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Exclusion of Airline Ticket Award from Income Doesn't Fly with IRS.
(Parker Tax Publishing September 9, 2014)

A married couple (1) had to include in gross income the value of an airline ticket received when they redeemed thank you points awarded for opening an account at Citibank, and (2) could not take a deduction for IRA contributions because the wife was an active participant in an employer-sponsored retirement plan and the couple's modified AGI was above the phaseout ceiling. Shankar v. Comm'r, 143 T.C. No. 5 (8/26/14).

Unreported Income from Redemption of "Thank You" Points

Parimal Shankar and Malti Trivedi are married to each other. During 2009, Parimal banked at Citibank. In return for opening an account at Citibank, Parimal received a noncash award from Citibank in the form of thank you points. Citibank reported to him and to the IRS on a 2009 Form 1099-MISC, Miscellaneous Income of $668. This was the fair market value of an airline ticket Primal received when he redeemed 50,000 Citibank thank you points. Parimal and Malti did not report this amount on their tax return.

The IRS included the $668 value of the airline ticket in the couple's income. This inclusion was supported by evidence in the form of Citibank records showing that Parimal had redeemed 50,000 thank you points to purchase an airline ticket. The IRS stated the value of the ticket was omitted from the Form 1040 and the amount constituted interest in the form of a noncash award for opening a bank account.

The couple denied receipt of the income shown on the 2009 Form 1099-MISC. Parimal claimed to have known nothing about the thank you points and said he received no award. The court found, based on Citibank's records, that in 2009 Parimal did receive an airline ticket from Citibank in redemption of 50,000 thank you points. The court next considered whether this receipt of the airline ticket constituted taxable income and held that the couple did have to include in their gross income the value of the airline ticket received in redemption of the thank you points.

The court noted that the issue at hand was different from the redemption of frequent flyer miles attributable to business or official travel, which the IRS does not consider taxable income (Announcement 2012-18). Instead, the court concluded that it was dealing with a premium for making a deposit into a bank account that was, in effect, taxable interest given in exchange for the use (deposit) of Parimal's money. Because the couple failed to show the ticket was worth any less than the $668 Citibank said was its fair market value, the court found that Parimal had omitted $668 of gross income from the couple's Form 1040.

IRA Contribution Deduction

In 2009, Parimal was a self-employed consultant who reported his self-employment income on Schedule C. Malti worked for University Group Medical Associates, PC (Associates). In addition to paying her salary, Associates made contributions on her behalf to an annuity purchase plan described in Code Sec. 403(b), which she was not required to report as an item of gross income. The couple claimed a deduction of $11,000 for IRA contributions made in 2009 and their adjusted gross income that year was approximately $244,000. They also reported alternative minimum taxable income of $235,000 and alternative minimum tax (AMT) of $2,775.

For 2009, Code Sec. 219(b) limited the deduction for IRA contributions to the lesser of (1) $5,000, or (2) an amount equal to the compensation includible in the taxpayer's gross income for the tax year. The deductible amount was phased out if both taxpayers were "active participants" in a retirement plan at work during any part of the year, including an annuity contract described in Code Sec. 403(b). For 2009, for a married individual who was not an active participant in a retirement plan at work and who filed jointly with a spouse who was an active participant, the phaseout range was $166,000 to $176,000.

The IRS disallowed the couples' IRA deduction and adjusted their AMTI and AMT as a result. According to the IRS, the couple's IRA deduction was $0 because Malti was an active participant in her employer's retirement plan and the couples' income was above the threshold amount for taking a deduction.

With respect to the IRA deduction, the couple argued that Code Sec. 219 is unconstitutional because it discriminates against self-employed individuals who contribute to IRAs by imposing restrictions on IRA contribution deductions that do not apply to tax benefits afforded to participants in other types of retirement plans.

The Tax Court held that the couple was not entitled to a deduction for IRA contributions because Malti was an "active participant" in an employer-sponsored retirement plan and the couple's combined MAGI was above the phaseout ceiling. The court rejected the argument that the IRA deduction limitation on married couples was unconstitutional. The limitation on the deductibility of IRA contributions by one who files a joint return with an active participant in a qualified retirement plan, the court stated, does not involve a fundamental right or suspect category and is, therefore, constitutional if the classification is reasonable and has a rational relationship to the purpose of the legislation. The court noted that Congress had drawn a reasonable line limiting or denying the IRA deduction in certain cases and thus was constitutional.

For a discussion of limits to IRA contributions, see Parker Tax ¶134,520. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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