A recent Tax Court case adds to the rules that now exist whether frequent flyer miles will be considered taxable income. Below is a summary.
1. The general rule under Announcement 2002-18 is that awarded miles, whether issued by an airline for purchasing tickets, or from other issuers (well, at least rental car companies and hotels) in exchange for purchases, is not presently taxable. The IRS reserves the right to change this rule in the future on a prospective basis.
2. That announcement indicates the awarded miles will be taxable if they are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.
3. In Shankar and Trivedi v. Commissioner, the Tax Court ruled that the receipt of points issued by a bank that were redeemed to purchase an airline ticket were taxable. The points were a noncash award for opening a bank account, and the court characterized the points as being in the nature of interest on money. The court did not believe Announcement 2002-18 applied. A reasonable conclusion from this case is that if miles are issued in payment of compensation for the use of money, then they will be taxable as interest income.