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what about airline frequent flier miles, when they are redeemed aren't they considered income, when in fact they are a rebate against existing flights previously taken?
Sure, they're income, but the IRS won't be requiring anyone to declare them--in general. We need to look at some history here.
Back in 1985, the Deficit Reduction Act of 1984 was passed. It directed the IRS to go after taxing employee fringe benefits. The IRS looked at a wide variety of these benefits, including frequent flyer miles. Most airlines did nothing, but American Airlines, which originated frequent flyer miles, protested vigorously. They claimed that such miles were a "rebate."
In 1988 the IRS dropped the issue.
This website speculates that the IRS dropped it because it would "cost too much."
Fast forward to 1995. The IRS issued a Technical Advice Memorandum stating that frequent flyer miles were taxable. I remember that well, as I was a frequent flyer during that time. America's middle class--businessmen & women--yelled at their Congressional representatives. The IRS heard that taxing frequent flyer miles was like hitting a third rail of taxation. The IRS subsequently announced that there were no plans to tax the miles.
Having said that, it's clear that under Section 61 of the I.R.C., frequent flyer miles are taxable. Indeed, when the issue has gone to court, that's been the ruling. See, for example,
Charley v. Commissioner 91 F.3d 72 (9th Cir. 1996), where an executive must pay tax on his miles.
So, what does this mean if you have frequent flyer miles? Should you voluntarily declare them (the value you use for them) on your tax return? You certainly can, but given the IRS' position, you're in almost no danger if you don't. If the IRS starts up again on this issue, the yells from the airline industry and middle America would be deafening.
-- Russ Fox
NOTE: This opinion is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this opinion and the opinion does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this opinion, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.