz

But Citibank didn't report this as interest. They reported it on a 1099-MISC. A spokesperson for Citibank said it was in the category of prizes and awards. (I assume that means they put it box 3.)

"Catherine Pulley, a Citi spokeswoman, cited the 2012 instructions for Form 1099-MISC, which state that income tax must be paid if at least $600 in 'prizes and awards' is received."

(Quoted from a news article at

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Bob Sandler

Reply to
Bob Sandler

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