Donations of Frequent Flyer Miles: Are they tax-deductible?
Texas International Airlines launched the first frequent flyer program in 1979. Now most airlines have similar loyalty programs that offer members opportunities to redeem accumulated miles for service upgrades, free or discounted car rentals, hotel stays, merchandise, and other products and services.
Clearly, frequent flyer miles have beneficial value, but are they tax deductible if given to a charity?
Tax advisors have been pondering this question for years. Most feel that a tax deduction for donated miles would not be sanctioned by the IRS. An August 2000 article from the Gift Planning Design Center stated that “Frequent flyer miles are often solicited by charity (but) the miles may generate no deduction at all since they appear to be ordinary income property and the deduction is limited to basis….. however, the miles have no basis since they are free rather than purchased.”
The underlying logic is that if the value of the frequent flyer awards is not taxed to the individual as earned income, then the individual would have no basis in any award and, assuming the award is ordinary income property, there would be no charitable deduction for a gift of zero basis ordinary income property.
Other advisors have taken the position that donated frequent flyer miles can be deducted because they should be considered as part of the consideration received in exchange for a purchased airline ticket. They maintain that if airline patrons do not have enough frequent flyer miles to acquire a ticket, airlines will often sell them additional miles. Basis, arguably, could be valued as the cost of purchasing new miles or, perhaps, the price at which frequent flyer miles may be redeemed.
Still other advisors argue that the frequent flyer miles taxpayers receive for “free” cannot be deducted– but those for which taxpayers pay and then donate may be tax deductible. Whether purchased miles might be considered a capital asset as opposed to ordinary income property, and whether the property, as such, would need to be appraised to determine whether the fair market value is greater or less than the donor’s basis should be determined by the donor’s tax advisor.
In 2002, the IRS announced that it would not deem frequent flyer miles to be taxable. In Announcement 2002-18, it stated that “The IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”
The IRS announcement didn’t directly answer the original question about their tax deductibility, leaving lawyers, accountants and others scratching their heads, including Jim Peterson. Peterson, the editor and publisher of Frequent Flyer, is billed by the Wall Street Journal as the most influential frequent flyer in America. The New York Times tagged him “the world’s leading expert on airline frequent flyer programs.”
Peterson writes that IRS treats frequent flyer mileage redemptions as a reduction in the ticket purchase price—not as income. His analogy is that it’s like a coupon for a free box of Bisquick. Because neither free pancake mix nor frequent flyer miles need be reported as income to IRS, “you can’t deduct value from an item that does not have value to begin with.” Peterson maintains that members who donate their frequent flier miles to nonprofit causes are not allowed to take a deduction against the donation.
Tim Winshop, the Editor and Publisher of FrequentFlier.com, offered a somewhat different spin. “If you didn’t purchase it on the front end, you can’t deduct it on the back end,” he wrote in 2001. He backed this up with a quote from a United spokesperson, who stated that “Frequent flyer miles are a reward for loyalty. They do not constitute property. And the IRS does not grant you deductions for something you don’t pay for.”
Cutting to the quick, there is a reasonable risk that the IRS would disallow any charitable tax deduction for donated frequent flyer miles, potentially increasing their risk of audit. There are just too many technical and administrative issues relating to these benefits on which no official guidance has been provided. Although the IRS, to my knowledge, has not pursued a tax enforcement program with respect to promotional benefits such as donated frequent flyer miles, the Make a Wish Foundation, Delta Airlines, and American Airlines all state on their websites that donated frequent flyer miles are not tax deductible. So why risk it?
As seen in the Ohio Jewish Chronicle.
Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.