In Uncategorized on 02/23/2021 at 16:58

Konstantin Anikeev and Nadezhda Anikeev, 2021 T. C. Memo. 23, filed 2/23/21, get a Taishoff “Good Job, Third Class,” for their inventive roundy-round with American Express Rewards, befuddling IRS in the process and avoiding the stumble that brought down Parimal Shankar when Citibank said “thank you.”

For Parimal’s story, see my blogpost “Thanks but No Thanks,” 8/26/14. Parimal got Thank Yous from Citibank for keeping his account, and Citibank gave him a 1099-MISC at no extra charge. That was interest.

Today, Konni, not a ramblin’ wreck but from Moscow Tech and MIT, ran cool $6 million through his Amex card over a couple years (hi, Judge Holmes), using same to buy VISA gift cards and reloadable debit cards, using that plastic to buy money orders wherewith to stock his bank account. He always paid down his Amex as he went, and got the Rewards as credits to his Amex account, so he could buy more VISA gift cards and reloadables, and more money orders, da capo al fin.

At days’ end, Konni pocketed a cool $302K in cash, none of which did he or Nadezhda report in either year at issue. Nor did Amex hit him in either year with a 1099-anything.

IRS’ long-standing policy is that rewards for plastic utilization is a rebate of purchase price, not income. If the goods list for ten bucks, but the dealer only charges me nine, I just spent less, I didn’t make more. But my basis in the goods is nine dollars, not ten. Likewise with a credit card rebate. Watch those business card reward purchases for depreciables, inventory or COGS components. Your basis may vary.

Judge Goeke decides IRS is hoist by its own policy, which fouls the Section 61 “grab-it-all.”

“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 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.” 2021 T. C. Memo. 23, at pp. 13-14.

Amex won’t Reward purchases of cash equivalents. But the VISA gift cards and reloadables aren’t cash equivalents. They can’t be redeemed for cash. So the Rewards for buying them with the Amex plastic aren’t taxable.

What is taxable is the direct purchase of money orders and the reloads of the reloadable cards with depreciated plastic.

“Reward Dollars petitioners received were not notes, but they were commitments by American Express 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 Reward Dollars. Respondent’s position holds weight only if the Reward Dollars were not an effect of the purchase price of goods and services. Otherwise, all Reward Dollars would be taxable as cash equivalent income. American Express offered the Rewards Program as an inducement for card holders to use their American Express cards. For his own reasons respondent has made a conscious choice to avoid the application of a rebate analysis to the taxability of the cash rewards as a reduction of basis. In conclusion, we hold that the Reward Dollars associated with the Visa gift card purchases were not properly included in income.

“However, petitioners’ direct purchases of money orders and reloads of cash into the debit cards using the American Express cards presents a different question from the purchase of Visa gift cards. The Visa gift cards have product characteristics. They provide a consumer service embodied in a simple plastic card for convenience. The Visa gift cards are not redeemable for cash, but the money orders purchased with the American Express cards and the infusion of cash into the reloadable debit cards are difficult to reconcile with the IRS credit card reward policy. No product or service is obtained in these uses of the American Express cards other than cash transfers. The money orders are not properly treated as a product subject to a price adjustment because they were eligible for deposit into petitioners’ bank account from acquisition. Similarly, the cash infusions to the reloadable debit cards were not product purchases. The reloadable debit cards were used for Moneygram transfers, which are arguably a service. However, the Reward Dollars in dispute were issued for the cash infusions, not the transfer fees. Therefore, we uphold respondent’s inclusion in income of the related Reward Dollars for the direct purchases of money orders and the cash infusions to the reloadable debit cards.

“We note that the above holdings are not based upon the application of the cash equivalence doctrine but rather the incompatibility of the direct money order purchases and the debit card reloads with the IRS policy excluding credit card rewards for product and service purchases from income. These holdings are based on the unique circumstances of this case. We hope that respondent polices the IRS policy in the future in regulations or public pronouncements rather than relying on piecemeal litigation.” 2021 T. C.Memo. 23, at pp. 21-22.

Rule 155 beancount for Konni and IRS.


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