Hyatt Hotels Corporation & Subsidiaries, T. C. Memo. 2023-122, filed 10/2/23, wanted to treat its reserve for free hotel stays and ancillary comps to loyalty members as trading stamps per section 451, but Judge Nega says that’s only for “cash or merchandise,” not intangibles like hotel room stays; wisely, he dodges the State law issue of license-vs-lease. So its reserve for future loyalist freebies is disallowed.

If you want to know how that loyalty program in your wallet works, this is a thorough exposition.

IRS claims that Section 481 change in accounting method allows it to hit Hyatt with a cumulative single-shot eight-figure SNOD covering the three (count ’em, three) years at issue because of Hyatt’s nonrecognition of income derived from Third Party Hotel Owners (TPHOs, who are either franchisees, or investor-owners who delegated management to others, either Hyatt or someone else) who were required to participate in the program and pay Hyatt for the privilege, but Hyatt gets to deduct for the advertising it pays.

No, says Judge Nega, hit ’em each year going forward.

“Material item” is the keyword for Section 481, and that means timing of recognition or deduction. But Hyatt’s system goes on until the program ends. When the program ends, whatever’s left goes back to the TPHOs. Note that since TPHOs come and go, whoever is last man (or woman) standing may not have kicked in all along. Nevertheless, this is a lifetime deal. That IRS didn’t apply duty of consistency each year (no deduction without recognition) this time doesn’t mean they’re barred for the future. I expect IRS to appeal this one.

Hyatt claims the payments to the fund for future redemptions is a trust fund, but Hyatt has too much command and control. Hyatt decides who does what and how, and the TPHOs have no say.

I expect other loyalty programs will come under scrutiny, and not only hotel types.

A Taishoff “Good Job, Second Class” to Hyatt’s trusty attorneys, one of whom, despite his name, was far from unlucky.