WASHINGTON — Democratic Sen. Sherrod Brown, an outspoken critic of big banks, had to back away from his criticism of Citigroup just hours after blasting the firm on Monday.
On Monday morning, Brown wrote to Citigroup chief executive Vikram Pandit, chastising the bank for sending 1099 tax forms to customers who received at least $600 in frequent-flier miles as a reward for opening a checking or savings account.
Brown's letter cited a 2002 ruling by the Internal Revenue Service that, the Ohio Democrat argued, makes it clear that frequent-flier miles are not taxable income.
"Reporting frequent-flier miles as taxable income is inconvenient to consumers, raises their anxiety unnecessarily, and is not required by law," Brown said. "I urge Citibank to halt this practice."
But later in the day, the IRS released a written statement that undercut Brown's argument.
"When frequent flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law," IRS spokeswoman Michelle Eldridge said.
Eldridge went on to say that the 2002 IRS guidance focused specifically on the use of frequently flier miles attributable to a taxpayer's official or business travel.
"That guidance does not address the issues raised when frequent flier miles are given as a premium for opening a financial account," she said.
Sean Kevelighan, a Citigroup spokesman, defended the firm's practice of sending out 1099 forms regarding frequent flier miles in certain specific circumstances.
"When a customer receives a gift for opening a bank account — whether cash, a toaster, or airline miles — the value of that gift is generally treated as income and subject to reporting," Kevelighan said. "This is separate and distinct from miles or points earned by our credit card customers for their purchases."
After the IRS weighed in, Brown spokeswoman Meghan Dubyak said that her office had contacted the IRS prior to sending the letter to Citigroup.
"An IRS representative indicated that the 2002 notice clarifying the tax-exempt status of frequent flier miles still stands, and that the Service would not be releasing additional guidance," Dubyak said in an email.
She added: "Sen. Brown intends to follow up with IRS to seek greater clarification as to why it would apply a different stand to frequent flier miles accrued through professional versus personal travel."
Brown's letter to Citi followed a report last week in the Los Angeles Times that raised questions about Citi's practice, in certain circumstances, of sending 1099 forms regarding frequent flier miles.
In that article, an IRS spokeswoman was quoted as saying simply that the 2002 guidance still stands — without commenting on how the guidance would apply to miles awarded as a reward for opening a bank account.