its close
"Two customers have filed a federal lawsuit seeking class action certification (Hirsch v. Citibank, N.A., No. 1:12-cv-01124 (S.D.N.Y., filed 2/14/12)), and Sen. Sherrod Brown, D-Ohio, wrote Citibank to reprimand it and ask it to discontinue the practice. In addition to questioning the method of valuing the award and claiming that Citibank did not tell its customers of its reporting plans, the lawsuit and Brown assert that the award is not taxable in the first place.
This seemingly should be a cut-and-dried matter, but the rules carry a story of their own. The Code and the regulations do not address the taxability of frequent flyer miles.
Rules addressing de minimis fringe benefits seem to come closest. Without a specific exception, the reference in Sec. 61 to “all income from whatever source derived” would include the award in income. The most on-point guidance is found in Announcement 2002-18. It specifically addresses frequent flyer miles and reads, in part:
There are numerous technical and administrative issues relating to these benefits on which no official guidance has been provided, including issues relating to the timing and valuation of income inclusions and the basis for identifying personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures. Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles"
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