Redemption of "Thank You" Points Included in Income
A married couple filed a joint return, reporting the husband’s self-employment income and the wife’s wages. The husband had an account at a bank. The bank awarded "thank you points" to customers such as the husband who kept certain balances in their accounts. The husband redeemed his points for an airline ticket. The IRS determined that the value of the airline ticket was includable in income.
The court found that the husband had redeemed 50,000 "thank you points" to obtain an airline ticket. The bank gave the taxpayer something of value in exchange for use of the taxpayer’s funds. That something was in the nature of interest, the court found. The airline ticket constituted receipt of an item of gross income. The taxpayer failed to show that the airline ticket was worth any less than the amount determined by the bank.
The court noted that the airline ticket was not redeemed with frequent flyer miles earned by travel but rather with points apparently earned by opening a bank account. The Tax Court found this was analogous to taxable interest. The court also noted that the IRS has provided limited guidance on frequent flyer miles. In Ann. 2002-18, the IRS announced that it will not assert that any taxpayer has understated his/her federal tax liability by reason of the receipt or personal use of frequent flyer miles.