Chapter 2, Problem 72

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Facts: Recently Latrell purchased a free roundtrip ticket to Milan, Italy with a value of $1,200. The ticket was purchases with Latrell’s frequent flyer miles generated from business travels as a CPA. Those previous business trips were paid by Latrell’s employer and he was not taxed on the travel reimbursement.

Issue: How much income, if any, does Latrell have to recognize as a result of purchasing an airline ticket with frequent flyer miles earned from business travel?

Authorities: Internal Revenue Service, Bulletin No. 2002-10 - Announcement 2002-18.
Internal Revenue Service, Publication 17.

Conclusion: Latrell should not consider rewards and discounts issued by credit card companies and frequent flyer miles as taxable income.

Analysis: IRS Announcement 2002-18 is intended to answer questions concerning the taxability of frequent flyer miles or other promotional items received as the result of business travel and used for personal purposes. IRS Publication 17 includes the general rules for individuals filing a federal income tax return.

The IRS bulletin No. 2002-10 in its part IV states that the receipt or personal use of frequent flyer miles or other in-kind promotional benefits should not understate any taxpayer’s federal tax liability. This section also clarifies that this rule does not apply to travel or other benefits converted to cash. Later in its publication 17, the IRS specifies that rewards are only taxable for individuals if rewards were received for providing information.

Because Latrell used his frequent flyer miles to purchase his roundtrip ticket and did not converted these miles generated from business travel to cash, he does not have to recognize the ticket value as taxable income.