In 2010, the IRS issued a private letter ruling (PLR 201027015 - only legally binding on the taxpayer who requested it) saying that points from a credit card company were non-taxable as really being reduction to the price the cardholder paid for items purchased with the card.
A few years ago there were stories in the press about Citibank (and perhaps a few other banks) issuing 1099-MISC for the award of points to people who had opened accounts with them. A 1099-MISC is only issued if the value given is $600 or more. Even if less than $600, it is still taxable, assuming it is truly income.
Well, a few weeks ago, the U.S. Tax Court issued a regular decision (one involving interpretation of law rather than facts), to someone who received a 1099-MISC from Citibank and did not report it. What did the court say and what might this mean for others?
In Shankar, 143 TC No. 5 (8/26/14), Citibank issued Mr. S a 1099-MISC for $668 for 2009, which he did not report on his return. The court held that S had taxable income.
At trial, the IRS provided an affidavit from a Citibank employee that S redeemed 50,000 “thank you points” and purchased an airline ticket. The affidavit noted the ticket value as $668. S testified that he knew nothing about thank you points and had received no award. The court did not delve into this, but instead just noted that S had almost three months between receipt of the Citibank records in September 2013 and trial in December 2013 to investigate Citibank's information to show it was incorrect. S provide no information. Thus, the court followed the Citibank information. But, it next analyzed whether it was gross income and if yes, its value.
The court observed that S offered no information on why Citibank gave him the points. At trial, the IRS told the court that the omitted income was interest. IRS also noted that the omitted income was a noncash award of points for opening a bank account. S did not object to these statements from the IRS.
The court assumed that S received “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 [S’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. See sec. 61(a)(4)”
A few observations:
Bank Warning – The Citibank website on their points program does say in the fine print that a 1099-MISC will be issued for redeemed points where the value of the reward is $600 or more.
Frequent Flyer Miles - The court noted that this case did not involve whether frequent flyer miles (FFM) received for business travel was taxable. That matter has been addressed in Announcement 2002-18. In this announcement, the IRS noted unresolved issues involving the award of FFM and that no enforcement effort had been initiated by the IRS. The IRS stated it would “not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.” Also, any future guidance would apply prospectively. However, if the FFM or similar promotional item is converted to cash or represent compensation, the announcement does not apply. When and How Much - Valuation? - Issues exist as to when the receipt of points is taxable, and the value. For example, if S had only received 500 points from Citibank and they were not usable due to the low quantity, arguably, S would have not have received income. But what if something, such as flowers, could be obtained with the points, or a discount obtained on the purchase of some item? Or the points were freely transferable? Would they be income?
The court did mention Turner, TC 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 taxpayer was not equal to their retail cost.”
How did Citibank determine the value of the airline tickets? Airline tickets can vary tremendously in price depending on when purchased, which airport and time of day you fly, if the airline is having a special promotion, etc. Should Shankar have been allowed to show that the tickets could have been obtained for a lower amount?
Footnote 2 of the case states: “Neither party has addressed, nor do we consider, whether award of the thank you points, itself, may have been the taxable event.”
1099-INT? – In Shankar, the Tax Court referred to Shankar’s income as interest, even noting §61(a)(4) on interest income. If it is considered interest income from the bank, it seems that 1099-INT should have been given to Shankar rather than 1099-MISC. The filing thresholds for these forms are quite different:
1099-INT Payments of $10 or more (§6049(a))
1099-MISC Payments of $600 or more (§6041(a))
Why did Citibank issue a 1099-MISC rather than a 1099-INT? If the court is correct and the airline ticket represents interest income, far more 1099-INTs need to be issued by Citibank.
Tax Assistance – Shankar
was not represented by legal counsel at trial. Might the result have been different if
legal counsel had explored why Citibank issued the 1099 and placed a
value of $668 on the tickets? What if legal counsel had looked at Rev. Rul. 76-96 and PLR 201027015 (7/9/10) and
other authorities? I suspect that legal counsel would have challenged
Citibank’s valuation of the ticket given the wide range of possible prices for
most airline tickets.
What's Next? - Given how many 1099-MISC Citibank must have issued, perhaps there will be additional litigation on this matter. Perhaps the IRS will issue some guidance!
What do you think?