Konstantin Anikeev, an experimental physicist, gathered everything he needed for an investigation outside his field.
Its materials included American Express cards, the government’s view that credit card rewards are not revenue, and its own willingness to spend time buying gift cards and money orders. He extracted the concept of personal finance sites: explore the difference between unlimited 5% rewards and lower fees on gift cards and money orders.
“If someone has a theory, they can test it experimentally. Some are easier to test, ”said Anikeev. “Others require a Large Hadron Collider or something like that. But this one was a little more accessible. “
(Mostly) it worked.
Mr. Anikeev’s financial optimization plan in 2013 and 2014 – including $ 6.4 million in credit card charges – led to an Internal Revenue Service audit and the discovery that he and his wife had more than $ 310,000 in revenue that should be taxed.
Judge Robert Goeke’s decision last month broadly confirmed the Internal Revenue Service’s longstanding practice, which says that credit card rewards are generally non-taxable discounts. In other words, buying a pair of shoes for $ 100 and getting a 5% reward is actually a purchase of $ 95, not $ 5 of income. But the judge also offered the IRS avenues for stricter enforcement.
Anikeev’s interest in personal finance began when he was a graduate student with a lot of time but little money. The Connecticut resident was based on ideas from personal finance websites, he testified at his 2019 trial.
In 2009, he, like many others, used a rewards credit card to buy $ 1 coins from the United States Mint, profiting from the lack of shipping charges.
In 2013, he found the strategy that would take him to the tax court.
His American Express card offered unlimited rewards of 5% at supermarkets and pharmacies after he spent $ 6,500. Thus, Mr. Anikeev used his AmEx card to buy prepaid Visa gift cards at supermarkets, stopping routinely during his journey and buying the maximum allowed per day at a store. He used to use gift cards to buy money orders, then use money orders to make deposits in his bank account and then use that money to pay his credit card bill.
In a $ 500 transaction, the 5% rewards would yield $ 25 – more than enough to cover the gift card fees of around $ 5 and the $ 1 payment request fee.
The millions of dollars from these transactions triggered the sensors of the Treasury Department’s Financial Crimes Enforcement Network, which investigates money laundering, an IRS lawyer said during the trial. That agency took the case to the IRS, which said it owed tax arrears. Mr. Anikeev took the government to court, taking a box of gift cards to his trial to demonstrate what he did.
“They sort of picked a fight with the wrong person,” said his lawyer, Jeffrey Sklarz. “They should have chosen someone who was a mess.”
Judge Goeke issued a split decision. Rewards earned on Visa gift card purchases are not taxable, he decided, because cards are products; most, but not all, of Anikeev’s transactions took place this way. Rewards earned on money order purchases or debit card top-up are taxable, the judge determined. The IRS already says that rewards can be taxed if they are earned without spending, as a bonus for opening a bank account.
The two sides have yet to calculate the additional taxes Anikeev may owe. Andrew Johnson, a spokesman for American Express, declined to comment on Anikeev’s case. He said the company uses a “combination of strategies” to police the rules of rewards programs that do not allow the purchase of cash equivalents. The IRS does not comment on active litigation.
Anikeev said he was somewhat disappointed. He said the judge’s distinctions ignore that the IRS classifies business with money orders as services and that money orders are items and therefore any rewards for their purchase should not be taxed.
Judge Goeke raised an alternative way for the IRS to attack future transactions like Anikeev’s.
Perhaps, he wrote, if gift cards are a property, the rewards reduce a person’s cost base on that property. Following this logic, exchanging gift cards for money orders would be to sell a property with a gain. The judge urged the IRS to consider regulations or public statements to offer clearer rules in case people get confused.
“How do you know when you cross the line?” said Robert Tobey, a partner at the Grassi accounting firm in New York.
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The case highlights a flaw in the IRS’s approach to credit card rewards, said Stephanie Hoffer, professor of tax law at Indiana University’s McKinney School of Law.
Treating them as discounts makes sense when buying products, she said. But in the case of Anikeev, there is no purchase of goods or services, just a circular flow of money.
“I was really shocked by the outcome of the case. To me, this clearly seems like a recipe, ”said Hoffer. “At the end of the day, does this taxpayer have access to wealth? The answer is clearly yes. “
Users of ordinary credit card rewards need not fear that they are earning taxable income. Even so, the case is a warning that activities outside the norm can get government attention, said Tobey.
Anikeev said he is not doing anything like what he did in 2013 and 2014, although he is still so interested in personal finance.
“He is a very mathematical and brilliant person,” said his lawyer, Sklarz. “And that was just something he found amusing.”
Write to Richard Rubin at [email protected]
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