Are Points Income Under the Tax Code? The Answer

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Previously I had posed the question given on a final exam when I was a professor of tax law about whether or not points are considered income under the US Tax Code: Now in commiseration of Tax Day, I will give the answer. Note that the answer is exactly why law school produces unemployable lawyers. There never is a straightforward answer.

Question: 

‘Unlucky’ is a small business owner and world traveler. He recently signed up for credit card offers that give him points that he can use to purchase airline tickets, hotels, or simply redeem for cash. Most recently he signed up for a U.S. Generic Bank personal card and U.S. Generic Bank business card. The business card has a spending requirement of $5000 within the first 3 months of opening and awards him with 50,000 points. The personal card has no spending requirement but charges an annual fee of $75 for first use. The reward is 30,000 points.

The 50,000 points is redeemable for $500 cash or a round-trip flight overseas ranging in value from $5000-$10,000. The personal card’s 30,000 points is worth $300 in cash or five nights stay at a resort worth $500 a night.

Explain Unlucky’s tax implications for the personal and business cards. Assume rewards cannot be combined. Please focus more on the policy implications for your answer.

Answer: The overall policy that should be discussed is what constitutes gross income, when it is realized, whether it makes a difference if it is for personal or business use. Does it matter if the amount gained is in cash or is in services? This is a pressing issue as Citibank has recently sent out statements for its reward card members but there has yet to be an IRS ruling on whether this constitutes gross income or not and in what form.

 

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