Andy2

This is the exact case I think many of us had feared would occur, especially with the numerous posts from people visited by the IRS Criminal Investigation Division. Fortunately, nothing came from those visits, and contrary to predictions by numerous posters, particularly Often1, we never saw significant Structuring investigations from Manufactured Spending. But at $4 million a year in money order deposits into the bank, some types of reporting must have occurred, and eventually a civil audit occurred.

And fortunately, the court reaffirmed the rebate rule. For the few thousand out of millions that they spent on food and clothing, the cash rebate just reduced the basis of what was purchased, and wasn’t taxable. The problem with Manufactured Spending for variable load cards that you convert to cash with a cash back card is that at the end of the day all you have left is cash. And it is difficult to argue that a cash profit isn’t taxable. So the masses will totally misunderstand this court case.

If all you have left at the end of the transaction are miles from this same type of purchasing variable load cards that are converted to cash,, you can make an argument that the miles you obtained are not worth very much, although that argument might not prevail. We still have that issue throughout Flyertalk, with a very wide range of value that various issuers of AA miles use when essentially issuing those miles as interest on bank accounts.

And if the “currency” you have left after a variable load card to cash MS transaction is something that just allows you buy travel at a deep discount within a closed travel booking system, there is some argument (although weak if the discount is too large) that the currency is merely a valueless coupon, and the “profit” from the transaction should be a reduction to the basis of the purchased travel instead of being taxable income.

But the pure cash profit from the Blue Card transactions when used for buying variable load cards that were converted to cash was the perfect storm. Fortunately the Statute of Limitations has closed for the most profitable years for most FTers since the limitations and closures have changed the landscape.

Other than the Statute of Limitations issue, I don’t see why the volume of transactions matters. If $300,000 of profit is taxable, $3,000 of profit would be taxable just the same.