Neither the Code nor any regulations issued by the IRS address frequent flyer mile programs. Announcement 2002-18 currently provides the most direct guidance on how to handle the redemption of these. Issued over ten years ago, this announcement states that the IRS was not going to enforce taxability of frequent flyer miles received as a result of business travel. Beyond that, the somewhat vague announcement does not provide much clarity or interpretation of the law. Because of a lack of issued authority on the subject and that penalties for non-filers of Forms 1099 were recently increased (Rose 2012), Citibank took a very conservative approach in the treatment of their “thank you point” promotional program. In 2012, Citibank filed Forms 1099-MISC…show more content… However, Citibank’s conservative approach probably is not outrageous given that Announcement 2002-18 simply stated that the IRS was not going to pursue the issue and did not give technical guidance on the subject (Rose 2012). Also, the penalties for not issuing a Form 1099-MISC “were recently increased to as much as $100 per form [and] up to $1.5 million per calendar year for inadvertent omissions” (Rose 2012). Even so, some customers took the case to the U.S. Tax Court and in Shankar v. Comm., the court ruled that the value of the airline ticket that was redeemed constituted an item of gross income based on Sec. 61(a)(4) of the IRC (Shankar v. Comm. 2014). Citibank seemingly interpreted the value of the miles as an “award or prize” for opening a bank account (Nevius 2012) constituting the issuance of Forms 1099-MISC, while the U.S. Tax Court interpreted the miles as representing a form of interest paid to the customers. Even with slightly different interpretations, both awards and interest fall under gross income according to Section 61(a) of the…show more content… The only firm interpretation of the law that has been given is that frequent flyer miles attributed to business travel are nontaxable, per Announcement 2002-18. With the U.S. Tax court backing the conservative approach taken by Citibank and interpreting miles as a form of interest is a step toward more solidified guidance, but it addressed just one aspect of the issue. When should frequent flyer mile programs be considered a rebate (which are generally nontaxable), a form of interest, or a prize or
