Tax Court: Cash Reward Profits from Credit Card Manufactured Spend could be Taxable

There’s an interesting ruling which came down from a tax court yesterday with regards to a couple who used their Old Blue Cash card to earn 5% cash back to buy Visa gift cards and do prepaid reloads, and to profit on the exchange. They spent over $6 million during 2013 and 2014, and generated over $300,000 in rewards which was mostly profit.

Link to PDF with court ruling

The court ruled the earnings to be taxable. The ruling notes the long-standing default position to be that credit card rewards are considered rebates and non-taxable, but considers the earnings generated in this particular instance to be taxable. I wrote many years ago similarly when analysing the issue, see My Thoughts on Taxes for Miles, Points, and Cash Back.

This case rests squarely in the legal chasm between the basic principle to broadly define income and respondent’s own policy. Petitioners’ aggressive efforts to generate Reward Dollars have created a dilemma for respondent which is largely the result of the vagueness of IRS credit card reward policy. Petitioners clearly acquired economic benefits by cleverly and relentlessly manipulating the Rewards Program. Their actions never offended American Express and had Mr. Anikeev not been so successful in his efforts he likely would have been ignored by [*14] the IRS. However, the scale of his success in acquiring rewards makes this case an extreme test of the longstanding nontaxability of credit card reward programs. To avoid offending his own longstanding policy respondent seeks to apply the cash equivalence concept. As we will explain herein we do not find it is a good fit.

Not very surprising, but quite an interesting case!

Update to clarify further (thanks to all those who chimed in below):

  • The court case clearly rules that reloading cards directly or buying money orders directly is considered a taxable gain.
  • The ruling also notes that buying Visa gift cards is considered purchasing a product and is thus NOT a taxable gain (e.g. if you’d spend the Visa gift cards down organically there would be no tax burden).
  • The ruling also states that when using the Visa gift cards to buy money orders, that SHOULD be considered a taxable gain. (See page 6: “…Thus, it would appear that the taxable event would not be the receipt of Reward Dollars upon the purchase of their Visa gift cards but the transformation of the cards into cash equivalents that could be deposited in a bank account.”)
  • However, the IRS did not make that claim; they had claimed that the purchase of Visa gift cards constitutes a gain based on the Reward Dollars received which the court ruled incorrect, and the consumer has emerged victorious.
  • If the IRS would charge the consumer based on the conversion of Visa gift cards to money orders, the ruling implies that it WOULD be taxable.
    • I suppose a counter-argument to this point could be: since the IRS did not go down the path of considering the conversion a profit, it appears they have some reason that they don’t want to pursue that route, and thus that leaves us the clear. Of course, always consult your own tax advisor for actual advice.

Hat tip to Milestomemories
    Chuck
  • On February 24, 2021, 10:22
Tags: manufactured spendtaxes

View Comments (242)

  • How much did it cost them to sue the IRS?

    It seems they spend a ton of money only to have their names public like this. Could have agreed to the initial assessment, saved all the lawyer fees and not become public figures.

    • I think if The IRS sends you a notice of deficiency you either have to pay or it will end up in tax court eventually.

  • Now that the IRS has lost the argument that VGC are cash equivalents, when they go after people for similar offenses in the future, will they use the alternative argument that the bases in the VGCs have been reduced? Seems like they didn't go with that argument for a reason.

    • Nobody outside the IRS is likely to know that answer. Dan of Dan's Deals and one of the lawyers that mostly won this case both have theories but that is all they are.

  • I received the requested items and will write them up later. One thing I will say, from reviewing the thousands of pages of exhibits (which are Amex and bank statements and copies of checks and money orders deposited) is that he is damned lucky he didn't get in trouble for structuring. Making a $5,493, $2,992, and $2,884 deposit (of presumably money orders) at three different ATMs on the same day for the same bank should have triggered fraud alerts well before the IRS ultimately got to them in 2015. They could have forfeited a lot more than legal fees for their tax attorney.

    • Structuring isn't really a problem unless it's in connection with illegal activity. Of course you can get flagged for structuring, but it's not going to lead anywhere other than a slap on the wrist unless you are actually engaged in illegal activity.

    • If you are reading what I am reading, it would appear that they were in fact investigated by Criminal Investigation division first, but were kicked off to civil IRS after that investigation did not find any wrongdoing.

    • The more I look into this the more I'm impressed - and surprised the IRS only targeted the Amex OBC rewards. The Anikeevs heavy hit TD Bank, Citizens Bank, and Wells Fargo, wrote balance transfer checks, and one spouse used bill pay services to pay the other spouse, as well as random $2,000+ bill pays from a person in Illinois to the couple. But they also did small ball stuff like Kaspersky rebates (which were a thing in 2014). I don't want to post the whole 1500+ pages because it has their home address and the addresses of innocent parties, and I want to try to be careful when drawing conclusions, so it may take a while.

  • This is from his lawyer.

    On February 23, 2021, the U.S. Tax Court rule in favor of our client that acquisition of credit card reward points, no matter how many the receive, is not a taxable event. In Anikeev v. Commissioner, the IRS tried to tax credit card reward points that the taxpayer received claiming they were “cash equivalents” because the taxpayer purchased gift cards with his credit card, which generated rewards points, and then used the gift cards to purchase money orders, which the taxpayer then deposited in his bank account. The Tax Court ruled the transaction was not a taxable event: “Reward [points] petitioners received were not notes, but they were commitments by [the credit card issuer] to allow petitioners credits against their card balances. Respondent’s analysis leaps to the cash equivalence position without an analysis of the origin of the[r]eward [points].” This was a case of first impression and an important development in the cash equivalent doctrine.

    This is obviously a big win for Green & Sklarz LLC and Jeffrey Sklarz, as well as our client.

    If you wish to contact Jeff Sklarz about the case or any other tax issue he cab eb contacted at jsklarz@gs-lawfirm.com

  • Regarding your last bullet point :
    “ If the IRS would charge the consumer based on the conversion of Visa gift cards to money orders, the ruling implies that it WOULD be taxable.”
    It seems like an odd inference. The gain is only made during part 1, the purchase of the gift card, which is not a taxable event.
    The 2nd part, purchasing a MO with the gc only incurs a loss ( the MO fee).
    You may very well be right in your assessment, it just seems odd to me. Once you own the gift card you cannot earn a further profit.

  • ALL OF YOU NEED TO GO AND ACTUALLY READ WHAT IT SAYS... DAMN..

    MS IS NOT TAXABLE, I REPEAT, NOT TAXABLE.

    On February 23, 2021, the U.S. Tax Court rule in favor of our client that acquisition of credit card reward points, no matter how many the receive, is not a taxable event.

    In Anikeev v. Commissioner, the IRS tried to tax credit card reward points that the taxpayer received claiming they were “cash equivalents” because the taxpayer purchased gift cards with his credit card, which generated rewards points, and then used the gift cards to purchase money orders, which the taxpayer then deposited in his bank account. The Tax Court ruled the transaction was not a taxable event.

    • "ALL OF YOU NEED TO GO AND ACTUALLY READ WHAT IT SAYS… DAMN..

      MS IS NOT TAXABLE, I REPEAT, NOT TAXABLE."

      Did you? The decision pretty clearly states that some of that was taxable. Regardless of how many capital letters you use.

      "Therefore, we uphold respondent's inclusion in income of the related Reward[*22] Dollars for the direct purchases of money orders and the cash infusions to the reloadable debit cards."

      • Correct. Note that was only a small fraction of their 300k. I doubt you can do either of the 2 any more.

    • Absolutely no where in the decision is the conclusion you arrived at supported. The decision stated that the argument the IRS made was incorrect because it A.) conflicted with previous adjudications B.) relied on a cash equivalence argument of VGCs not supported by a basic fact that VGC, by definition have no cash equivalent value. It's a narrow reading that did not address the topic of further taxation implications, namely because the IRS did not make them.

      But certain MS activity yielding rewards (loading redbirds, greendots, etc) was clearly rules to be taxable. Funding bank accounts, P2P transactions, maybe even tax payments are under the umbrella of this ruling.

      The IRS likely didn't make a the "other" argument since it would rely on a far more complex rebate calculation which their past policies and enforecement may not jive with. The IRS cannot act arbitrarily or capriciously, which is probably the reason they did not pursue that argument. Not sure if that can be brought up on appeal in this case, but certainly could be for others. The preliminary decisions of GC are not binding on other cases, and this court seems to indicate it might have been receptive of the "other" argument (which would have had a different counter argument)

      • " To the extent the rebates
        exceeded the fees charged to acquire the gift cards, it
        seems that gain was generated similar to the gain that
        a purchaser of the rebated automobile would generate
        if the vehicle was sold for more than the purchase
        price reduced by the rebate. Thus, it would appear that
        the taxable event would not be the receipt of Reward
        Dollars upon the purchase of their Visa gift cards but
        the transformation of the cards into cash equivalents
        that could be deposited in a bank account."

        • I did read the whole article more than once. But the first half is saying that the court ruled the 300k profit is taxable which wasn’t the case.

          • Right, I added an update to clarify further. I hadn't grasped the full nuance of the case at the time of the initial post, and decided to do an update with my conclusions instead of editing the initial post.

  • IANAL and IANARabbi, but basically, my read, if you cut a hole in a bed sheet and place the VGC through it while purchasing a MO, you are okay with G-d and the IRS.

  • Any idea how this will affect rewards earned thru mortgage payments via Plastiq? If the rewards earned are greater than Plastiq fees, will the difference be considered income? Or will it be a rebate on principal/interest/taxes/insurance that is included in the payment, so not taxable? Also, complicating factor is interest can be claimed as a tax deduction.

    • taxes would be interesting. Not a service, not a good, but not exactly a cash equivalent either. Loan payments, I'd say this would be a yes (maybe not interest, but that would open up another can of worms if you are itemizing it). Insurance seems like a hard no.

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