Lawmaker To Revisit Taxing Of Frequent Flier Miles

Even harder than racking up enough frequent flier miles to earn a free flight may be figuring out how they're taxed. Sen. Sherrod Brown (D., Ohio), chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, plans to revisit the guidelines over taxing frequent flier miles after a letter he sent to Citibank (C)triggered confusion and highlighted the issue's complexity.

In a letter sent Monday to Citibank's chief executive, Vikram Pandit, Brown urged the bank to stop sending tax forms to its customers encouraging them to report their frequent-flier miles as income that can be taxed. Calling Citibank's interpretation of tax laws "incorrect," Brown wrote that "the last thing Citibank should be doing is creating baseless fear in middle class families, or placing a nonexistent tax burden on the backs of families who are already struggling to make ends meet." But Brown's reading of the law may not have applied in this situation, in which Citibank awarded the miles to customers who opened bank accounts.

Brown pointed to a 2002 IRS announcement stating that someone who earns frequent flier miles while traveling for business or "official" travel generally doesn't need to pay taxes on them. However, in this case, Citibank noted that the frequent flier miles were distributed as a bonus for starting an account, making them a taxable gift.

"When a customer receives a gift for opening a bank account--whether cash, a toaster or airline miles--the value of that gift is generally treated as income and subject to reporting," Citibank spokeswoman Catherine Pulley said in a statement. Citibank declined to say how many of its customers received the tax forms.

The IRS said earlier this year that a taxpayer who earns more than $600 in "prizes and awards" must pay taxes on them. And in a statement provided Monday, the tax agency specified that someone who received frequent flyer miles as an incentive for opening a bank account may have to pay taxes on them.

The agency's 2002 announcement "focused on a specific area involving the receipt or use of frequent flyer miles attributable to a taxpayer's business or official travel," the IRS said in the statement. "That guidance does not address the issues raised when frequent flyer miles are given as a premium for opening a financial account."

A spokeswoman for Brown said the senator's office had contacted the IRS before sending the letter to Citibank. An IRS representative had said the 2002 guidance still stood and the agency did not plan to give any further guidance, according to Brown's staff. The IRS did not return a request for comment on this exchange.

"Sen. Brown intends to follow-up with IRS to seek greater clarification as to why it would apply a different standard to frequent flier miles accrued through professional versus personal travel," his spokeswoman said.

-By Kristina Peterson, Dow Jones Newswires; 347-882-7215; [e-mail]