Prize winnings

[groovie]

We may have won enough air miles from Hawaiian air to get round trip tickets and hotel vouchers to cover a stay at a Hyatt resort in Hawaii. We didn't win cash and the air miles would be deposited on my air miles account.

What if anything should be done?

[NoMoreCards]

Pack?

[LadyInTheRed]

I love NoMoreCards answer. BUT...

The value of the miles is probably taxable income and the trustee may be interested. It also may be that it does not result in enough of an increase in income to matter. The best thing to do is contact your attorney and let him/her know about your winnings.

(I see from prior posts that you are in an active Chap 13. In the future, it would be helpful to include that information when you ask questions. Or, you could include it in your signature.)

[tobee43]

really you think it's taxable? that would mean when you go to our wells fargo down the street and you get a $100 cooler for opening up a savings account you'd have to pay tax? ROFL!!! if that's not calling the kettle black!!

my vote is it's not taxable, based on how you won this prize and that's the key. in this case you "earn" the value and did not win it per se. i'm certain by paying what you have already to the airline company you already paid for the trip as well.

i'll second NoMoreCards answer.

[justbroke]

Unfortunately most "lottery" winnings are taxable even when they are non-cash prizes. For example, a person that I know won a vacation not too different from the poster. While it was from the Massachusetts lottery, the person was told, when they picked up the prize, that the prize was taxable and it would be reported at ARV (average retail value). The person sold the prize to another person to cover the taxes, because this person could not afford the taxes on the vacation.

The key is in the value of the prize. Even if the prize were $100, it may still be taxable.

I would consult with my bankruptcy attorney as to whether this needs to be reported to the Trustee. Please be fully aware, however, that the miles may have a "retail value" and your winning could be both reportable and reported to the IRS on a 1099.

[LadyInTheRed]

really you think it's taxable?

Yes. There are many forms of prizes that are taxable income. Go to http://www.irs.gov/publications/p17/ch12.html and click "other income" in the table of contents to see some of them. Here's a Wall Street Journal article specifically about the taxation of frequent flyer miles, insipred by a lawsuit against citibank for issuing 1099s for miles awarded as an insentive for opening a credit card account (part of their complaint is that Citibank didn't disclose that the value they would report would generate enough tax to make the incentive less attrative). http://online.wsj.com/article/SB1000...818720712.html According to the article, miles received as prizes are taxable income.

that would mean when you go to our wells fargo down the street and you get a $100 cooler for opening up a savings account you'd have to pay tax? ROFL!!! if that's not calling the kettle black!!

Receiving an incentive for openning an account is different than winning a prize. But, the Wall Street Journal does say that incentives recieved in exchange for opening an account are taxable. The $100 cooler probably is taxable income. The instructions for form 1099-Misc says that a 1099 must be issued to any individual who receives "at least $600 in rents, services (including parts and materials), prizes and awards". Just because income isn't enough to require a 1099, doesn't mean it's not taxable income.

[justbroke]

Just because income isn't enough to require a 1099, doesn't mean it's not taxable income.

This is exactly the case! In fact, many taxpayers do not understand "use tax" and how that may relate to their online purchases, where no sales tax is collected by the seller.

[tobee43]

i have to defer to what you are both saying dealing with chapter 13's and what and what is not considered income. since i was a 7 i just know frequent flyer miles are not considered assets as such.

also, i can only say from direct experience tax wise. i have never seen anyone claim this as part of their income. so that is the view i can only take. certainly not what is reportable to the trustee in a 13 as part of or considered "taxable" income. with the thousands of returns i have dealt with over the past 30 years i can't say i saw a one with someone provided any documentation on frequent flyer mile reimbursements.

yet...i get exactly what you are saying, in a 13 it's still considered income. i don't get it, since these are earned rewards not money exchanges.

you may find this interesting:



Frequent Flyer Miles and Rewards Points – Are They Even an Asset of Yours?

In deciding how to treat miles and points for bankruptcy purposes, we start by looking at what kind of assets they are.

A consumer who files for bankruptcy must list all assets in the bankruptcy petition. However, there is an issue as to whether frequent flyer miles are an asset that must be listed.

I would say that they do not have to be listed at all in a bankruptcy petition. Here’s why:

All frequent flyer programs have fairly comprehensive terms and conditions that uniformly indicate that the miles and award points have no monetary value whatsoever. These loyalty programs also state that miles are personal and cannot be assigned, traded, willed or otherwise transferred, except with consent of the program.

In addition, most programs state that membership terminates upon a member filing personal bankruptcy. Also, all airline programs vigorously prohibit the sale of award tickets.

Many frequent flyer loyalty programs and point programs, such as the popular American Express Membership Rewards program, expressly state that miles or points are not property of the member, and are not transferable by operation of law to any person or entity. Some actually state that the miles are owned by the program.

Although it can be argued that a consumer debtor has a legal or equitable interest in the miles or points, and that this interest must be reported in the bankruptcy schedules, that argument is defeated by the terms of the loyalty programs which state that the member does not have a property interest in them.

Thus, if a program states that the miles have no value and that they are not owned by the consumer, the reasonable conclusion is that the consumer does not have an asset that must be listed in the bankruptcy petition.

Even if, for the sake of argument, the miles and points were considered “assets of the bankruptcy estate,” most debtors would be able to exempt them under a wildcard exemption.

Bankruptcy Trustees Do Not Ask About Miles and Points

In my twenty-six years of practicing bankruptcy, and having attended many thousands of meetings of creditors in bankruptcy court, I have never once seen any case where a trustee has even asked about frequent flyer miles. There are two reasons for this:

First, trustees recognize that it would be very difficult to administer miles and points as an asset considering they are very illiquid, and secondly, even if they did have value, most consumers who file for bankruptcy, and who have frequent flyer miles, would have miles worth so little in relative terms, that it would not be viable for the trustee to administer them as an asset.

Can a Bankruptcy Trustee Compel a Consumer Debtor to Redeem Miles?

Let’s suppose a creative and aggressive Chapter 7 trustee did learn that a debtor had a substantial cache of miles. Keep in mind that a trustee certainly could not sell an airline ticket – every program clearly prohibits that. Could the trustee compel the debtor to redeem those miles for gift certificates, which the trustee could then try to sell?

I would argue that if the frequent flyer program stated that the miles were not the property of the debtor, then the miles never became an asset of the bankruptcy estate, and the trustee has no right to control that asset.

A trustee would also have great difficulty pursuing them because of the standard provision in most frequent flyer programs, that the debtor’s membership in the program terminates upon the filing of bankruptcy. Technically, upon filing bankruptcy, all miles would then be lost.

However, I believe the frequent flyer programs include this provision to protect the consumer from creditors, similar to a spendthrift provision, rather than punish a consumer for filing bankruptcy. Thus, it is unlikely that an airline’s frequent flyer program would terminate benefits to a consumer for filing bankruptcy, absent any meddling by a bankruptcy trustee. Frequent flyer programs have no incentive to become embroiled in a fight over miles.

Nevertheless, consumers should not be parading the fact that they filed for bankruptcy to the frequent flyer or loyalty program, nor do they have any obligation to do so.


"Many frequent flier programs expressly state that miles or points are not property of the member, and are not transferable by operation of law to any person or entity," Connolly says. "This means there's a good argument that the miles are not even part of a debtor's bankruptcy estate.

"Second, even if they are considered an asset of a debtor that could be administered by a bankruptcy trustee to pay creditor claims, they very rarely, if ever, are. Bankruptcy trustees rarely inquire about airline miles. Even if a bankruptcy trustee learned about the miles, the miles usually have restrictions on transfers that would render them valueless in a sale by the bankruptcy trustee.

Consumers should therefore be able to emerge from bankruptcy with their air miles in airline frequent flyer programs intact.


Advice for Protecting Rewards Points in a Credit Card Program If You Anticipate Filing for Bankruptcy

There is a major difference between airline or hotel loyalty programs and credit card rewards programs. With the credit card programs from banks such as American Express, Chase, Capital One and others, the likelihood is that the consumer owes the banks money. All such programs have provisions that freeze the points if the consumer falls behind with payments.

Let’s take a typical scenario where the consumer has points in a credit card program such as American Express Membership Rewards. The consumer cannot use those points if the account is in default. That would certainly be the case once the bankruptcy petition is filed if there is any balance owed on the account.

The issue in protecting the points is thus: If you think you need to file for bankruptcy, and you are current with your payments, should you quickly cash out the rewards points before you fall behind and the account goes into default?

The short answer is YES. Here’s why it should be OK to do so. Let’s first address the potential argument the credit card company can conceivably make. They can argue that if the debtor cashes in the points just prior to filing bankruptcy then they engaged in some kind of bad faith conduct.

However, the credit card company would have great difficulty proving this as the debtor should be able to argue successfully that the points were already earned, and that the debtor had the full right to use them regardless of any debt problems or future plans to file for bankruptcy.

When it comes to bankruptcy cases involving credit card debt, the real issue is not whether the consumer redeemed points, but whether the consumer incurred the underlying credit card debt at a time when the debtor knew or should have known that they would not be able to pay their debts.

Also, from a practical perspective, in my many thousands of consumer bankruptcy cases, I have never seen one instance of a credit card bank alleging an impropriety for redeeming rewards points. The value of points in relation to the amount of money that the consumer owes is so nominal, that banks will simply not go to any length at all to pursue a debtor who cashed them in.

Accordingly, I would feel comfortable advising a consumer debtor client to immediately redeem the points or transfer them to an airline’s frequent flyer program, assuming there was no larger issue that the consumer incurred the debt to the credit card company under fraudulent pretenses.

Another bit of advice: If you feel that you are about to fall behind with your minimum credit card payments, pull those rewards points out immediately. Otherwise, they will be frozen. You can transfer the points to airline or hotel loyalty programs, or redeem them for merchandise or gift certificates.

Keep in mind that if you redeem them for goods or gift certificates, you would now have assets that should be listed in your bankruptcy petition.

How One Savvy Consumer Lived on Miles and Points After Filing for Bankruptcy

Let me leave you with an anecdote. Jim Kennedy, a 46-year-old California man, lost his six-figure corporate development job. At the time, he had about a million frequent flyer miles and rewards points in various loyalty programs including 125,000 American Express Membership Rewards points, 85,000 Starwood Preferred Guest points, 400,000 Hilton Honors points, 100,000 Delta Sky Miles, 120,000 American AAdvantage miles, and 200,000 United Mileage Plus miles.

After running out of funds, losing his home to foreclosure, and having no luck finding a job, he filed for Chapter 7 bankruptcy. He emerged from bankruptcy with his miles intact. Thereafter, he lived for months in Holiday Inns and Motel 6′s by converting his frequent flyer miles into hotel points. This also helped his food budget because the motel provided free breakfast to its guests.

The lesson is that frequent flyer miles can sometimes really help, even after bankruptcy.

[justbroke]

tobee, it really comes down to how you acquired the frequent flyer miles. If you acquired them because you were flying on the airline, then it's considered a rebate, and neither income nor taxable. The question arises when you acquire them as part of the award in a contest.

Whether they are an asset in bankruptcy is a different story and I have not ever read where a Trustee wanted them scheduled and/or wanted to take them for the Estate. I was answering more of the tax (liability) question. The reason may be that many programs consider the miles to be property of the service provider and void at any time. That could make a Trustee very unwise to pursue recovery of the miles for the Estate.

[tobee43]

jb, yes, i understand. i was addressing the taxable income with respect to whether it's a winning of a price or a big win at a casino, which would both be considered taxable and must be reported when filing one's taxes.

it is somewhat interesting the frequent flyer miles are not consider an asset with respect to a 7, since one could literary, as the example above indicates really turn them in for tangible goods. which by the way would be taxable at the time of purchase.

your description of receiving something as a result of a contest most certainly would fall under the category of a winner of a prize therefore the total amount should and would be reflected and the issuing company should send the "winner" a W-2G, which i don't swear, but i think it's publication 525 of the tax code, which deals with , raffles, horse races, and casinos and the like and then one can and should claim the amount.

i think the question poised here deals mainly on whether the turning in of ones frequent flyer miles is viewed as "income" and should or should not be reported to the trustee when in a chapter 13.

[LadyInTheRed]

i think the question poised here deals mainly on whether the turning in of ones frequent flyer miles is viewed as "income" and should or should not be reported to the trustee when in a chapter 13.

The best answer to that is that OP should check with his/her attorney. I highly doubt it will be an issue. But, it's better safe than sorry.

As far as taxes are concerned, I agree that people often (usually?) don't report prizes and many other things as income that under the law are taxable income. Just like JB's example of use tax, the fact that people don't report it, doesn't mean that they aren't legally required to.

The reason I mentioned that the prize is taxable income is that if the IRS views it as taxable income, the trustee may view it is dmi that must be paid to the plan.

[tobee43]

i can understand that, that the trustee in a 13 may view it as dmi. that's why it's so important to understand the workings of a 13 when one is going through the process. it's important that those involved with a 13 have a full understanding...so thanks lady and jb for all this important information!