Wondering if you owe taxes on points you’ve received from a loyalty program? The answer for one couple in New Jersey was unequivocally “Yes” and they missed that in their IRS filing; the Commissioner of Internal Revenue was not so impressed that the value was omitted from the 1040 filing. The good news here is that this is not particularly new news, but it does raise some interesting questions about the value of sign-on bonuses and exactly where the line is between what is taxable and what is not. And I think, based on some of the verbiage, the potential liability might be greater than has previously been presumed by the community.
In this specific case – Shankar v. Commissioner, 143 T.C. No. 5 (Aug. 26, 2014) – the couple in question was audited and held liable for underreporting income on a few items. One in question was the cash value of a plane ticket received by way of redemption of Citi Thank You Points.
[R]espondent has provided us with evidence in the form of Citibank records (i.e., computer transcripts) showing that, on February 27, 2009, Mr. Shankar redeemed 50,000 thank you points to purchase a restricted coach class airline ticket.… There are still the questions of whether receipt of the airline ticket constituted receipt of an item of gross income and, if so, its value.
OK, so far this is mostly the same as what we oft hear discussed. Essentially the question is whether the points, when converted to be a plane ticket, now represent taxable income. The good news is that points accrued by way of travel are still safe:
We are not here dealing with the taxability of frequent flyer miles attributable to business or official travel, with respect to which the Commissioner stated in Announcement 2002-18, 2002-1 C.B. 621, he would not assert that a taxpayer has gross income because he received or used frequent flyer miles attributable to business travel.
In this case the points were accrued as part of a sign-on bonus for opening an account with Citibank:
Respondent’s counsel added that the omitted income was a noncash award for opening a bank account. We proceed on the assumption that we are dealing here with a premium for making a deposit into, or maintaining a balance in, a bank account. In other words, something given in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest. In general, the receipt of interest constitutes the receipt of an item of gross income.
So, yeah, that’s taxable according to the IRS. Even though it was points issued as interest. And the value of those points is determined by the real-world value of the good for which they were redeemed:
Receipt of the airline ticket constituted receipt of an item of gross income, and petitioners have failed to show that it was worth any less than $668, which Citibank, which had purchased the ticket, said was its fair market value. But cf. Turner v. 2 Commissioner, T.C. Memo. 1954-38 (in which we determined that the “proper fair figure” to be included in the taxpayers’ gross income on account of the taxpayer husband’s winning steamship tickets on a radio quiz show was substantially less than the tickets’ retail price because the tickets’ value to the taxpayers was not equal to their retail cost).
It is not clear that one would be successful in arguing that the value to a consumer of a premium ticket is lower than the retail price of that ticket, but at least the opportunity to make such an argument is there. But that’s also not what piqued my interest from the wording in this ruling. The part which interests me most is how the IRS defined interest in this case.
In other words, something given in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest.
Did you open a brokerage account in exchange for a massive pile of points? Do you participate in the AAdvantage Bank Direct program? Are you declaring the value of those points on your income statement based on the value of whatever ticket you redeem using those points, as was the standard laid out in this case? If not, seems there’s a decent chance that the IRS might want to talk with you about that decision.
Then again, if the bank doesn’t file a 1099-MISC then the IRS probably doesn’t know about it. But that doesn’t mean the income didn’t happen.
What about Credit Cards?
The other interesting thing which this ruling – and the original guidance from the IRS – raises is how other points accrual means are treated. That guidance offers up that points are not taxed “by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the tax-payer’s business or official travel.” It doesn’t offer up any advice on points accrued for transactions on a credit card – those are not attributable to travel – and how they should be treated.
I’m not suggesting that points earnt as a result of CC transactions are taxable or that they are not. Back in 2012 an IRS spokesperson suggested they are not taxable but that was not formal guidance the same way the travel earning bit is. I honestly don’t know. It would be hard to describe them as interest since you’re not making a deposit or otherwise giving the bank use of your money; you’re actually taking a loan from them, not the other way around. But they’re also not “promotional benefits attributable to the tax-payer’s business or official travel” so there’s definitely a gray area there.
Until 1099s start to be issued odds are there’s nothing to worry too much about. But this ruling does reaffirm the position that some sign-on bonuses are most definitely taxable.
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I think it will be harder for the IRS to dispute points earnings from CC spend because those are part of the benefits we paid $XXX in the form of annual dues. In other words, those points are not free and there is also the ‘rebate’ argument. However, promotional points that does not require any spending or payment of fees on a customer’s part makes it harder to dispute.
Interesting development indeed.
I wonder what is Canada’s Revenue Agency position on that subject…
It seems this would open up lots of cans of worms. Just about every program has multiple ways of obtaining points and multiple ways of putting them to use. A lot is not clear, but which programs, in which uses, do you identify this ruling as definitely or very likely applying to?
Haha I thought the HMRC (UK tax agency) were bad, but the IRS clearly have them trumped with this sort of rubbish 🙂
Citi has been issuing 1099s for redemption of TYPs in conjunction with bank (not credit card) accounts — both signup bonuses and interest (both variable and fixed). Any points redeemed that are attributed to points earned on the bank side will be 1099’d based on the actual price of the revenue ticket they were redeemed for.
They won’t issue a 1099 if it’s below some total annual redemption amount (can’t remember the amount off-hand).