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IRS seeks punishment over cash rewards credit card program
In Anikeev v. Comm’r, T.C. Memo 2021-23 (Feb. 23, 2021), a husband and wife used two American Express credit cards to make charges of more than $5 million in 2014, and they earned over $277,000 in reward dollars under the American Express Blue Cash Rewards Program. Under the rewards program, a card holder earned reward dollars equal to either 1% or 5% of purchases. To maximize their reward points, the husband and wife used their American Express cards to purchase Visa gift cards, Visa debit cards and money orders. The Visa gift cards were then used to purchase money orders which they then deposited into their bank account.
The IRS asserted that the $277,000, which was the total amount of reward dollars, represented taxable income. Indeed, the Tax Code broadly defines gross income as all income from any source derived. However, the IRS has long ruled that adjustments to a purchase price of goods and services is nontaxable (the Rebate Rule). For example, if you buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer, the $2,000 is not income. Rather, your basis in the car is $22,000. The IRS argued that the Rebate Rule does not apply because Visa gift cards are “cash equivalents” to which no adjustments can apply.
The Tax Court ruled that the rewards generated on the purchase of Visa gift cards do not result in taxable income, but the rewards earned on the purchases of Visa debit cards and money orders are taxable income. The Court reasoned that Visa gift cards are not redeemable for cash or eligible for deposit into a bank account. Therefore, the Visa gift cards are not cash equivalents and under the Rebate Rule, do not result in taxable income. In contrast, Visa debit cards and money orders are cash equivalents and are taxable income.
The Court indicated that it would have applied the Rebate Rule to the Visa gift cards and determined a tax deficiency. The Court theorized that the reward dollars would reduce the basis in the Visa gift cards and a taxable event would occur when the gift cards were converted to money orders. However, because the IRS declined to pursue this alternative position, the Court refused to decide the case on this theory.
Note: The lesson of this case is even common transactions can result in complicated tax consequences.
Contact a tax attorney at Chuhak & Tecson, P.C. for representation on tax issues.
Client alert authored by David B. Shiner (312 855 4319), Principal and Practice Group Leader of the Tax & Employee Benefits group.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.