Tax Court rules some MS now taxable

Old Feb 28, 21, 7:46 pm
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In Tax Court, the IRS will always be represented by attorneys. If you'd like to try your luck on a case of first impression (novel issue not yet addressed by TC) with an Enrolled Agent or other non-attorney, God bless and good luck.
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Old Feb 28, 21, 11:20 pm
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I think the situation is very clear. As long as you are not doing anything extraordinary, there is nothing to worry. There is no need to bring up the tax court, attorneys, fines and prison terms to regular people.

All people here at FT and a lot regular people maximize CC rewards. There is nothing wrong with it. If you really get something to worry, then you really should worry about what you have been doing.
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Old Mar 1, 21, 11:04 pm
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Originally Posted by garykung View Post
IRS does not really care how the T&Cs are written. FWIW - even you are correct, what IRS cares is who has the actual control of the points/miles, i.e. nominal owner v. beneficiary owner. Because the account holder is the beneficiary owner, IRS can in fact assess tax against him/her.
This has gone to court several times, and each time the court ruled that the airline/hotel is the owner of the miles/points and has the right to cancel the account and confiscate the miles/points. In some cases, the airline also canceled tickets that were purchased with those miles.
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Old Mar 1, 21, 11:07 pm
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Originally Posted by sethb View Post
This has gone to court several times, and each time the court ruled that the airline/hotel is the owner of the miles/points and has the right to cancel the account and confiscate the miles/points. In some cases, the airline also canceled tickets that were purchased with those miles.
Given the MS situation, that could be changed.

(Note - AFAICT, those cases you mention should largely involve contract law, but not tax law. So the interpretation may be different.)
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Old Mar 7, 21, 3:09 pm
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Wall Street Journal - IRS Taxes MSer

Deleted by poster - contained no new information.

Last edited by redtop43; Mar 7, 21 at 9:56 pm
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Old Mar 8, 21, 11:46 am
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Some comments on reading through this thread.

1) Posters' analysis of what is and isn't income, is and isn't taxable, theories of taxability, are about as meaningful as the spouse's assurances after arriving home 6 hours late that they were "at the office." The other party will decide what they want to decide and there is nothing you can do about it.
2) As I read the reports of the case, it was determined that rebates received from purchases of gift cards are not taxable but rebates from purchases of money instruments (including reloads) are. But we all know that you basically can't buy MOs or debit reloads with credit cards. However, the party in the tax court case supposedly did $6.4 million in spend and had income of $310K. That's very close to the 5% rewards percentage, so it implies that all these rebates were treated as income. I find this confusing.
3) The Tax Court seemed to suggest to IRS that they treat it like a reduction in basis. I wonder if this is something that could be applied retroactively. For personal reasons, I obviously hope not.

IRS has taken a clear position that credit card rewards are rebates, but in the instant case it appears that they are arguing that this particular case did not fit the definition of a "rebate."

My understanding is that IRS has long wanted to tax CC rewards, but have not done so under pressure from Congress, who simply know that their constituents like their freebies. However, at least based on my memory, ten years ago cashback cards with rewards rates high enough to make MS profitable rare. Go back a fair number of years. Simon sold $500 cards for $3.95, 70 cents per $1000 money order, fees of $8.60 per thousand, so a 1% card was barely break-even. Today, it's $3.95 for a $1K card, 88 cents for the MO, fees of $4.83 per thousand and cashback of 2% is not rare, major profit change. And Congress is way less likely to care about MS whales than about a customer who spend $25K a year on their credit card and gets enough miles for a free airline ticket. Also, it's way easier to value cash.
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Old Mar 8, 21, 3:52 pm
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I liked the link you had in the prior post, Redtop43. Always good to read a summary, even though it was high-level and the writer didn't understand the importance of the topic to MSers. I wish you had left it up.

I do think it is important to focus on the fact that court cases only address the facts that are unique to a particular taxpayer.

And this case is particularly difficult for all of us to get our heads around, because it seems that the judge gave a surprisingly good result to these particular taxpayers, but was so disgusted by the result that the judge made it difficult to see.

And the judge explained how he/she would apply the transaction in a manner that would make it taxable, but wouldn't impose that result upon these taxpayers since the IRS didn't argue for that particular application in this particular case.

An IRS agent could certainly pull the case and apply the judge's logic and calculation method to other taxpayers on audit.

If there was some technical reason that the IRS litigation branch didn't want to apply the logical math that the judge said should be applied, the IRS might abandon that technique at some point during the process, but that is just hypothetical musing.

Certainly, the way the judge applies his/her math and logic, the MSing for a cash profit on the Amex Blue would be taxable.

But the good news is that the Statute of Limitations is usually three years, and this type of IRS adjustment requires a physical audit. So most of the highly profitable cash MSing transactions of concern are too long ago to make this any more than an academic exercise.

As you alluded to, most MSing with variable load cards now simply leaves the recipient with a pile of miles/points that he effectively purchased with the fees he/she incurred. Quite a bit different than ending up with a pile of cash in excess of the fees incurred.

Whether those miles/points have an actual value in excess of the fees that were incurred is definitely a debatable point.

In my opinion, and it is just my opinion, they don't.

I think we are all too biased by the blogger silliness of miles/points having a high value. They say so to hawk credit cards on their websites.

Yes, we all make an effort to get miles/points at a low cost per mile/point, often by MSing.

But what people are doing is simply trying to get a good deal.

And getting a good deal is simply not taxable.

One person might spend $1,000 on a purchased flight, while the person sitting next to them might have spent $200 for the seat right by them.

The person getting the $200 seat is certainly not taxed on his $800 "bargain".

With MSing, one person might spend $100 in fees to get 100,000 of miles (especially if there is a credit card bonus), while another person might spend $600 in fees to get those 100,000 miles.

When redeeming the 100,000 miles, one person might get a flight that "retails" for $2,000, while another person might get a flight that "retails" for $500 and has airport and fuel fees of $300 that he/she has to pay.

It is basically impossible to determine the fair market value of a mile or point.

Ultimately, they are a marketing tool that simply lets someone buy travel at a discount, or a perceived discount.

They function nowadays like coupons, and with MSing, they are coupons that must be purchased (by incurring fees).

Buying things with a coupon doesn't subject the purchaser to tax.

That is how I view miles/points. Simply a coupon that doesn't have independent value. Just like with a grocery coupon, you end up buying things that you wouldn't have otherwise bought. The level of enjoyment from the purchase might be sufficient to generate the exercise. But that is different than true fair market value.

This court case would never had occurred if the taxpayers had not exited the transaction with cold, hard cash. The opinion in the court case essentially says as much in various sections.

So unless there are a lot of MSing transactions for cash that are not discussed here, I think the application to miles/points is misapplied, particularly when MSing generates a relatively high cost-per-mile, and in the current environment where the fees to actually redeem the miles/points are themselves fairly high. Miles/points is now just a system of purchasing travel at a discount.
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Old Mar 9, 21, 6:34 am
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It is completely BS to state rebates can or should be taxable.

If I buy $50 or $100 grocery at local grocery store and receive $10 back, either cash or coupon for next use, would IRS tax me the $10 rebate? No. How can IRS know I would be using the coupon? This rebate is store discount, not any kind of "income" that should be taxable. This can't be enforced. Stores can't ID every shopper.

It is also flawed to say that loading or cashing GC on prepaid cards or purchasing MOs is taxable. GCs are prepaid cash cards. They can be used to purchase anything. Period. There is a fee when we buy MOs. And we do not earn anything by purchasing MOs. This is not a taxable event.

There are only two things that can stop that offender. One is the CC bank. It can enforce the "cash like" provisions and remove the rewards/rebate. This is up to the CC bank.

The other way is for the IRS to invoke the broad "income" clause. Buying GC or cashing GC alone is not taxable. But combined, it is a new MS activity that produces the substantial "income" out of ordinary daily activities. This MS activity has to be substantial and regular. The burden is on IRS....
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Old Mar 9, 21, 9:15 am
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I basically agree, Redsun.

But a strict application of your rebate rule analysis with the Amex Blue Cash card means they had a real good deal on money orders down there at WalMart.

A person, could, and did, go through the gyrations and buy a $999 money order for $960 of cash, and that just feels different to a lot of people than getting a $999 television set for $960 of cash by going through the same gyrations.

As to whether the money order transaction involving a variable load gift card that generates a cash profit constitutes a "sale or exchange" is the debatable issue. The IRS didn't directly argue that by the end of this particular court case process, and the judge seemed irritated that the IRS didn't argue that, so it makes the entire court case kind of a wasted effort as far as guidance is concerned.

Most MSers will likely take the favorable overall outcome of the case and run with it, regardless of the judge's musings about an alternative theories.

And most transactions just don't generate the kind of cash profits that the old unlimited Amex 5% Blue Card did, so it is largely a moot point.

For most MSing now, a person pays $1,012 or so for that $999 money order, and is left with a ton of miles/points. So a person has two arguments as to why he isn't taxed. If miles/points have some significant value, the outcome of this court case would suggest that most traditional MS activities aren't taxable. But even if the Judge's alternative theory were to become the proper way to analyze it, I still think a strong argument can be made that miles/points have no value beyond the actual fees incurred to obtain them. They are just a mechanism to purchase travel at a discount. We are all too biased by the bloggers who assign a value to miles/points in order to make a cash profit from credit card referral links.
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Old Mar 10, 21, 6:36 am
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All the individual CC, GC and MO transactions are governed by each private business. They make the rules and customers follow. It is up to each private business to guard against any "abuse" behavior. AmEx RAT can be hard at working, which is their job. Chase added "cash like" clarification to guard against all cash like transaction. If they find some wrongdoings from Mr. Trial, then CC banks have rights to ban him and get points/miles back.

But if CC bank and merchants have generous promotions and offers, customers can certainly benefit from those. As long as we follow the terms of those offers and promotions, we have all rights to do so. If AmEx/Marriott has 20% discount on Marriott and Marriott has another 20% discount on its GCs, it is up to AmEx to determine if those offers are stacking. It is not up to IRS to determine if a 45% total discount on Marriott is my income or not. The same goes with hotel free rooms and airline companion passes. Of course I could be saving $1,000 on airfare. But it is not my income. Those are business promotions and freebies.

The same again goes with the purchasing MOs with GC. It is really up to WM or each store to decide what to do.

In this trial case, it is not the CC purchases or GC or MO that causes the problem, it is the pure magnitude of such combined "activities". Essentially this has been run like a business, or like a "side job" and generates incomes. Then IRS has its right to levy on such 'income".

Again, if someone spends 3-4 hours everyday to do such MS activities and generate such "income" every week and every month, then they run the risk. But for most of the small guys, there is nothing to worry about....
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Old Mar 10, 21, 6:50 am
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Originally Posted by Andy2 View Post
Worth noting that the case is a Rule 155 case, which is why you don't see how much is ultimately owed. The court gave some guidelines and now the parties go back and do the calculations based on those guidelines. We may never know the final result unless the parties go back to court. Some of the guidelines were favorable to the taxpayers, and the law firm and Dan's Deals point that out. And of course the problem with any court case is that the court just addresses what the parties argue, and may not give a different answer if neither party gets it correct (if there is a correct answer). I always thought that if a person buys $1,000 worth of variable load cards, pays $11.90 in fees, gets a $50.60 credit on his reward credit card, he has a basis of $961.30 in those cards. If he uses those $1,000 of variable load cards to buy a $999 money order, he has a short-term taxable capital gain of $37.70 (he bought $999 for $961.30). But if he is just a regular person who did this transaction and used the $1,000 of variable cards to buy food, gas, clothing, he doesn't have any taxable income since he just gets a basis of $961.30 in the "regular" stuff he bought.

The IRS didn't argue for that gain in the court case, but seemed to simply have argued that the statement credit was taxable, presumably as a result of what the taxpayers did before and after getting the statement credit. Of course some would argue that since $1 is always worth $1, perhaps there was never any gain on the purchase of the money order (or the eventual use of the money order if the benefit somehow transferred from the variable load card to the money order). So maybe there was a reason the IRS didn't argue that a taxable capital gain exists.

Anyway, we may never really know how it turns out, but it is worth reading the thoughts of those who say the declaration of the case being a big win for the IRS to have been misleading.

If one were to form a business to do this "work", then mileage and other expenses might be deductible, right? If I were taking in $300k a year from MS, I'd figure out a business to form and keep meticulous records of all costs, expenses and income. Perhaps down to paying myself a salary from the business. So long as there's some gain, the IRS is going to allow the business entity to continue. Where it would get nixed as a business is if there's a loss every year.
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Old Mar 10, 21, 12:33 pm
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I'm certain Mr. Trial has been permanently banned by AmEx and Chase for MS activities....

If you form a "business" for the MS purposes, it will be out of business really soon.
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