In Uncategorized on 08/26/2014 at 18:03

And It’s Constitutional

While Parimal H. Shankar and Malti S. Trivedi make a to-do about the Constitutionality of the Section 219(a) IRA AGI adjustment (improperly called a deduction in the opinion) and limitation when applied to the self-employed spouse of an actively-participating employee spouse in 143 T. C. 5, filed 8/26/14, that’s not  what I’m aiming at in this blogpost.

Judge Halpern blows away the argument that Section 219(a) discriminates unconstitutionally against self-employeds by pointing out that self-employeds are not a suspect category (although I sure know a lot of self-employed types who are pretty suspect), and the IRA tax deduction isn’t a fundamental right. And Congress had a rational reason for precluding certain high-income joint filers from taking IRA deductions if one of them actively participated in a plan. See 143 T. C. 5, at p. 9, if you’re interested.

No, I find more juice in the “Thank You” points.

Parimal cashed in 50K “Thank You” points he got from Citibank, wherein he stashed his cash, apparently in exchange for his patronage. With the cashed points, he got an airline ticket to anywhere in the lower 48, Alaska and Canada. This is set forth in an affidavit from a duly authorized records custodian at Citibank. “Attached to the affidavit are documents and computer transcripts from Citibank showing that Mr. Shankar redeemed 50,000 thank you points…to purchase a restricted coach class airline ticket for travel in the lower 48 United States, Alaska, and Canada. Also attached to the affidavit is a letter… in which… the custodian of records for Citibank, represents that the fair market value of the airline ticket was $668.” 143 T. C. 5, at pp. 4-5.

The affidavit and attachments go in as business records (see FRE 803(6) and 902(11), and yes, Parimal and Malti got the 902(11) notice and the right of inspection).

Now Judge Halpern nails Parimal for unreported income for the airline ticket, despite Parimal claiming he never got it. Parimal has the burden, and his unsupported testimony doesn’t beat Citibank’s records. And Malti doesn’t show up for trial, so no testimony from her.

But why are the redeemed points income? “We are not here dealing with the taxability of frequent flyer miles attributable to business or official travel, with respect to which the Commissioner stated in Announcement 2002-18, 2002-1 C.B. 621, he would not assert that a taxpayer has gross income because he received or used frequent flyer miles attributable to business travel. Petitioners have provided us with no information concerning the reason Citibank awarded Mr. Shankar thank you points.” 143 T. C. 5, at p. 13.

And Parimal’s counsel didn’t object when IRS’ counsel said that unreported interest income was at issue here. Note the word “interest”; Judge Halpern does.

“We proceed on the assumption that we are dealing here with a premium for making a deposit into, or maintaining a balance in, a bank account. In other words, something given in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest. In general, the receipt of interest constitutes the receipt of an item of gross income.” 143 T. C. 5, at pp. 13-14.

And Parimal didn’t argue that the FMV of the airline ticket he said he never got was less than the $668 Citibank claimed it was worth.

But the best part is in the footnotes. And that’s my takeaway.

“Neither party has addressed, nor do we consider, whether award of the thank you points, itself, may have been the taxable event.” 143 T. C. 5, at p. 14, footnote 2.  The award, note well, not the redemption.

Aye, there’s the rub.

Practitioners, if you’re hit with a thanks-but-no-thanks, if the points were awarded and accumulated over years, especially years before the year at issue and now outside the SOL, make the argument.

And recipients of bank-issued largesse, remember: “Timeo Danaos et dona ferentes”. I need not, of course, translate.

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