Tax Court Rules Cash Reward Profits from Credit Card Manufactured Spend to be Taxable

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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, convert them to money orders, and profit on the exchange. They spent over $6million 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!

Hat tip to Milestomemories





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