Court Rules Bank Account Points Redemptions are Taxable

Taxation of frequent flyer miles: Via William T. and others, a Tax Court has ruled on the taxability of points programs under certain circumstances.

The Tax Court yesterday required the taxpayer to include $668 in income as reported by Citibank on Form 1099-MISC as the value of an airline ticket received by the taxpayer upon redemption of 50,000 “Thank You Points” from opening a Citibank account. Shankar v. Commissioner, 143 T.C. No. 5 (Aug. 26, 2014).

When you sign up for a Citibank checking account bonus, and the value of the bonus exceeds $600, you’ll generally get that value reported to the IRS on a 1099-MISC form.

When you redeem Citibank Thank You points earned from a bank account signup bonus, a 1099 may be generated.

Citibank’s view — consistent with IRS statements, when pushed — is that signup bonuses for opening bank accounts may be tax-reportable.

You don’t have to agree with the valuation, you can dispute the value, but a tax court has now ruled (.pdf) against a taxpayer who did not want to include what Citibank reported on its 1099 as income.

  • This ruling has zero effect and contributes nothing to the taxability of frequent flyer miles.
  • This ruling has zero effect and contributes nothing to the taxability of bank points given for credit cards.

Here’s what happened:

The taxpayer has their gross income increased by the IRS by $668, the value of the tickets redeemed from his Citi Thank You points account; points which were earned from his Citibank bank account.

That’s the reported value of 50,000 points that were redeemed in 2009. The taxpayer’s primary argument was apparently that he knew nothing of the redemption, though he provided no records to dispute the redemption, and his wife wasn’t present at the trial (so the court speculated the redemption could have been for her). Citibank introduced evidence of the redemption.

The taxpayer didn’t dispute that points earned off of a bank account are, essentially, interest. And bank interest is taxable.

..did not object when, at the start of the trial in this
case, respondent’s counsel answered in the affirmative the Court’s question as to whether, besides the IRA contribution, the other item in dispute, i.e., “Other income”, involved the omission from the Form 1040 of interest. 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.

There was also no dispute about the value of the points redemption.

So, unsurprisingly, the Court ruled that income reported on a 1099 that has been substantiated placed a burden on the taxpayer seeking to dispute inclusion in their return. And the taxpayer, representing himself, didn’t really offer much in dispute.

The court is clear they are not addressing the taxability of frequent flyer miles attributable to business travel.

Miles earned for personal travel are rebates. You’re not getting a rebate on your own spending if your employer buys your ticket. But the Court reiterates that still wouldn’t be taxable.

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.

Unsurprisingly the view of the tax court in this case was that bank points for bank accounts redeemed for value are tax-reportable. This says nothing about any other sorts of points, and is consistent with current practice.

The Court doesn’t hear, and didn’t discuss, other arguments that were not made but that a future taxpayer might make. This issue is far from over, but the case offers a basic insight into tax law thinking on points.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. The value should have been disputed. The points were worth only $500. The incremental value above that is due to owning a Citi credit card that allows for a higher redemption rate.

  2. This will be interesting as it pertains to potential tax consequences of miles earned for mortgages and for brokerage accounts.

  3. Whew, my heart palpitations are slowing down after reading the full post.

    @easy victor: I’d argue that miles/points for a mortgage are not “in the nature of interest.” At a guess, points for a mortgage would be something closer to a rebate on future interest paid by the borrower. If there’s a tax consequence, I think it would more likely be a reduction in amount of deductible interest.

    Brokerage accounts are more debatable. If I’m moving cash into a money market fund, maybe the incentive would be “in the nature of interest.” However, if I’m just moving stock from one custodian to another, I don’t see how it could be interest. Ordinary income, maybe, but not interest.

  4. Isn’t this problematic when a customer has an account that generates points for different things? You might earn points for flights, points for dining, or points for opening an account that all go into one bucket. Then you redeem some of those points and need to parse out whether you’ve redeemed the reportable, taxable points.

    Separately, why can’t we also construe the TY points for opening an account as another form of “rebate.” Obviously the bank intends to make money off their new customer, or wouldn’t be doling out points at all. The points are a rebate on future fees and expenses the customer will surely spend managing the account.

    Also, I’m not sure the fact that the litigant did such a bad job makes a difference going forward. The court didn’t indicate that other, better litigants might be able to win a claim on thank you points issued under these circumstances. I think we may be stuck with this ruling even under the best of circumstances.

  5. This headline is incorrect from William T and others.

    The tax court did not rule that Bank Account points are taxable. In this case, it was Citibank issuing out a 1099-MISC as a “fair value” income of for the airline ticket purchased directly through the bank; which from there, the Petitioner made errors, or did not dispute, the gross income based on their adjustments of Alternative Minimum Tax (i.e.: AMT).

    From the Opinion of that specific tax court case:
    See page 14 footnote 2: “Neither party has addressed, nor do[es the Court] consider, whether award of the
    thank you points, itself, may have been the taxable event.”

    Hence, these points are not taxable, but the receipt of the airline ticket for the use of the points directly with Citibank was (according to Citibank, from which the fair value could have been disputed), in this case.

    Had the Petitioner read Gary’s travel blog and transferred these points somewhere where they are not taxable (i.e.: a 1 – 1 point transfer to Starwoods, Hilton, AAdvantage, etc.) and received an awrd ticket from there, there may have been no 1099-MISC.

    Thanks.

  6. The amount of time, money spent on lawyers, and sheer amount of paperwork to get an issue all the way to Tax Court is staggering. To go through all that and essentially not even put up a defense is just crazy.

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