Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Friday, January 7, 2022

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

Wealth taxThe IRS went after Konstantin Anikeev, an experimental physicist, after he exploited the difference between unlimited 5% rewards and lower fees on gift cards and money orders, a concept Anikeev learned about from personal-finance websites. 

Anikeev used 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. Anikeev stated, "If one has a theory, one can test it experimentally. Some are easier to test. . .[o]thers require a Large Hadron Collider or something like that. But this one was a bit more accessible." 

Mr. Anikeev's $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 Joseph Goeke affirmed the IRS practice, which says that credit-card rewards are usually nontaxable income. For example, buying a sweater for $100 and getting a 5% reward is really a $95 purchase, as opposed to $5 of income. However, the judge did offer the IRS avenues for tougher enforcement. 

Anikeev took the government to court and received a split ruling from Judge Goeke, who ruled that rewards earned on purchases of Visa gift cards aren't taxable because the cards are products. Anikeev even brought a tub of gift cards to court as a demonstration, and according to his lawyer, Jeffrey Sklarz, "[The government] sort of picked a fight with the wrong person. . .They should have picked someone who was a hot mess."

See Richard Rubin, He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income., Wall Street Journal, March 7, 2021. 

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.

https://lawprofessors.typepad.com/trusts_estates_prof/2022/01/he-got-300000-from-credit-card-rewards-the-irs-said-it-was-taxable-income.html

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