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Anikeev v. Commissioner (T.C. Memo. 2021-23)

On February 23, 2021, the Tax Court issued a Memorandum Opinion in the case of Anikeev v. Commissioner (T.C. Memo. 2021-23). The primary issue presented in Anikeev was whether the “rewards” earned from the purchase of gift cards…a lot of gift cards…were income.

Background

The petitioners were crafty Russians, who gamed the credit card reward system.  They joined a credit card rewards program and proceeded to purchase their credit limit worth of prepaid gift cards.  With the gift cards, they bought money orders, and with the money orders deposited in their bank accounts, they paid off the credit cards.  This process cost, on average, $6, whereas they could make anywhere from $5 to $25 on each purchase.

In 2013, the petitioners charged $1,219,077 on their credit card, $1,208,376 of which was used to purchase gift cards.  In 2014, they spent $5,184,033 on gift cards.  They made $36,200 in 2013 and $277,275 in 2014 on this scheme.

Naturally, they did not report any of these rewards as income. The IRS, pissed that it hadn’t thought of this first, issued a notice of deficiency against the taxpayers, at which point the petitioners petitioned the Tax Court to redetermine the deficiency.

The IRS’s Argument

Generally, when a payment is made by a seller to a customer as an inducement to purchase property, the payment does not constitute income but instead is treated as a purchase price adjustment to the basis of the property. Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956); Rev. Rul. 76-96. In this case, however, petitioners did not purchase goods or property to which a basis adjustment may apply. Rather, they purchased cash equivalents, in the form of Visa gift cards, reloads for the Green Dot card, and money orders, to which no such adjustment can apply. See Cowden v. Commissioner, 289 F.2d 20, 24 (5th Cir. 1961) (setting forth the cash equivalence doctrine); Bixby v. Commissioner, 58 T.C. 757 (1972) (cash equivalents have basis equal to face value). As a result, the Reward Dollars paid to petitioners as statement credits for the charges relating to cash equivalents are an accession to wealth and income to petitioners under IRC § 61.

The Petitioners’ Position

Nuh uh.

So I’m paraphrasing here, but I’ll be damned if it didn’t work.

The Court’s Reliance on Rev. Rul. 76-96

IRC § 61(a) broadly defines gross income. It has a “sweeping scope.” Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995) (quoting Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429 (1955)). On the other hand, adjustments to the purchase prices of goods or services have consistently been considered nontaxable. Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956) (addressing income of the seller of goods who provided price reductions); Rev. Rul. 76-96, as modified by Rev. Rul. 2005-28.

Rev. Rul. 76-96 is a key link in the chain of IRS reasoning on credit card rewards. It concerned the tax treatment of rebates paid by an automobile manufacturer to qualifying retail customers who purchased its automobiles. That Revenue Ruling held that the receipt of the rebate by the retail customer did not result in the receipt of gross income. Rather, the rebate was a reduction in the purchase price, requiring a downward adjustment to the basis of the automobile pursuant to IRC § 1012.

A taxpayer who avails himself or herself of a discount in acquiring goods and services has no accession to wealth. That taxpayer has retained more of his or her wealth than a taxpayer who pays full price for the same good or service, but that taxpayer has no additional income; he or she simply has reduced consumption. The Tax Court observes that the sheer scale of his success in acquiring rewards “makes this case an extreme test of the longstanding nontaxability of credit card reward programs.”

The IRS Argues Against Itself

The Tax Court observes that it has been the IRS’s longstanding policy to not tax rewards.  The rebate rule, as set forth in IRS guidance, states that a purchase incentive such as credit card rewards or points is not treated as income but as a reduction of the purchase price of what is purchased with the rewards or points. Rev. Rul. 76-96.  Indeed, Publication 17 observes rather pointedly that “a cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.”

Gain Not Argued

The IRS failed to argue that the petitioners must recognize gain on the exchange of the gift cards. The Tax Court noted that, at least theoretically, on the basis of established precedent, the Reward Dollars reduced petitioners’ bases in the Visa gift cards that they purchased, and petitioners generated proceeds when they converted the cards to money orders. To the extent the rebates exceeded the fees charged to acquire the gift cards, it seems that gain was generated similar to the gain that a purchaser of the rebated automobile would generate if the vehicle was sold for more than the purchase price reduced by the rebate. Thus, it would appear that the taxable event would not be the receipt of Reward Dollars upon the purchase of their Visa gift cards but the transformation of the cards into cash equivalents that could be deposited in a bank account. See Wentz v. Commissioner, 105 T.C. 1, 11 (1995) (considering the discrete severable events that made up a transaction that generates a purchase price adjustment).

Cash Equivalency Rejected

The IRS asserts that petitioners’ Reward Dollars were not purchase price adjustments but rather cash equivalents that are property equal to their face values. It argues that no price adjustment is possible for the gift cards because cash equivalents have basis equal to their face values. See Bixby v. Commissioner, 58 T.C. 757, 785 (1972); see also UFE, Inc. v. Commissioner, 92 T.C. 1314, 1328-1329 (1989) (“Cash or cash equivalent items…are accorded basis at face value.”); Felt v. Commissioner, T.C. Memo. 2009-245, *15 (stating that notes are cash equivalents with basis equal to face value), aff’d, 433 F. App’x 293 (5th Cir. 2011).

Holding

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, the Tax Court upheld 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.

Caveat

The Tax Court notes clearly that the holding was 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. The Tax Court admonishes the IRS to police its policy in the future in regulations or public pronouncements rather than “relying on piecemeal litigation.”

(T.C. Memo. 2021-23) Anikeev v. Commissioner

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