Paul L. Caron

Monday, March 8, 2021

WSJ: He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income.

Wall Street Journal, He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income.:

Konstantin Anikeev, an experimental physicist, assembled everything he needed for an inquiry far outside his field.

His materials included American Express cards, the government’s view that credit-card rewards aren’t income, and his own willingness to spend time buying gift cards and money orders. He pulled the concept from personal-finance websites: Exploit the difference between unlimited 5% rewards and lower fees on gift cards and money orders. ...

It (mostly) worked.

Mr. Anikeev’s financial-optimization plan in 2013 and 2014—including $6.4 million in credit-card charges—led to an Internal Revenue Service audit and a finding that he and his wife had more than $310,000 in income that should have been taxed.

Judge Robert Goeke’s decision last month largely affirmed longstanding Internal Revenue Service practice, which says credit-card rewards are usually nontaxable rebates [Anikeev v. Commissioner, T.C. Memo. 2021-23 (Feb. 23, 2021)]. In other words, buying a pair of shoes for $100 and getting a 5% reward is really a $95 purchase, not $5 of income. But the judge also offered the IRS avenues for tougher enforcement. ...

Judge Goeke issued a split ruling. Rewards earned on purchases of Visa gift cards aren’t taxable, he ruled, because the cards are products; most but not all of Mr. Anikeev’s transactions happened that way. Rewards earned on purchases of money orders or reloading debit cards are taxable, the judge determined. The IRS already says rewards can be taxable if they are earned without spending, such as a bonus for opening a bank account. ...

The case highlights a flaw in the IRS approach to credit-card rewards, said Stephanie Hoffer, a tax-law professor at the McKinney School of Law at Indiana University.

Treating them like rebates makes sense for purchases of products, she said. But in Mr. Anikeev’s case, there is no purchase of goods or services, just a circular money flow.

“I was really shocked by the outcome of the case. To me, this seems clearly to be income,” Ms. Hoffer said. “At the end of the day, does this taxpayer have an accession to wealth? The answer is clearly yes.”

(Hat Tip: Ahmed Taha)

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