Frequent-flyer Miles Attributable to Business Travel Are Not Taxable

Most major airlines offer frequent flyer programs, under which passengers accumulate miles for each flight. Individuals may also earn frequent-flyer miles or other promotional benefits, for example, through rental cars or hotels. These promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services or other services or benefits.

Questions have been raised as to the taxability of frequent-flyer miles or other promotional items received from business travel and used for personal purposes. There are numerous technical and administrative issues relating to these benefits for which the IRS has offered no official guidance, including the timing and valuation of income inclusions and the basis for identifying personal-use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures. Because of these unresolved issues, the Service has not pursued a tax-enforcement program on promotional benefits such as frequent-flyer miles.

Consistent with prior practice, the IRS will not assert that any taxpayer has understated his Federal tax liability because 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. Any future guidance on the taxability of these benefits will be applied prospectively.

This relief does not apply to travel or other promotional benefits converted to cash, to compensation paid in travel or other promotional benefits, or in other circumstances in which these benefits are used for tax-avoidance purposes.

Ann. 2002-18, IRB 2002-10