Man wins 1 million airline miles

Discussion in 'Alaska Airlines | Mileage Plan' started by sobore, Mar 10, 2013.  |  Print Topic

  1. sobore
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    sobore Gold Member

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    http://fox13now.com/2013/03/09/vernal-man-wins-million-airline-miles/

    A Vernal man is now a millionaire—if you count someone with a million airline miles a millionaire that is.
    Tal Ehlers was the grand prize winner of a contest held last year by Red Lion Hotels. He now has one million airline miles to use on Alaska Airlines. A million miles are worth as many as 40 round-trip flights.
    Ehlers said he was a little bit skeptical when he first got the call.

    “You always look at these sweepstakes, and you wonder if people really win these things and apparently they do,” he said. “It was quite exciting to find that this came to our household, that we were fortunate to be the recipient of this particular prize.”

    Read More: http://fox13now.com/2013/03/09/vernal-man-wins-million-airline-miles/
     
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  2. canucklehead
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    canucklehead Gold Member

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    Nice prize!

    I wonder if he will have to claim the value of the miles in his tax return! :eek:
     
  3. HaveMilesWillTravel
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    HaveMilesWillTravel Gold Member

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    I am pretty sure that's a requirement. I'd value it at 40 times the cheapest RT on Alaska.
     
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  4. MX

    MX Gold Member

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    I'm not so sure. Miles are not legal tender, so can not be treated as income. What are the requirements when you receive any other property that's not legal tender -- like a couch, house, or company shares? I believe in all cases you declare it to the IRS when you sell or convert that property into something else. In case of miles, you can't sell them on the open market - so they do not have a current market value. However, they can be converted to air travel. So based on the standard IRS logic, you incur tax liability at the time of that conversion (i.e. air travel).
     
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  5. cliburn
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    cliburn Gold Member

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    I won 100,000 AA miles last fall in a sweepstakes. They asked for my SSN and sent me a 1099-MISC valuing the miles at 1.75 cents each......
     
  6. HaveMilesWillTravel
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    HaveMilesWillTravel Gold Member

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    Tell Citibank :)
     
  7. MX

    MX Gold Member

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    That sucks. Unfortunately, inconsistent tax treatment in this area will likely continue until someone decides to challenge it.
     
  8. HaveMilesWillTravel
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    HaveMilesWillTravel Gold Member

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    It's sucks, but I think I'd gladly accept 100,000 free RDMs in exchange for a $1750 1099-MISC... all day long.
     
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  9. cliburn
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    cliburn Gold Member

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    That was my view.
     
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  10. eponymous_coward
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    eponymous_coward Gold Member

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    Yeah, but a million RDMs = 17.5K in income to add to taxes (could easily push you into a new tax bracket, where you are looking at $4+K in taxes). Ouch. Oh, and you can't sell some of the miles to help pay the taxes, without getting into trouble (like you could a new car, so you could at least score cash out of winning a car if the tax bill was going to really hit you).... :(
     
  11. HaveMilesWillTravel
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    HaveMilesWillTravel Gold Member

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    Yes, I agree that for some folks the 1,000,000 miles may not be the great prize they were hoping for. I'd still love to win it :)
     
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  12. Scottrick
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    Scottrick Gold Member

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    It depends partly on the value to Alaska Airlines. If they want to write it off as a business expense, then it's definitely taxable.
     
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  13. Bay Pisco Shark
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    Bay Pisco Shark Gold Member

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    Well, the "good news" is that if he redeems the Red Lion miles for the best air seat he can (such as EK or CX), the seat, service and food will be far superior to any lodging or dining he ever had at a Red Lion.
     
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  14. ralfkrippner
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    ralfkrippner Silver Member

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    In Germany our tax laws are that if you win something at a lottery or sweepstake it's always tax free. Maybe one of the few good things in german tax law... ;-)
     
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  15. Counsellor
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    Counsellor Gold Member

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    Well, it's not really inconsistent.

    If you receive miles for buying something (and getting a credit card is considered "buying something" even if the fee is waived the first year), the miles are considered to be a part of the "something" you purchased (technically, they're considered to be a "refund" of part of the purchase price, known as a "rebate"), and hence not taxable.

    If you win a prize, be it a new car or a million miles (or a toaster), the prize is considered to be income, and taxable at fair value (but see below). You're supposed to get a 1099-MISC from the entity awarding the prize if it is valued at $600 or more.

    Because of laws governing banking/financial transactions, if you get a million miles (or a toaster) for opening a banking account, the miles (or toaster) is considered to be advance interest and taxable as such. You'll get a 1099-INT from the banking institution reflecting that (or at least you're supposed to).

    Valuation is a problem. With a new car (or a toaster), there are many ways to value it -- purchase price if you bought it (MSRP?), what you could likely get if you sold it in an arms-length transaction (e.g., "blue book" value, taking into consideration the depreciation just from driving it off the lot), the value of the use you will put it to (e.g., if you'd have bought a Chevy, the Caddy might be valued as a Chevy), etc. The entity awarding the prize is likely to value it on the high side (e.g., MSRP) to avoid questions from the IRS. The taxpayer may value it differently. It can get complicated if there is no legitimate market for the product.

    If you search on FlyerTalk, you'll find many threads on how to value miles and how to contest the valuation on the 1099 you may have received. There may be some here, too, but I haven't looked.
     
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  16. daninstl

    daninstl Gold Member

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    What if you turn the value around and donated them to charity. What type of deduction would you get? Just wondering.

    What if you bought a million miles and used them for business travel. I assume that's deductible?
     
  17. anabolism
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    anabolism Gold Member

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    It has nothing to do with "legal tender" or not. It has to do with what the IRS considers income, and that includes in-kind benefits or services (e.g., car service, products, etc.) If you win a car, you must pay taxes on the value of the car, even though a car is not "legal tender" and you might never sell it.

    As I understand IRS rules on the subject, FF miles that you receive as part of normal business are akin to a rebate and not taxed, but those that you receive for winning a contest are. Bonus miles offered as an inducement for credit card spending are currently treated in the former, while those you get for simply opening a checking account are treated (by CitiBank) as the latter, but I don't believe the IRS has actually ruled on these finer points.
     
  18. MrAOK
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    MrAOK Silver Member

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    We've been through this in the past, but in the U.S., a contest win is a taxable event--even a win of frequent flyer miles.

    That said, what Alaska Air values the "gift" as is not necessarily what it is worth.

    IRS rules (which I'm all too familiar with since I won a trip last year), lets the taxpayer value the gift.

    So for instance a taxpayer who can demonstrate that 50,000 miles bought a trip for two that would have cost $500, can fairly value the 50,000 miles at $500 even if the airline says the miles were worth $1,000.

    The difficultly comes in arguing about the value of that many miles well before they are used. For two or three years, you can amend a past tax return after the actual value becomes clearer, but it still is going to be hard to demonstrate a lower value for all the miles.
     
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  19. MX

    MX Gold Member

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    I don't think that miles in your account are ever your full property, because you can't sell them. They are more like a feature of your contract with the airline. You may or may not receive any benefits of those miles (i.e. air travel) depending on many factors, such as continuing existence of that airline. When everything goes well and you receive the benefit of air travel, then yes that benefit has a clear value and should be taxable. But until that time you got nothing tangible with no market value.
    I know that Citibank would disagree with this logic, but their marketing expense does not automatically become my property or benefit until I actually get air travel. ;)
     
  20. anabolism
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    anabolism Gold Member

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    I'm not sure the IRS cares.
     
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  21. HaveMilesWillTravel
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    It's weird anyway.... "here, congratulations, you win this big prize... but no, it's not really yours!"
     
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  22. MX

    MX Gold Member

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    That's correct. If you can not do with it as you please, and it only exists in the airline's account, and the airline can make it disappear at it's whim -- stop kidding yourself, it's not your property.
     
  23. Counsellor
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    Counsellor Gold Member

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    Well, it doesn't have to be your "property" in order to be income to you. If you have the use of it, that "use" can be income, e.g., you win a leased car to use for a year -- you have received income.

    There may be an argument that until you actually use it you haven't received income, but the IRS usually says if you could use it, it's income whether you do use it or not. In a trivial example, IRS counts interest income as income when it is credited to your account, not when you pull it out and actually spend it.

    Arguing that the miles might never be used is speculative, and I rather doubt (but am issuing no legal opinion on the subject) that it would persuade the IRS to devalue the prize. On the other hand, if they actually did expire unused, and the tax year was still open for a 1040X, you might try amending your return and arguing that they in fact had no value to you.
     
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  24. MX

    MX Gold Member

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    I understand and like your point, although the example is probably not the best. To me having use of a leased car would be a tangible benefit that's more similar to air travel than having points on a statement.
    Also when you have a million miles, there's a good chance that some will be devalued before you get to convert them into something useful.

    In any case, I don't think IRS would ever argue that points are similar to interest income in legal tender. That would amount to giving points the status of alternative national currency, which is illegal.
     
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  25. milchap
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    milchap Gold Member

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    Same law in Canada.
     
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