Involuntary denied boarding compensation paid in cash that's 4 times your one-way fare is clearly not a rebate on your ticket price, it exceeds the ticket price. And yet it isn't taxable... //

1099: Miscellaneous payments of less than $600 are generally not reported to the IRS. IRS flags are triggered when they receive a 1099-MISC and the taxpayer does not report it. It seems that the airlines do not report denied boarding payments to the IRS. Airlines would need tax information from passengers to issue 1099s, and to my knowledge that information is not collected.

Transportation Taxes: Tickets purchased with vouchers are not taxed for one additional transaction, the view being that taxes were paid on the original foregone flight and doing so again would be double-taxed. AA, for instance, says that transportation vouchers are tax-exempt unless they have the code OU (full refund on unused flight). However, if someone uses a $300 voucher for a $200 flight and then a $100 flight, the passenger will pay transportation taxes on the $100 flight.