Baseball history, frequent flyer miles and the IRS - Albuquerque Journal

Baseball history, frequent flyer miles and the IRS

The tax law affects, or some may say infects, just about everything that we do in life.

I thought of this pearl of wisdom as I checked the flight status before driving my daughter to the airport.

This may require a bit of an explanation. To start, you need to know that the tax law says income can be any economic benefit not specifically excluded by law.

In a simple sense, if you were happy to get something, it’s income unless you can find a specific exclusion that says otherwise.

In 1998, Mark McGwire hit 70 home runs, the first Major League Baseball player to do so. The fan who caught the ball refused to return it when McGwire would not meet with him.

Almost immediately, tax geeks started commenting on the tax effects of this transaction. Found treasure is income. Giving a valuable asset away is a gift.

Earlier that same season, the IRS was forced to issue a news release to say it would not try to tax a fan who returned McGwire’s 62nd home run ball (that home run broke Roger Maris’ single-season record).

The “no tax” result was clearly wrong as a matter of law. The guy who caught home run No. 70 sold the ball for just over $3 million. The cash would definitely be income.

Years later Yankee star Derek Jeter got his 3000th major league hit with a home run. A former football player fell on the ball as if he were recovering a fumble.

This fan gave the ball to Jeter in exchange for some swag (and a Jeter meeting). The ball was worth much more, hence, a gift likely resulted.

The nice guy approach probably saved Fan Two from tax problems. Again, not because the law has an exception for nice guys, just because the IRS has an aversion to negative publicity.

Back to the flight. In 2002, the IRS adopted a nice guy approach to redemption of frequent flyer miles. This was an “announcement,” which carries little authoritative weight.

Nonetheless, IRS said if it changed its mind, the change would be prospective only. They have said nothing since 2002.

What did IRS say? That trying to treat the use of frequent flyer miles as taxable income created “numerous technical and administrative issues.”

These issues included trying to separate the source of the miles (business versus personal travel), and the value of the miles redeemed.

Miles earned for personal travel should be a purchase price adjustment rather than income. Miles earned for business travel really should be income.

The valuation issue led IRS to just say, like catching a historic baseball, we’ll just look the other way.

When someone looks the other way, smart people know you’re supposed to quietly slip out the door. Don’t knock the silverware over on the way out or sing a bawdy Irish drinking song.

The announcement said it did not apply if you received cash for the miles. That’s a bit too bawdy for IRS’ tastes.

These days many flights are being canceled or oversold. Many are also very late. Flyers may get vouchers for future travel, or even cash for being bumped.

Vouchers should not be taxable. A 2006 formal ruling by the IRS National Office said federal law creates two rights when you buy an airline ticket.

First, you have the right to travel on the flight that you booked. Second, you have rights to compensation if you are bumped from that flight. Both rights come from a single contract with the carrier.

Vouchers for future travel represent part of what you originally paid for. Therefore, they cannot be income. Cash is likely a different story.

There are no court cases dealing with cash received from the airline that bumped you. In a 2014 Tax Court case a man redeemed account award points earned with Citibank for a flight.

Citibank valued the flight at $668 and issued a 1099 form for that amount. The Tax Court held that the bank’s flight award was not covered by the 2002 IRS announcement and that Citibank’s valuation seemed reasonable.

Cash for being bumped may be more exciting than a voucher, but also troublesome at tax time.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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