MANHATTAN (CN) – Irate customers claim in a federal class action that Citibank lured them in by offering 40,000 frequent-flier miles to open an account – but didn’t tell them they had to report 2½ cents per mile as income to the IRS.
Lead plaintiffs Bertram Hirsch and Igor Romanov say that Citibank grossly overvalued the miles, which have no actual value to customers and should not be taxable.
“Citibank regularly offers promotional American Airlines miles to induce customers to open up checking or savings accounts at Citibank, usually with a minimum deposit of $25,000,” the complaint states.
“What Citibank does not disclose to customers who take advantage of the American Airlines miles promotions is that Citibank will file with the Internal Revenue Service (‘IRS’) a 1099-MISC reporting that they received miscellaneous income, in the amount of 2.5 cents per mile, for the American Airlines miles provided to such customers.
“It is widely understood in the marketplace that airline miles are not reported to the IRS as being taxable for income tax purposes. Indeed, Citibank expressly informed plaintiff Hirsch that the American Airlines miles that he would receive for opening up Citibank checking and savings accounts were not taxable.
“Even if the airline miles were taxable, Citibank’s practice of valuing the airline miles at 2.5 cents per mile is grossly unfair and deceptive. Airline miles have no value to Citibank customers that can be fixed at the time they are awarded. If redeemed, these miles typically have an average value to customers of between .76 cents per mile and 1.2 cents per mile. At least one study recently concluded that American Airlines miles in particular are only worth about .76 cents per mile.
“Citibank failed to make these material disclosures because it knew that very few customers, if any, would take advantage of the airline miles offers because they did not make economical sense. Citibank benefits from this practice by gaining additional banking business and savings deposits from which it could lend out at much higher interest rates than the low interest rates paid to plaintiffs and the members of the class.
“On Jan. 30, 2012, United States Senator Sherrod Brown, Chairman of the U.S. Senate Banking Subcommittee on Financial Institutions and Consumer Protection, sent a letter to Citigroup’s CEO, requesting that Citibank stop issuing 1099 forms to customers and noted that Citibank ‘arbitrarily calculates the value of each frequent flyer mile at 2.5 cents.’ In a newspaper interview response, Citibank stated that it is required by law to issue 1099 forms to customers, and implied that it would continue the practice notwithstanding it was grossly misstating the value of the airline miles.”
Hirsch and Romanov say they each received 40,000 frequent flyer miles for opening Citibank accounts with minimum deposits of $25,000, in New York and California.
Hirsch, a semi-retired lawyer, says he became concerned when he read the fine print on Citibank’s offer letter, which states: “Customer is responsible for taxes, if any.”
Hirsch says he asked a local Citibank employee if the miles were taxable, to make sure he did not exceed a certain income threshold, so he could keep his retirement benefits. He says the employee assured him the miles were tax-free.
However, “In January 2012, Mr. Hirsch received a 1099 form from Citibank stating that he must report $1,000 as miscellaneous income,” the complaint states. “Mr. Hirsch did not understand what the 1099 was for and went back to his local branch. At the branch, Citibank representatives also did not know what the 1099 was for, again confirmed that the 40,000 American Airlines miles that Mr. Hirsch received were not taxable, and stated that he should initiate an internal investigation with Citibank in an attempt to resolve the issue. Mr. Hirsch did so.
“Finally, Mr. Hirsch received a letter from Citibank stating that the American Airlines miles were taxable under federal law and that the bank was correct in reporting the income to the IRS. No Internal Revenue Code provision or associated regulation was referenced.
“Citibank valued the 40,000 miles that Mr. Hirsch received at 2.5 cents per mile, or $1,000.”
Since a 2002 ruling by the IRS, consumers have not been asked to pay income tax on frequent flyer miles. Though the IRS did not clearly side with Citibank, spokeswoman Michelle Eldridge said: “When frequent-flyer miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law,” according to Investment News.
Hirsch says he has not used any of the miles.
He says he never would have opened an account with Citibank had he known the miles were taxable.
Romanov, who also took advantage of Citibank’s frequent-flyer offer, says he received a similar 1099 form from Citibank, claiming that he owed $1,000. He says he offered to sell the miles back to the bank and asked for Citibank’s help in paying the taxes, but the bank blew him off.
The plaintiffs say that since 2009, the bank has sent 1099 forms to many other customers who signed up for the airline miles promotion. They claim Citibank’s miles have no value to customers because many go unused and expire within a short time.
“Citibank’s actions are causing customers to not only be liable for taxes on the American Airlines miles that they should not be, but also to pay more than double the income tax because Citibank values the miles at more than double their typical redemption worth,” the complaint states. “For example, a typical promotion would provide Citibank customers with 40,000 American Airlines miles, and the 1099 form sent to customers would state that the customer must report $1,000 as additional income, amounting to 2.5 cents per mile. Applying an average federal and state tax rate of approximately 35 percent, customers are required to pay $350 in taxes for the receipt of said 40,000 airline miles. Plaintiffs take the position that the airline miles do not have a value at all upon receipt for tax reporting purposes, and therefore, Citibank should not have issued 1099 forms to the IRS or its customers. However, even if they did have a value, and Citibank had valued the American Airlines miles at 1 cent per mile, which is still overvalued according to a recent study, the tax would have been $140, based on additional income of $400,” the complaint states.
“Citibank does not disclose in its American Airlines promotional offering materials that Citibank will report to the IRS that its customers received miscellaneous income as the result of the receipt of airline miles, or that the American Airlines miles would be valued at 2.5 cents per mile by Citibank, because Citibank knew that very few customers, if any, would take advantage of the offer if the disclosures were made.”
Hirsch and Romanov seek class certification, restitution and compensatory and punitive damages for unfair trade practices, breach of contract, negligent misrepresentation and unjust enrichment. And they want Citibank enjoined from using the trick.
They are represented by James Kelly.
Citibank is a wholly owned subsidiary of Citigroup, an international financial conglomerate serving more than 200 million clients. Citibank has 1,400 outlets in more than 100 countries and territories around the world.