Senate Dem calls out Citibank on airline miles

Sen. Sherrod Brown is calling on Citibank to end a practice of treating frequent-flyer miles as taxable income. 

In a Monday letter to the banking giant, the Ohio Democrat dismissed Citibank’s assertion that airline miles are a taxable prize or award, and suggested that the bank was piling on American families during a sluggish economy.

“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,” Brown wrote to Vikram Pandit, the chief executive of Citigroup, which runs Citibank.

The Los Angeles Times reported last week that Citibank classified frequent-flyer miles as miscellaneous income — valued at 2.5 cents per mile — on tax forms sent to customers who received thousands of miles as part of opening an account with the bank.

Citibank said it was basing its decision on the Internal Revenue Code, which says that someone must pay income tax if they receive at least $600 in prizes and awards.

Tax professionals said they had never seen airline miles considered taxable, and the IRS, at the time, said it stood by a 2002 policy declaration that said that the agency “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles.”

But on Monday, the IRS distinguished between what Citibank was doing and the agency's previously outlined position.

Michelle Eldridge, an IRS spokeswoman, said that the 2002 announcement was focused on the use of business-related frequent flyer miles, and suggested the Citibank miles would be taxable.

“When frequent-flyer miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law,” Eldridge said.

The spokeswoman added that taxpayers unsure of how to proceed should contact their tax professional or the company or entity that sent the tax form in question.

The statement comes just weeks after the IRS announced that the 2006 tax gap — the difference between what taxpayers owe and what is paid on time — had grown to $450 billion.

A Citigroup official told The Hill that, while the practice discussed in Brown’s letter is not exactly common, it is also far from unprecedented. The official also said that Citibank is far from the only financial institution to engage in the practice.

“Rewards and airline miles that are provided in connection with a purchase on a credit card are routinely not subject to individual income tax reporting,” the official said. “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. This is separate and distinct from miles or points earned by our credit card customers for their purchases.”

Meanwhile, a spokeswoman for Brown said that the senator’s office had contacted the IRS to discuss the issue, and been told that the agency would not be updating its 2002 guidance on the subject.

“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,” the spokeswoman, Meghan Dubyak, said in a statement. 

Brown, who has a reputation for taking up populist causes, is up for reelection in 2012 and facing a tough fight to hold his Senate seat.

— This post was lat updated at 3:59 p.m.

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