TedChee wrote:
Read the article to get context for my comments:
_http://articles.orlandosentinel.com/2012-02-07/travel/orl-travel-perkins-02
0712_1_value-of-frequent-flyer-citi-inflated-value_
(http://articles.orlandosentinel.com/2012-02-07/travel/orl-travel-perkins-020712_1_value-of-frequent
-flyer-citi-inflated-value)
In a nutshell, Citibank is using this technique to artificially
boost its losses analogous to the old tax shelters where losses
were created independent of market value.
I'm willing to bet the article is inaccurate. (For that matter, your analogy doesn't hold water either.)
If fault lies anywhere, it's with the IRS in giving issuers faulty guidance on how to value the reported gifts. In a case of FF program mileage, where "market value" isn't readily nailed down, the IRS should have permitted Citi to substitute it's actual cost.
In citing a higher valuation on a 1099, Citi doesn't gain any advantage at all. There's no IRS provision that will permit it to use a inflated "valuation" as a cost, without also capturing the difference between that stated cost and it's actual cost as off-setting profit. (And, frankly, any newswriter who suggests that's the case is a bit of an idiot.)
The more likely treatment, would be similar to reporting any other cost in a transaction: Actual cost is expensed ... any associated revenue is recorded; the difference falls out as taxable profit/loss.
There are a few isolated transactions where a market value expense can be taken, without regard to cost paid. They tend to involve charitable contributions (and the associated tax advantage is granted to further the societal benefit of such contributions).
As far as OP's "analogy" -- There have historically been tax advantaged investments that were structured so that they generated sizable expenses on an accrual basis that weren't matched by actual cash outlay, so that for the taxpayer qualified to capture those accrued losses, the investments generated a potential cash influx up front. While in theory there should be an eventual recapture of those tax payments with subsequent tax liability, the issue is that the investments in essence effected a free loan from the IRS. The IRS has since cracked down on the deductibility of such expenses.
This is in no way analogous to the situation here. Again, I'll emphasize in this case there's no unusual tax break for Citi to be realized at all.
As far an any recipient of a 1099 involving an inflated market valuation of property, they should take appropriate steps to document a more realistic value and file on that basis. (I don't have sufficient experience with this to comment further.)
- H.