Mileage Pro The Insider's Guide to Frequent Flyer Programs

SOME OFFICIAL ESTIMATES CURRENTLY PUT the number of lawyers in the United States at about one million. That is approximately one attorney for every three hundred people. With this in mind, do not be surprised to learn that there are some legal issues attached to your miles and points.

Since the beginning of the contemporary frequent flyer program, more than a few spats between programs and members have landed in front of a judge. For example, the infamous case of Wolens v. American Airlines AAdvantage that went all the way to the U.S. Supreme Court before being sent back down for resolution in Chicago’s circuit court. In this case, plaintiffs challenged retroactive changes in AAdvantage’s terms and conditions, including American’s imposition of capacity controls (limits on seats available to passengers obtaining tickets with frequent flyer miles) and blackout dates (restrictions on dates when miles could be used). Fortunately, these types of lawsuits are not the norm. The typical traveler will only run into frequent flyer related legal issues in three unfortunate instances: death, taxes and divorce.

Taxes
The topic of taxing frequent flyer awards is as old as the programs themselves. Although they may feel like freebies, frequent flyer awards are not since they are earned through purchased flights and hotel stays, as well as a myriad of merchandise purchases—so, when taxes creep into the picture, the good feeling of getting free flights and hotel stays is seriously diminished. Like a bad penny, the issue always continues to surface.

For now, you are safe. In February 2002, the IRS clarified once and for all that frequent flyer miles earned from business travel would not be taxed as income.

This news ended more than a decade of ambiguity about whether or not the IRS might spring the value of employer-paid frequent flyer miles on unsuspecting taxpayers in an audit. The taxation topic was kicked around for a few years without an official ruling until 1988, when, without explanation, the IRS suspended consideration of the plan to tax frequent flyer benefits. Speculations were that, after two years of looking for ways to tax miles and awards, the IRS decided that administering such an effort would not be worth the cost.

In 1993, a private IRS ruling indicated that frequent flyer miles earned through employer-paid business travel might be viewed as a taxable fringe benefit. Award miles earned in personal travel, or by partner use such as credit cards, were deemed untaxable. Because the IRS provided no further guidance on valuing mileage or reporting it to the government, that ruling and subsequent ones were widely ignored.

In 1997, the Taxpayer Relief Act was quietly passed. As part of this act, when a program member receives miles from one of the airline’s partners (such as a hotel or car rental company) the partner must purchase the miles from the sponsoring airline with a 7.5 percent tax placed on top of the purchase. For example, if Hilton rewards you with miles for staying with them, the hotel company must buy those miles from the airline (in order to give them to you) and must also pay the 7.5 percent on top of the purchase price.

What does the tax mean to the frequent flyer? In all probability, the cost is passed on to the consumer/frequent flyer in the form of fees. According to the travel industry, partners’ profit margins for these miles are so slim that the tax cost would wipe out the partners. Still, they need to partner with the airlines to keep their market share. So, the partners remain in the frequent flyer program business and the costs are passed onto the consumer—that is you!

In the subsequent three years, the tax has appeared to consumers in the form of:

• Fewer miles awarded when a cheaper ticket is purchased.
• reater mileage requirements for tickets (for example, raising the number of miles needed for a free coach ticket).
• Transaction fees for redemption of mileage awards.

Car rental companies were the first to respond publicly to the increase in price. National Car Rental announced that it would not directly pass along the tax cost to consumers; however, the car company did reduce the amount of miles awarded for selected rentals. Hertz and Avis followed suit, reducing the number of miles awarded for selected rentals from 500 per day to 250 miles, and now to the current award of 50 miles. Unfortunately, this is how car rental companies solved their tax dilemma. It could have been worse for frequent flyers. In 1998, many car rental companies considered reducing the number of airline frequent flyer programs in which they participated. This would have been detrimental to the average business traveler who is often forced to rent vehicles to shuttle from meeting to meeting.

In mid 2000, Hertz began to blatantly pass the taxes onto travelers by requiring frequent flyer awards be subjected to a 50-cent transaction tax recovery fee.

Other frequent flyer program partners also pass the buck when it comes to frequent flyer taxes. MCI WorldCom and Sprint both add the tax to regular monthly phone bills. Interestingly, some partners, such as giant Hilton HHonors, have not passed this tax onto their customers. Somehow HHonors manages to award both points and miles through its revolutionary Double Dip program without needing to pass the tax onto customers.

Death
Nearly all major North American programs offer some means of transferring the miles of the dearly departed. But, as you might expect, those means vary significantly. Fees, documentation, even requirements as to whether or not the miles were specifically referenced in a will, vary by airline.

Despite the variations in methods, though, there are almost always ways to get the transfers done, and in most cases, survivors have been pleased by the airlines’ efforts.

Take the case of Arlene H. of New York City who was widowed in 2003.

She and her husband both had accounts with a number of airlines: America West, American, British Airways and Delta. Her husband had a considerable sum of miles built up—somewhere in the neighborhood of 200,000.

When the time came, she went to work, calling each of the airlines and requesting the miles be transferred to her.
“American charged $50, but there was no problem. They were just great,” she said. “And Delta was fine.”

Few programs in the United States allow mileage pooling—that is, the ability for two members to effectively share their accounts. British Airways does, which makes things much easier for survivors. “With British Airways, we had a family account, and I just notified them that [my husband] had passed away. They converted the account to my name,” Arlene said.
Other program members, while generally pleased with the results of their transfer efforts, have started to run into another obstacle: processing fees.

Not all airlines require a fee, and many will waive it under the right circumstances, but the $50-plus fees charged by some programs are simply too high for some members.

Carolyn V. of Chicago faced the fee quandary while in the process of transferring her deceased father’s United Mileage Plus miles into her mother’s account. With Mileage Plus, that transfer required $75.

“I am paying the fee but protesting,” she said at the time. “They should take into consideration that she is an 82-year-old widow on a fixed income and that $75 is too high in her circumstances.”

In Carolyn’s case, her father’s account had about 25,000 miles—not a mileage fortune, but enough for a free domestic ticket. With larger accounts—accounts that hold hundreds of thousands if not millions of miles, a double digit fee might seem more reasonable.

Fees aside, there are a few steps individuals can take to smooth out the transfer process.

First and foremost, accurate and accessible record keeping is a must. Arlene H. understands the importance of detail, particularly after her own experience. “I am very cautious. I want my kids to have those miles, so I keep very clear records.”
When planning their estates, members should list their miles in a will, specifying how they would like them to be dispersed.

Also, it is best to name just one beneficiary. When programs allow the transfer of miles or points, they may well be bending their own rules. The chance for success is much higher and the process is easier if there is only one party to whom the transfer can be made.

In some cases, the difference between a single beneficiary and multiple beneficiaries can mean the difference between keeping miles active or being forced to redeem them immediately should one of the beneficiaries want free travel right away.

According to United, for example, “If there are multiple beneficiaries, the mileage will be transferred into the account of the executor or personal representative of the estate, and they will assume responsibility for ordering award certificates for the beneficiaries.” We should note that the executor, or personal representative, is not required to redeem the miles right away. The account is treated like any other, requiring activity in the account (usually about every three years) to keep the miles from expiring.

Not surprisingly, because of all the complications and fees involved in the transfer of miles upon death, many people simply assume the role of the deceased for the purpose of cashing in awards. Often a survivor will have access to the deceased passenger’s frequent flyer number and PIN and will just use the remaining miles to issue tickets in whatever name they see fit. This is a popular method used to bequeath awards to charitable organizations.

This is, of course, against the rules. All airlines make a specific point in their terms and conditions that accounts belong solely to an individual, and that any attempt to “infiltrate” that member’s account by another party is taboo.
The obvious response is: “How are they going to catch me?”

They may not. We are not aware of any cases in which an “identity assumer” has been nabbed. But the fact remains that this approach runs contrary to the spirit of the programs, and since there are “lawful” means of transferring these miles, the risks involved may not be worth it.

The Legal Fine Print of Death
Some elect to include a codicil (an addendum) to an existing last will and testament, though this often requires the assistance of an attorney. An easier solution might be to include this sample paragraph along with your will or, if no will is intended, this paragraph could be used if it is signed, dated and witnessed and kept with your personal papers:
“Upon my death I leave all my airline and hotel frequent flyer miles and/or points in my accounts to my (relationship), (name).”

The use of this paragraph will leave no question as to your wishes for your miles and points. While these same programs are constantly changing their rules with regard to leaving miles to heirs and beneficiaries, we advise you to check with your programs in advance before planning a specific action regarding your miles. And when doing so, it is probably best to remain anonymous when asking the question.

Divorce
As with wills, divorce laws vary considerably by state. There is no single rule of thumb regarding the disposition of miles.
As a general rule, any interest that may be considered “property” is subject to division, and therein lies the rub: Are frequent flyer miles property?

As of yet, no court has been willing to make that declaration. Two cases on record, one in Colorado and one in Florida, have treated miles as a marital asset without specifically declaring them property. In two other cases, one in New Mexico and one in Tennessee, the courts have divided miles between parties, a division that was not questioned on appeal.

Yet in Washington, in 1999, an appellate court specifically declared miles to be deemed separate property, thus avoiding the division question entirely.

One of the keys to determining whether or not something constitutes property is the concept of transferability. Rarely will a property interest be found if the owner cannot transfer one asset to another.

In some cases, the courts have left it at this: Since, under the rules of most programs, transfers are not allowed, no property interest exists. However, a few clever attorneys have suggested that miles are indeed transferable, regardless of what the rules say. There is, after all, an active black market in mile brokerage, with a number of Web sites devoted to that purpose.

“A lively market for the sale, exchange and barter of (miles) has existed for a number of years,” attorney Barry Roberts explains. “(Members) consider their mileage credits to be an asset that can be sold, bartered or exchanged in a free market just like any other asset.”

The drawback to this argument is that a black market does not necessarily constitute an “open” market. A court would probably be reluctant to attach a value to a commodity—in this case, miles—when the only means of determining that value is illegitimate.

Nevertheless, a divorcing spouse can try to make the case. If a valid third-party estimate of the value of miles can be attained, the court would likely consider a division.

The problem is that establishing a value is tricky at best. Three cases, one in Florida and two in Virginia, simply rejected a monetary award in lieu of miles because no evidence of value had been presented. Legal experts suggest that evidence is unlikely to arise anytime soon. Brett R. Turner, the author of numerous articles on this subject, says, “It is probably not possible to value frequent flyer miles with sufficient accuracy to permit an offsetting award.”

Some courts have indeed placed a value on miles, using the familiar “two cent” rule (the cost of a domestic ticket, $500, divided by the number of miles required to earn that ticket, 25,000).

Of course, that assumes the “two cent” valuation is valid. However, as most frequent flyers know, this is not always the best way to estimate value. Two individuals, given the same number of miles in the same program can come up with a variety of award options, some of which are clearly more valuable than others. Value is entirely subjective.

In the absence of any clear and fair way to value frequent flyer miles, some have suggested the only equitable means of division is to simply split the miles. But, the airline and hotels may not be willing to play along. In the absence of a court order, not every program will set up a new account. Take these unambiguous words from the Hilton HHonors terms and conditions: “Accrued points do not constitute the property of the member, and are not transferable in the event of death, divorce or operation of law.”

In that case, the division needs to be done “indirectly”—that is, strictly between the parties. Under a written agreement, the mileage owner will, over time, dole out awards in the other party’s name.

HHonors would not need to know about this agreement as it is between the two parties with the lawyer often assisting in making the agreement “stick.” While the agreement could be given to HHonors to prove, one must still be wary of HHonors’ “rules.”

In the case of a hostile divorce, such a division is unlikely. In a more amicable situation, however, and with the help of good record keeping, such splits have been and continue to be made.

Solutions are really only as limited as the willingness of the parties.

Consider the case of Bob S. from Salt Lake City, Utah.

Prior to his divorce, Bob had been a prolific mile collector. Not surprisingly, his abundant bank of miles and points came up during his divorce. Faced with valuation difficulties, both sides came up with a novel plan.

“What we finally settled on, and this is actually in the written agreement, is that I had to give her enough points for a week in the Caribbean with Hilton,” Bob said.

“Hilton required a copy of the divorce agreement, then split the points into two accounts, and transferred the points over. [Hilton was] very efficient; they just assigned a new account number. It was really a piece of cake.”

The amicability of Bob’s divorce may not have been the norm, but the creative use of his points has helped maintain a civil post-marital relationship. Since the split, he has voluntarily used his mileage bank to send his “ex” and their children on vacations.

“Let’s face it,” he says, “you can buy some good will. It is basically free, and can benefit the kids, and it is certainly a good way to negotiate.”

Other Considerations
All this talk of “assets,” “rights” and “valuation” begs the question: Whose miles are they anyway?
The fact is that even though members often believe their miles are individual property, the programs’ terms and conditions are quite clear: The miles are an intangible currency that belongs solely to the program.

Of course, a good case can possibly be made that a property right does exist. Take the case of a few Delta flyers whose miles were confiscated by the program for violations of program rules. Their attorney quite specifically called those miles a property right, and it did not hurt his case that in events of death and divorce, the airlines treat them as such. The case is still in litigation.

But there is danger here.
As it stands, the IRS has said it has no interest in pursuing the taxation of miles at this time. If, however, the courts begin to create clear rules about the valuation of miles, it is not unforeseeable that this newfound property could be taxed.
Furthermore, when an airline offers to transfer miles in the case of death or divorce, they are, in essence, doing their customer a favor. If push comes to shove, it is plausible that they could alter their rules to keep their liability low.

Which in turn illustrates the most important point of all (and one veteran flyers know all too well): You can catch more flies with honey than with vinegar.

Your approach, and your value to the program, can make all the difference. Airlines and hotels have rules, and when cornered, will happily roll out all the fine print you could ever want. “Policies,” on the other hand, tend to be a little more flexible.

REMEMBER THIS:

• In 2002, the IRS finally declared that frequent flyer miles earned from business travel would not be taxed as income.
• Donating miles to a charity is not tax deductible.
• While members believe that their miles and points belong to them, the truth is that they are an intangible currency belonging solely to the loyalty program.