Harry Gross: IRS is up in the air on whether to tax frequent-flier miles

DEAR HARRY: I have written to you before concerning my reason for having more than two credit cards: I get a lot of frequent-flier miles by opening new credit cards. But this has now had an interesting twist. My accountant just informed me that those miles (really, their cash value) are going to be taxed by the high muckety-mucks at IRS. He said he'd get back to me when he got more info on just what I have to do. Is he on the ball here, or is he just setting me up for an additional fee?

WHAT HARRY SAYS: Do you really think a true professional would set you up? If you don't trust him, you should go elsewhere. Here's where we stand. Back in 2002, the IRS issued Announcement 2002-18, which stated that it would not go for additional taxes by virtue of the use of frequent-flier miles. There was no clear statement that this was to be restricted to "earned" miles. The miles you were given as a promotion for the use of a new credit card were not even mentioned. Over many years, the IRS has permitted some minimal amounts to be excluded from taxable income, and frequent-flier miles are among them. The whole furor started this year when Citibank issued 1099 Forms for promotional miles, but not for earned miles. There is a case in court now (Hirsch v. Citibank) to block Citibank from doing this in the future. I think Citibank is off-base here, and I suspect we'll see a favorable ruling from the IRS before the case is heard in court. My advice: Do not report these miles as income until we hear further.