Stay Schemin': Tax Court's Recent Ruling on Credit Card Rewards and the Impact This Ruling Has on Future Rewards Programs

• Publication year: 2023

Stay Schemin': Tax Court's Recent Ruling on Credit Card Rewards and the Impact this Ruling Has on Future Rewards Programs

Hunter Davis
University of Georgia School of Law, hdavis@uga.edu

Stay Schemin': Tax Court's Recent Ruling on Credit Card Rewards and the Impact this Ruling Has on Future Rewards Programs

Cover Page Footnote

* J.D. Candidate, 2023, University of Georgia School of Law; MAcc, 2016, University of Georgia; BBA, 2015, University of Georgia. I would like to thank Professor Gregg Polsky for his guidance and advice, which made this Note possible. I would also like to thank the Editorial and Executive Board Editors for their assistance.

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STAY SCHEMIN': TAX COURT'S RECENT RULING ON CREDIT CARD REWARDS AND THE IMPACT THIS RULING HAS ON FUTURE REWARDS PROGRAMS

Hunter Davis^*

Beyond the utility of actual "credit," the most important perk cardholders seek to capitalize on are the rewards that each cardholder's particular credit card offers. Cardholders look for the most bang for their buck in terms of rewards and points. Ranging from frequent flyer miles to cash back to everything in between, rewards programs have expanded and diversified rapidly over the past several decades, and consumers cannot get enough. So much so that the question of whether, and when, consumer loyalty rewards should be taxable has arisen and persists today.
The Internal Revenue Service (IRS) and the Tax Court have been presented with opportunities to address the taxability of what appears to be "clear accessions to wealth," and thus taxable gross income. Yet, the Tax Court and the IRS have both failed to make the first move to end this deferential dance, as each body believes its counterparty to be responsible. Whose responsibility is it? Will the taxman finally prevail in this arena, or will cardholders, even scheming cardholders, continue to take the money and run? This Note examines the Tax Court's most recent consumer loyalty rewards case, Anikeev, and the question of which governmental entity has the onus to make the first move to settle this enduring tax question.

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Table of Contents

I. Introduction....................................................................807

II. Background and History of Credit Card Rewards Program..........................................................................810

A. HISTORY OF CONSUMER REWARDS PROGRAMS..........811
B. HISTORY OF CONSUMER REWARDS LITIGATION.........812
C. FACTS OF ANIKEEV V. COMMISSIONER......................816

III. Why the Tax Court's Failure to Ensure Justice in Anikeev is Due to the IRS's Continuous Reluctance to Address this Area of Tax Law..............................817

A. HOLDINGS AND REASONINGS OF ANIKEEV V. COMMISSIONER ............................................................ 817

1. Two Holdings in Anikeev.................................818
2. The Tax Court's Reasoning for Method 1........818
3. The Tax Court's Reasoning for Method 2........820

B. WHY IT MATTERS......................................................821

1. Problematic Argument by the IRS for Method 2 Purchases Due to Administrative Burdens and Speculation Required for Future Consumer Loyalty Program Tax Cases ............................ 822
2. The Alternative Argument for Method 2—The IRS's Initial Pre-Trial Argument...................825

C. MOVING FORWARD IN THIS AREA OF TAX LAW...........827

IV. Conclusion....................................................................828

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I. Introduction

"Is this going to be separate or all on one check?" the restaurant waiter asks a table of eight millennials who just engulfed six burritos, four tacos, two cups of queso, one large bowl of guacamole and a couple pitchers of house margaritas. Prior to 2009, the response to this waiter's question would have likely been a resounding "separate." Although credit card rewards programs were well established by 2009,¹ customers were more hesitant then to cough up their card for the entire dinner bill—foregoing the opportunity to accumulate the rewards points.² Taking on the entire bill would require either undesired effort to track down their friends for reimbursement via cash or check or considerable trust in a friend's willingness to cover "the next beer or dinner." With the rise of peer-to-peer mobile payment service applications, like Venmo, Apple Pay, and Cash App, over the last decade,³ customers are likely now more willing to accept one check for the table (and appease the waiter's preference). Customers, especially those who are "rewards-savvy," will now eagerly debate who gets to be the lucky one to put their credit card down for the entire bill. The question has become "Who wants the points?"

Credit cards have been around for years: In 1950, the Diners Club credit card was the first "modern credit card" and "the first credit card accepted by more than one merchant."⁴ In 1986, Sears "introduced the first Discover card, which became the first rewards credit card," meaning that it "offer[ed] cardholders a small rebate on purchases."⁵ Since the 1980s, credit card use has continued to soar amongst consumers, and the benefits offered by different credit

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card companies have continued to increase as competition to obtain and retain cardholders' business has fiercely intensified.⁶ In what is seemingly an unlimited array of credit card options available to consumers,⁷ the different types of rewards and perks associated with each credit card can make or break a consumer's willingness to apply for a certain card and remain loyal to it. But, in reality, is this assertion just an oversimplification of a heavily saturated market? Do the specific perks credit card companies and banks offer with their particular cards really influence consumers' decisions to opt for one card over a competing card? According to the 2018 Total System Services, Inc. (TSYS) U.S. Consumer Payment Study, reward offerings are the "most attractive credit card feature for consumers."⁸ Thus, it would appear that the types of offers for each credit card heavily influence consumers in deciding between the options.

As rewards offered by credit cards have become more commonplace to consumers, cardholders' incentives and their attentiveness to accumulating the best and as many rewards as possible has increased. Websites and companies largely dedicated to providing insights into which cards offer consumers the best rewards based on spending behavior are on the rise.⁹ For example, WalletHub provides quick snapshots of the rewards rates for certain spending with promoted credit cards and the introductory bonus offers available for those promoted cards.¹⁰ Resources like these websites have made it easier for consumers to navigate the complexities of consumer rewards programs and have provided

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guidance enabling cardholders to obtain the most benefits that they can.

Whenever consumers seemingly accumulate benefits on a "free" basis, however, the government will not be very far behind. As Benjamin Franklin once stated, "In this world nothing can be said to be certain, except death and taxes."¹¹ As taxpayers have accumulated more and more benefits over the years through rewards programs, including credit card rewards, the Tax Court, the Internal Revenue Service (IRS), and Congress have taken a closer look at whether these benefits should constitute taxable income.¹² In a recent Tax Court case over credit card rewards, the court determined whether taxpayers' specific scheme to obtain a surplus of—what they hoped to be tax-free—cash constituted an accession to wealth that should be considered taxable gross income.¹³

This Note analyzes the court's holding and reasoning in Anikeev v. Commissioner and considers the potential ramifications of the Tax Court's conclusion for cardholders and the IRS moving forward. Part II begins by providing a historical account of the types of transactions and rewards the IRS and the Tax Court have considered taxable in relation to rewards programs and, more specifically, credit card rewards programs. This Part then details the facts and background of the Anikeev case that led to the court's holding and reasoning.

Part III evaluates the holding and reasoning of the Anikeev case and details potential pitfalls of the Tax Court's ruling, including its characterization of Visa debit and gift cards as products or services and the potential that other taxpayers may use the indirect method that the Anikeevs used in their rewards scheme to avoid tax liability based on the court's ruling. This Part will also consider whether the

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IRS's failure to pursue its initial tax basis reduction argument was an avoidable mistake.

Finally, Part IV concludes that, despite the Tax Court's first step in attempting to address the historically tax free accumulation of credit card rewards, the court ultimately failed to deter future manipulations of credit card rewards programs, such as the one implemented by the Anikeevs. This failure, however, stems from the Department of Treasury and the IRS's unwillingness to assist the Tax Court by promulgating regulations or issuing revenue rulings, respectively, on when consumer loyalty rewards are taxable. Part IV highlights the deflection game that the IRS and the Tax Court have played over the years and emphasizes that the responsibility falls on the IRS to bolster this area of tax law that is sorely lacking.

II. Background and History of Credit Card Rewards Programs

Why is there controversy surrounding rewards associated with loyalty programs, especially credit card programs? If one was to ask an Average Joe on the street whether the points he earns with his credit card should be taxed, he would likely respond, "Absolutely not." To many Americans, it would be shocking that this is even a controversy; on the surface, reward points, accumulated as a result of the use of credit cards, are not clearly synonymous with compensation for sales or...